world bank document · document of the world bank report no: 21893-kos project appraisal document...

Document ofThe World Bank

Report No: 21893-KOS

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT OF US$3.0 MILLION

TO

KOSOVO, FEDERAL REPUBLIC OF YUGOSLAVIA(SERBIA and MONTENEGRO)(KOSOVO)

FORA

Private Sector Development Technical Assistance Grant

March 1, 2001

Private and Financial Sector DevelopmentECSPFEurope and Central Asia

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CURRENCY EQUIVALENTS

(Exchange Rate Effective February 7, 2001)Currency Unit = DEM

DEM I = US$0.481US$1 = 2.078 DEM

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ADJ - Administrative Department of JusticeCFA - Central Fiscal AuthorityCIS - Credit Information Service

CPA - Central Procurement AuthorityDTI - Department of Trade and Industry

EAR - European Agency for ReconstructionFMS - Financial Management

GFMIS - Government Financial Management SystemIAS - International Accounting Standards

TASD - International Accounting Standards CommitteeIDA - International Development AgencyIRR - Internal Rate of Return

KCB - Kosovo Consolidated BudgetOSCE - Organisation for Security and Co-operation in Europe

PIP - Project Implementation PlanPMR - Project Management ReportsPRU - Provisional Registration UnitRFP - Request for Proposal

SA - Special AccountSEED - Southeast Europe Enterprise Development.

SOE - Statement of ExpendituresSRSG - Special Representation of Security General

STA - Single Treasury AccountUNMIK - United Nations Interim Administration Mission in Kosovo

Vice President: Johannes LinnCountry Manager/Director: Christiaan Poortman

Sector Manager/Director: Ilham Zurayk/Paul SiegelbaumTeam Leader: Gerardo Corrocharno

PROJECT APPRAISAL DOCUMENT

Kosovo, Federal Republic of Yugoslavia(Serbia and Montenegro) (Kosovo)


Table of Contents

A. Project Development Objective .............................................................. 51. Project development objective ............................................................... 52. Key performance indicators ............................................................... 5

B: Strategic Context ............................................................... 51. Sector-related CAS goal supported by the project ............................................................... 52. Main sector issues and Government strategy ............................................................... 63. Sector Issues to be addressed by the project and strategic choices ................................................. 10

C. Project Description Summary .............................................................. 11 1. Project components .............................................................. 112. Key policy and institutional reforms supported by the project ....................................................... 123. Benefit and target population .............................................................. 134. Institutional and implementation arrangements .............................................................. 13

D. Project Rationale .............................................................. 141. Project alternatives considered and reasons for rejection .............................................................. 142. Major related projects financed by the Bank and/or other development agencies .......................... 153. Lessons lea rned and reflected in the project design .............................................................. 154. Indications of borrower commitment and ownership .............................................................. 165. Value added of Bank support in this project .............................................................. 16

E. Issues Requiring Special Attention .............................................................. 161. Economic .............................................................. 162. Financial .............................................................. 173. Technical .............................................................. 174. Institutional .............................................................. 175. Environmental .............................................................. 186. Social .............................................................. 187. Safeguard Policies .............................................................. 19

F. Sustainability and Risks .............................................................. 191. Sustainability .............................................................. 192. Critical Risk .............................................................. 20

G. Main Loan Conditions .............................................................. 211. Effectiveness Conditions .............................................................. 212. Other .............................................................. 21

H. Readiness for Implementation .............................................................. 21I. Compliance with Bank Policies .. 21

Annexes

Annex 1: Project Design Summary ...................................................... 22Annex 2: Detailed Project Description ..................................................... 23Annex 3: Estimated Project Costs ..................................................... 27Annex 4: Cost Benefit Analysis Summary ..................................................... 28Annex 5: Financial Summary ..................................................... 32Annex 6: Procurement and Disbursement Arrangements ..................................................... 36

Table A: Project Costs by Procurement Arrangements ...................................................... 43Table Al: Consultant Selection Arrangements ......................... ............................. 44Table B: Thresholds for Procurement Methods and Prior Review .......................... ............... 4.5Table C: Allocation of Loan Proceeds ...................................................... 46

Annex 7: Project Processing Budget and Schedule ..................................................... 47Annex 8: Documents in the Project File ..................................................... 4,3Annex 9: Statement of Loans and Credits ..................................................... 49)Annex 10: Country at a Glance ...................................................... 50

Kosovo, Federal Republic ofYugoslavia (Serbia and Montenegro)(KOSOVO)

Private Sector Development Technical Assistance GrantProject Appraisal Document

Private and Financial Sector DevelopmentECSPF

Europe and Central Asia Regional Office

Date: March 1, 2001 Team Leader: Gerardo CorrochanoCountry Director: Christiaan J. Poortman Sector Manager: Ilham ZuraykProject ID: SF-P071265-LEN-BB Sector: Private Sector DevelopmentLending Instrument: Grant from the Trust Fund for Theme(s): Institution BuildingKosovo

Poverty Targeted Intervention: [] Yes [X] No

Project Financina Data[ ] Loan [ ] Credit [X] Grant [ ] Guarantee [ ] Other [Specify]

For LoanslCredits/Others:Total Project Cost US$ 3.0 Cofinancing:

Contact person: Gerardo Corrochano (ECSPF)E-mail: [email protected]

Total Bank Financing US$ 3.0

Borrower: N.A.Guarantor: N.A.Responsible agency: United Nations Interim Administration Mission in Kosovo (UNMIK)Project implementation period: 03/01/01 to 03/01/03 - 2 years: FY01-FY03Implementing Agencies: UNMIK - Administrative Department of Justice (ADJ), and Central Fiscal Authority (CFA)

Contact person: Sylvie Pantz (ADJ); Tony Preston-Stanley (CFA).Address: Pristina, Kosovo

Tel: Fax: E-mail:Estimated disbursements (Bank FY/US$M):FY 2001 2002 2003Annual 0.2 1.8 1.0Cumulative 0.2 2.0 3.0

Project implementation period: 2 years: FYO1-FY03Expected effectiveness date: 04/01/01 Expected closing date: 09/30/03

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A: PROJECT DEVELOPMENT OBJECTIVE

1. Project development objective: (see Annex 1)

The objective of the proposed project is to improve the business-enabling environment for privatesector growth. Specifically the project would:

(a) support the establishment and operation of a modern business registry system;(b) strengthen the capacity of the Commercial and Supreme Courts and improve the quality of

legal services;(c) assist in the development of basic accounting standards, provide training for local

accountants, and assist in the establishment of an association of accountants.

2. Key performance indicators: (see Annex 1)

The grant will finance consultant services, training and equipment. Progress in achieving thedevelopment objective will be assessed on the basis of:

(a) Number of registered enterprises and turnover time of registration process;(b) Availability of information from the business registry for tax purposes;(c) Number of completed cases at the Commercial Court;(d) Number of Judges and Lawyers completing the training programs;(e) Number of trained accountants, and the establishment of an association of accountants.

B: STRATEGIC CONTEXT

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project:

The proposed project is consistent with the Transitional Support Strategy for Kosovo and thejoint European Commission/World Bank Program for Reconstruction and Recovery in Kosovo.Both strategies recognize that growth will be led by the private sector and call for the creation ofa legal and institutional framework to support its development.

The proposed project is an ancillary operation to support the policy framework supported by theBank's Third Economic Assistance Grant to Support Private Sector Development (EAG m,Quarter 1, 2001). EAG III is anchored around a core first set of recently approved commercialregulations: the regulation on business organizations, the regulation on contracts for the sale ofgoods, the regulation on pledges and the regulation on foreign investment.

Relevant Documents: Transitional Support Strategy for Kosovo, September 1999; Program forReconstruction and Recovery of Kosovo, November 1999; Economic and Social Reforms forPeace and Reconciliation, June 2000; Transitional support strategy for Kosovo - ProgressReport, July 2000.

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2. Main sector issues and Government strategy:

(a) Private Sector Background:

During the past ten years the economy of Kosovo deteriorated dramatically. Key sectors such asindustry, mining, and infrastructure suffered from massive disinvestments and neglect ofoperations and maintenance, and Kosovo's human capital eroded significantly. A largeproportion of the economic activity went underground, with intensive development of informnalprivate small enterprises. Kosovo's economy currently includes about 400 socially ownedenterprises (SOEs) and some 28,000 private small and medium enterprises (SMEs). However,these enterprises exist today in institutionally and economically unfriendly conditions withlimited industrial production, very limited access to credit and no regulatory framework. ManySOEs need significant restart capital to be able to produce at any level and have lost the marketsthey used to serve. Indeed, the value added that these SOEs contribute today to Kosovo'seconomy is not very significant.

In this context, it is expected that growth and recovery of economic activity will be driven mainlyby the private sector, that is, by privately owned SMEs, old and new. However, to support theprivate sector, Kosovo needs a comprehensive reform of its commercial legal and regulatoryenvironment. The absence of a legal framework not only creates a vacuum that is favorable tocriminal activities, but also significantly increases the costs and risks of new ventures,commercial transactions, and overall economic activity.

As the first step in the process of creating a viable commercial legal environment, the UNMIK'sDepartment of Trade and Industry (DTI) has recently, with the assistance of the World Bank,completed the drafting and approval process of a first set of commercial regulations: theregulation on business organizations (referred to also as company regulation), the regulation oncontracts for the sale of goods, the regulation of pledges and the regulation on foreigninvestments. This package of regulations is designed to allow economic actors to enter themarket and operate within it. This, however, constitutes only the first step in the creation of afully-fledged commercial framework. Work is well advanced on a new bankruptcy regime, on aregulation on mortgages over immovable property and on the introduction of appropriateaccounting standards. Drafts of regulations on a competition and intellectual property rightsregulation are also being developed.

It is important to emphasize that the successful implementation of the new commercial legalframework will depend heavily on adequate institutional capacity that is able to facilitateunderstanding and enforcement of the new framework. Accordingly, this technical assistanceproject focuses on assisting UNMIK in the development of key cornerstones of this capacitybuilding effort. In a nutshell, these are:

i. development of a new fully-fledged business registry,ii. providing programs to strengthen the capacity of the Commercial and Supreme Courts

and increase the quality of legal services, and

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iii. supporting the development of basic accounting standards, provision of training for localaccountants, and the establishment of an association of accountants.

It should be noted that these few initiatives are not intended to rectify all issues that plague thedevelopment of the private sector in Kosovo. Thus, it should be recognized that this is a startand other activities for improvement of private sector are expected to be undertaken underfollow-up projects. Priority has been given to the above mentioned TA activities as they directlysupport the implementation and enforcement of the incipient commercial regulatory environmentof Kosovo.

(b) Registration of businesses and economic activity

Prior to 1989, registration of business enterprises, associations, and individuals involved inbusiness activity was conducted at the economic courts in Pristina and Gjacova/Djakovica (alsoknown as the "Commercial" courts). The role of the courts was limited to verifying that theapplication submitted was complete and that it included all required documents. This procedurewas purely administrative in nature and the information provided was not independently verified.In fact, applications were never rejected. Overall, the inaccuracy and poor condition of existingrecords, combined with the large proportion of the informal sector that went unrecorded makewhatever is left of the old registration system obsolete and largely useless as a basis for thecreation of new registration system.

A provisional business registration process was established by UNMIK in March 2000 byRegulation No. 2000/8. Aside from gathering initial information regarding the level of post-conflict economic activity of economic units, the main purpose of this provisional registrationsystem was to assist with the administration of taxes for the Central Fiscal Authority (CFA).While the existing provisional registration does provide a form of identification of those who arein business, it is not considered a fully-fledged business registration system and does not createlegal personality for the registrants.

To date, some 28,000 registrations have taken place. The vast majority of these (85 percent)have been registered as sole proprietorships, yet it is estimated that most of them are in factfamily owned businesses operated by more than one individual. It is estimated that as many as2,000 additional registrations of businesses remain to be made.

To promote the development of the private sector and to move the emerging private sector intothe formal economy, a new Regulation on Business Organizations was adopted by UNMIK.This regulation contemplates the establishment of a system of modem business registration thatwill focus on the collection, verification, storage, and retrieval of information pertinent to thecompany's creation, liability, and continued existence.

After a careful assessment of the regulations, laws, and procedures dealing with the current(provisional) registration activity as well as the registrations that took place prior to 1989,UNMIK has decided to establish the new business registration system at the Commercial Court.The business registry is expected to operate as a semi autonomous administrative body,independent from the judicial activities of the Commercial Court. The location of the business

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registry was a controversial issue and several solutions including the setting up of an independentinstitution were reviewed and evaluated. Locating the business registry at the Commercial Courtreceived the support of the president of the Court, ADJ, and the general business and legalcommunity. The detailed plan for the establishment and operation of the business registrationsystem is discussed in Annex 2. Naturally, the current Provisional Registration Unit (PRU) willbe fully incorporated into the proposed registration system and every effort will be made toreduce the overhead and burden to businesses that operated in Kosovo during the businessregistration phase. In parallel, businesses should be educated on the value and procedures of theproposed registration system.

(c) Kosovo 's courts and legal services

The Kosovo Law on Regular Courts lays out the basic principles for the functioning andorganization of the judiciary. The judicial branch is comprised of a single system of general andspecial jurisdiction courts that functions at three levels: first instance (24 municipal courts),ordinary appeal (5 district courts), and extraordinary appeal (the Supreme Court). The specialcourt system comprises commercial courts and courts of minor offenses.

The commercial court system consists of one first-instance commercial court in Pristina.1 Thecommercial court deals with: (i) commercial and economic disputes and liability issues betweenlegal entities; (ii) economic offenses and crimes; (iii) bankruptcies; (iv) issues related toprotection of fair competition (anti-monopoly measures); (v) disputes which result fromaccounting problems; (vi) intellectual property disputes between or within legal entities; (vii)disputes related to the execution of the decisions in the above matters and the application ofcorporate, commercial, banking and business law. The Supreme Court functions as an ordinaryand extraordinary appeal court for all commercial cases.

As of today, activities of the commercial court include only old civil disputes and economicoffenses. The main reason is a lack of formal economic activities and economic players but alsothe absence of an adequate legal and institutional framework that would facilitate integration ofinformal (gray) business into formal structures. Obviously, informal businesses cannot use thecourts to protect their rights. As stated above, a first basic set of commercial laws was approved.In this context, it is envisioned that the number of cases in the commercial court will increasedramatically.

At present, the capacity of the commercial court is very limited. This is mainly due to theinsufficient experience and skills of judges to handle commercial cases. As of today, 13commercial judges have been appointed kl0 judges are in the Commercial Court and 3 for theSupreme Court). All judges graduated from the local law faculty, and passed the Bar exambefore 1989. Most of the judges have experience from the bench and/or prosecutorialexperience. This experience, however, is from the time they were active, that is prior to theirdismissal in 1989.

Prior to the41999 conflict there were two commercial courts in Kosovo, one in Pristina and one in Gjacova.Primarily because of financial constraints, UNMIK's Judicial Affairs Department has decided to reopen only theConnnercial Court of Pristina where most of commercial activities take and will take place. This court startedoperating in January 2000.

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Enterprises in Kosovo tend to use the services of lawyers in their interaction with the stateadministration and the courts. It is evident that, with the passage of the proposed package ofcommercial laws, along with the judicial services, legal advice and the services of lawyers willbe absolutely necessary to guide enterprises through a complex set of new legal rules.

According to the regulations governing legal services, only attorneys registered with the BarAssociation can advise, consult and represent clients in the courts. Today, about 154 lawyers areregistered with the Bar Association. There are, however, strong indications that the majority oflegal practitioners operate informally and are not registered or recognized by the Kosovo BarAssociation. This informal group of legal practitioners includes company lawyers, lawyers whowork for the government and municipalities, and the so-called "lost generation of lawyers"2. Thelawyers organized in the Bar mostly specialize in criminal law. It is the informal group of legalpractitioners who are now focussed on providing legal services to businesses.

While it is difficult to assess the quality of legal services provided today in Kosovo, it is clearthat the situation that will emerge when the new legal framework comes into effectiveness willrequire legal services, which are not currently available. The judges and legal practitioners arenot familiar with the new legal concepts being introduced. There is very little history of relevantand accessible legal information, including jurisprudence, necessary to implement and enforcethese concepts. The combination of novelty of policies and regulations, the absence of basiclegal information, and inexperienced and poorly skilled judges and legal practitioners will makethe implementation and enforcement of the commercial laws in Kosovo difficult. To overcomethese problems, it is of the utmost importance that the capacity of the commercial courts andlegal practitioners be strengthened without delay.

(d) Supporting the development of accounting standards and the accounting profession

The availability and quality of accounting services in Kosovo is unsatisfactory. This situation isdue primarily to a critical shortage of qualified accountants who posses a basic understanding ofaccounting and audit standards. But it is also due to the lack of recognized and acceptedaccounting standards. A sound accounting infrastructure, including appropriately trainedaccounting professionals, is a crucial pillar for private sector development and economic growth.This is particularly true in Kosovo, where large amourits of new investment are urgently needed,and where full transparency of information will play an important role in providing confidence tonew investors.

There are around 3000 individuals who describe themselves as professional accountants inKosovo. However, almost all of them perform simple bookkeeping tasks and have limited or noknowledge of basic accounting and auditing principles. While it is unclear what the exactprocess of certification was prior to 1989, many of these accountants have in fact grown throughthe ranks in enterprises until they have reached the status at which they are consideredaccountants. The degree of formal and informal education of many of these individuals is veryhard to assess.

2 The "lost generation of lawyers" comprises lawyers who graduated from the informal education system between1989 and 2000. It is estimated that there are approximately 2000 graduates from this system.

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As part of UNMIK's comprehensive fiscal reform efforts, a new tax regulation would beintroduced in the next few months, and will require businesses with revenues above a certainthreshold to pay tax on their profits3. The taxable profit will need to be determined in accordancewith applicable Kosovo accounting standards adjusted for some specific tax requirements.According to recent estimates made by the TMF, at least 500 local businesses will be subject tothe new profit tax regime., although UNMIK estimates that the figure could be as high as 5,000.

In this context, a significant number of qualified accountants will be needed to provide adviceand assistance to improve accounting and financial reporting systems and procedures ofenterprises. Given that, there is virtually no current local capacity to perform these tasks,international accountants hired from outside Kosovo at a very high cost are carrying out many ofthe accounting related tasks. Clearly, this is an unsustainable situation over the long term.

To address this problem UlNMIK is in the process of developing and implementing a transitionalstrategy to strengthen the accounting regulatory and institutional capacity. A new accountingregulation is being drafted to introduce rules on maintenance of records on a cash basissupplemented by additional information to enable reconciliation between accounting cash profitand taxable income for businesses subject to profit tax. Additional thought is being given to theintroduction of basic LAS-compliant principles adapted to Kosovo's needs and businessenvironment. It is also intended to support the creation of an association of accountants to assistthe development of sustainable accounting capacity in Kosovo.

3. Sector issues to be addressed by the project and strategic choices:

The project provides technical assistance (consultant and advisory services), training andequipment - to create or strengthen the institutions that will be indispensable for the conduct ofbusiness under the new commercial legal framework. Specifically, the project will address:

(a) The need to establish a modem and user-friendly business registration system. Theimplementation of this component will allow enterprises to acquire legal personality inthe forms and ways described in the Regulation on Business Organizations. Furthermore,the registry will collect information essential for the functioning of a market economy;

(b) The weak capacity of the Commercial and Supreme Courts to adjudicate commercialcases and the lack of legal services relevant to market based business development. Thiscomponent aims at improving the understanding of the commercial judges and legalcommunity of the new commercial framework; strengthening judicial technical skills,improving access to relevant legal information, and strengthening the capacity of legalprofessionals to provide adequate legal advice to private businesses;

(c) The need to establish minimum accounting standards, train local accountants, andestablish an association of accountants, all with the aim to increasing accounting capacityin Kosovo.

3As of today, tax is basically calculated on turnover.

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C: PROJECT DESCRIPTION SUMMARY

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

(a) Development of a new fully-fledged business registry: This component will support theestablishment and operation of a modem business registry system, which will allow enterprises toacquire legal personality in the forms and ways described in the new business organizationregulation. It is envisioned that on the basis of a new business registration regulation thecompetence to register companies will be given to a new registration section to be establishedwithin the Commercial Court. After a transitional period of 6-12 months the current capacity ofthe Provisional Registration Unit (PRU) will be incorporated into the new registry system andpassed into the Commercial Court. More specifically, this component will provide:

i. Advisory services to assist UNMIK's ADJ in drafting the new legislative/administrativeinstrument which will establish the new business registry; to design the transitionalmechanism by which the existing registration functions will be transferred to the registryunder the Commercial Court; and to explore the possibility of developing a pledgeregistry;

ii. Procurement of hardware, software, and other MIS to implement the transfer offunctions and the development of the new registry;

iii. Advisory services on business registry application and database development;iv. Advisory services to develop a public information campaign on the new business

registration system and training of key personnel at the Commercial Court;v. Advisory services to assist UNMIK with the establishment of a new pledge registry

using the resources of the new fully-fledged business registration unit. Further donorfunds will be sought for this activity.

(b) Strengthening the capacity of the Commercial and Supreme Courts and improving thequality of legal services:

The Commercial Courts capacity will be strengthened through:

i. Emergency training for sitting commercial judges and selected legal practitioners. Theprogram will include: 1) ad-hoc training aimed at understanding the recently approvedcommercial regulations and business environment, improving the technical skills ofjudges; 2) study tours of commercial judges to neighboring countries with a wellfunctioning commercial courts system and 3); apprenticeship program for judges in thecommercial courts of a neighboring country;

ii. Establishing law libraries in the Commercial Court and the Supreme Court accessible tolegal practitioners. The libraries will contain relevant legal literature, manuals, andcollections of court opinions from neighboring countries;

iii. Drafting of commentaries for the new package of commercial regulations;iv. Pilot legal aid program to finance a small group of legal professionals who will provide

legal advice to small and medium businesses free of charge or for a reduced charge.

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(c) Development of basic accounting standards, and provision of training, andestablishment of an association of accountants: This component will finance:

i. Advisory services to establish minimum accounting standards;ii. Training program for local accountants in basic accounting principles;iii. Procurement of hardware and software for the training of accountants;iv. Assistance in the establishment of an association of accountants.

(d) Project Implementation Support: This component will finance:

i. A Financial Management/Implementation Specialist to manage and assist with financialmanagement and reporting requirements of the project;

ii. Three local project assistants

Component Sector Indicative % of Bank- % ofCosts Total Financing Bank-

(US$ mln) (US$ mtn) Financing

Development of a new fully-fledged Institutional 1.36 45 1.36 45business registry Development

Program for strengthening capacity Institutional 0.89 30 0.89 30of the courts and increasing quality Developmentof legal services.

Development of basic accounting Institutional 0.52 17 0.52 17standards, provision of training, and Developmentestablishment of an association ofaccountants.

Project Implementation Support Institutional 0.23 8 0.23 8Development

2. Key policy and institutional reforms supported by the project:

As previously stated, the proposed project is complementary to the Third Economic AssistanceGrant to Support Private Sector Development (EAG Il, Quarter 1, 2001), which is anchoredaround the introduction of the commercial legal framework essential for PSD. The introduction ofa new commercial framework calls for capacity building in the institutions that are key for itsimplementation. The introduction of a new company regulation requires the creation of a modembusiness registry that allows enterprises to acquire legal personality in the forms and waysdescribed in the new regulation. Moreover, the introduction of a new legal framework requiresimproved capacity of the commercial court and legal practitioners to provide their services. Finally,the establishment of a new tax regulation requires the development of a basic accounting capacity,provision of training for local accountants, and the creation of an association of accountants.

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3. Benefits and target population:

The project aims at creating or strengthening the institutions that will support the newly createdcommercial legal framework. Specifically, the principal benefits will include the creation of amodem and user-friendly business and pledge registry, strengthening of the capacity of the legalprofessionals and commercial judges, and development of basic accounting principles andprovision for training of local accountants. The target population is the enterprise sector and thebusiness community at large, which will benefit from an improved business-enablingenvironment.

4. Institutional and implementation arrangements:

The project would be implemented over a two-year period.

The main executing agencies, the Administrative Department of Justice (ADJ) and the CentralFiscal Authority (CFA), will oversee the implementation and take overall responsibility for therespective component of their project. Two Project Coordinators will be nominated by the ADJand CFA to manage and provide a basic oversight role to ensure that the project is beingimplemented according to agreed objectives and operating manuals. The project coordinators willfornally report to the head of ADJ and CFA, respectively. The project coordinators will workclosely with representatives from the Department of Trade and Industry (DTI), the ProvisionalRegistration Unit (PRU), and the OSCE.

The CFA will be responsible for the financial management aspects of Grant administration. Anassessment of the financial capacity of the CFA has been conducted, and has concluded that theexisting system meets at least the minimum requirements for proper grant administration andreporting. However, the current capacity, within the CFA may become overly stretched by therequirements considered necessary to meet the FMS requirements of all Bank financed projects. Itis therefore proposed that a new financial management specialist be financed from the grant andlocated in the CFA. With the assistance of the new specialist CFA is expected to produce fullquarterly Project Management Reports (PMRs) by September 2001. To increase local financialmanagement capacity in Kosovo, at least two local assistants will also be hired in CFA under thegrant and will be trained by the FM specialist.

In addition, the Central Procurement Authority (CPA) will be responsible for carrying out allprocurement activities related to the project in accordance with World Bank guidelines andprocedures. A local assistant will be recruited under the grant to assist with the project procurementactivities. It is proposed that the CPA would carry out procurement according to agreed procedureson behalf of the departments involved in the project. However, departments in charge of individualcomponents will be responsible for defining the terms of reference, determining short lists,establishing evaluation committees, and contract management.

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In relation to proposed audit arrangements, CFA is in process of appointing Auditors to undertakeaudits of the entire consolidated Kosovar budget. This will also include an audit of the use of theGrant funds. CFA will utilize traditional disbursement procedures at the inception of the project.Once acceptable acronym PMRs are produced, a move to PMR-based disbursement could beconsidered.

D: PROJECT RATIONALE

1. Project alternatives considered and reasons for rejection:

Two other alternatives were considered and were rejected on the possible location of the businessregistry. These were:

(a) Private Sector Entity: The project team considered the possibility of creating a privateregistry, which should be accessible by all the interested parties. In particular, some considerationwas given to the use of the newly emerging Credit Information Service (CIS). The CIS was createdby a handful of existing financial institutions and provides its members with information on theborrowers of all the member institutions. However, the members of the CIS showed little interest inthe proposal. Moreover, given that the registry fulfills a public function it seems more appropriatethat the registry be public in nature.

(b) Separate Centralized Government Agency: At an earlier stage of project preparation it wasenvisioned that the registry could be established as a separate government agency under theEconomic and Natural Resources Department or the Judicial Affairs Department. This would havemeant strengthening the capacity of the temporary business registration unit to include a data entrysection, as the Statistical Office has to take on other functions. However, all the Kosovarstakeholders strongly support the location of the registry in the Commercial Court. In particular, thebusiness conmmunity felt that if the registration had to take place in a separated government agency,the information collected could have been misused. Also, the local business community wasadamant in its view that an entrepreneur would think twice before providing false information tothe court. The community of legal professionals, including judges, lawyers and academics,expressed a strong preference to have the registry based in the court.

A larger scale support component for a comprehensive reform of the commercial court was notconsidered as needed since other donors are providing targeted support to Commercial Courtsmainly in the form of technical assistance for court and case management.

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2. Major related projects financed by the Bank and/or other development agencies(completed, ongoing and planned):

Sector Issue Project Latestsupervision

(PSR) Ratings.(Bank Projects

Only)PSD - creation of Economic Assistance Grant for Private Sector Development Under Preparationnew commercial (EAG E)frameworkPSD - SME Pilot SME Line of Credit Project Sdevelopment

Other development agenciesAssistance on USAID: Financing the development of Kosovo accountingAccounting regulation.Assistance to SEED: Assists entrepreneurs develop sound business plansBusinesses through seminars and one-to-one assistance.

Assistance to the ABA/CEELI: Training of Magistrate and judges on criminal andJudiciary human rights

Assistance to the Belgium Government: Technical Assistance to Kosovo JudicialJudiciary Institute on criminal law, and human rights law

Assistance to the Finish Government: Automation of case management systemJudiciary and development of a web site for legal databaseAssistance to the EAR: Upgrading and refurbishment of court buildings includingJudiciary the Commercial CourtAssistance to the French Govenment: Tecbnical assistance on case managementJudiciary and refurbishment of court buildingsAssistance to the US Government:Judiciary i. Technical Assistance for court management. Assistance

specifically in finance and personnel managementii. Training in criminal, civil and juvenile law; law drafting;

legal literature; and legal translationiii. Quick start package including essential equipment

distributed to each court

3. Lessons learned and reflected in the project design:

Many of the lessons learned from similar TA operations were taken into account in the design ofthis project. Lessons from other projects indicate that when designing and reforming newinstitutions, particular attention should be paid to:

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(a) Minimizing the impact on the budget; this is especially applicable in the case of Kosovowhich has a very limited tax base;

(b) Preserving the existing institutional capacity; this is especially true in the case of Kosovowhich, for historical reasons, has very limited institutional capacity;

(c) Ensuring that the institutions are user-friendly; this holds especially for Kosovo as in thepast ten years a large proportion of Kosovo's economic activity went underground.Hence the new regulatory framework will be successful only if it makes the cost ofoperating legally significantly less than the cost of operating illegally.

Lessons learned from other operations carried out in Kosovo were also taken into consideration.These include the need to ensure:

(a) Local ownership to guarantee sustainability. This will ensure compliance by the Kosovarsand continuity in the project given the high turnover of the international counterparts;

(b) Donor coordination to avoid duplication of efforts;(c) Flexibility given the uncertain political situation;(d) Integration of the parallel structures into the formal legal and institutional structures;(e) High turnover of UNMIK staff. In order to mitigate this risk, funds have been allocated

under grant for hiring additional staff if required.

4. Indications of borrower commitment and ownership:

IJNMIK has requested Bank's support in designing the overall PSD agenda. The Bank has alsobeen heavily involved in reviewing the package of commercial regulations whoseimplementation is supported by this technical assistant project.

5. Value added of Bank support in this project:

In view of the limited availability of Bank resources for Kosovo and in light of the large financingrole of other donors, the Bank's strategy for Kosovo is based on investing in areas where the Bankhas a comparative advantage. The Bank's comparative advantage in financing this project stemsfrom its extensive experience in creating legal and institutional frameworks for PSD in the region.The crucial role played by a commercial framework in PSD is self-evident.

E: ISSUES REQUIRNG SPECIAL ATTENTION

1. Economic

The economic rate of return for the fully-fledged business registry is identical to its financialreturns because, as an UNMIK department, the business registry will not pay taxes. In addition,the financial analysis performed for the fully-fledged business registration system has notincluded the many externalities expected to benefit the Kosovo economy from its introduction:improved credit access for businesses; more efficient use of existing asset stocks as collateral;lower transaction costs in the financial system; additional employment and output resulting fromimproved business access to credit.

17

2. Financial

Financial cost benefit analysis was carried out for the operation of the proposed fully-fledgedbusiness registration unit. The analysis has shown that the project is expected to be financiallyviable on the basis of the assumptions used in the financial analysis. Although the businessregistry is expected to generate substantial surplus net revenues that will be transferred to theKosovo central budget, its objective is to fully cover costs and not to earn substantial profits.(See Annex 4 for more detail.)

Other project components will not be subject to financial analysis, mainly because they haveinstitution building, not return on investment, as their primary objective. These activities arerelatively low in cost, have had a high positive impact in other contexts and, while there areclearly identifiable benefits from successful implementation they cannot be quantifiedmeaningfully.

3. Technical

As mentioned above, the main executing agencies ADJ and CFA will oversee theimplementation and take overall responsibility for the respective components of the project. TwoProject Coordinators will be nominated by the ADJ and CFA to manage and provide oversightrole on project implementation. Since the project is multi-dimensional and complex and giventhe high turn over of staff at UNMIK, the effective implementation of the project may behampered. In order to mitigate this risk, unallocated/contingency funds have been built into theproject design to reinforce as required the project implementation management.

The new fully-fledged business registry will be developed under a tumkey contract with anexperienced international party covering software adaptation or development, hardware purchase,registry establishment and operation, training and project management. The draft TOR for thecontract has been prepared. In addition, the project team has launched an assessment of thepledge registry that is expected to utilize the resources of the new fully-fledged business registry.The project has allocated some funds to assist with implementation of the pledge registry; that isexpected to be complemented by other donor funding.

4. Institutional

(a) Executing agencies:As mentioned previously, the main executing agencies are the Administrative Department ofJustice and the Central Fiscal Authority. They will each oversee the implementation and takeoverall responsibility for their respective project components.

i. ADJ supported by Provisional Registration Unit (PRMJ, will be responsible for theestablishment of a modem business registration system and pledge registry. It is envisagedthat the current resources of the PRU will be fully incorporated into the new registry systemand its operation will become the responsibility of ADJ.

18

ii. ADJ supported by OSCE will be responsible for the development/procurement of trainingpackages, study tours and training to strengthen the understanding and awareness ofcommercial issues amongst legal professional and commercial judges.

iii. CFA will be responsible for the establishment of minimum accounting standards, theprovision of training for local accountants, and supporting the creation of an association ofaccountants. In addition, CFA with the assistance of CPA will manage the project'sfinancial management, procurement, and reporting requirements.

(b) Project management:The two project coordinators nominated from ADJ and CFA will manage and assume overallresponsibility for successful implementation of their respective sub-components.

(c) Procurement issues:CPA already assists other Bank funded projects with their procurement activities. However,since the current capacity in CPA is overly stretched a local assistant will be recruited under thegrant to assist the project coordinators with procurement activities of the project.

(d) Financial management issues:The project will be assisted by CFA on financial management and reporting requirements. TheCFA has in place a financial management system that is capable of producing projectmanagement reports as required by the Bank. This system has already been utilized for otherBank funded projects. Through this project a financial manager will be hired for the CFA, whoseprimary responsibility would be to prepare project management reports for all bank financedprojects. As part of its responsibilities CFA will be responsible for opening the project's SpecialAccount (SA). The SA, as in other projects managed by CFA, is a sub-account of their existingcommercial bank account. The SA will be replenished periodically using CFA's financialaccounting system.

5. Environmental Environmental category C

Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from thisanalysis.

There are no environmental issues to be addressed by the project, and EMP is not required.

6. Social

Participatory Approach: How are key stakeholders participating in the project?The project has been designed in cooperation with the ADJ, OSCE, BRU, CFA, DTI,Commercial Court, the Supreme Court, the Bar Association, the Legal Association. The businesscommunity at large has also been consulted.

19

How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?The project has been designed in consultation with the major legal NGO, the Kosovo Law Center.Advice has also been sought from the existing financial institutions. The project has been designedin close coordination with all the other donors involved in the area, such as USAID, ABA, EAR,CEELI, and the French Government.

7. Safeguard Policies

(check applicable items):

Environmental Assessment (OD 4.01)Natural Habitats (OP/BP/GP 4.04)Forestry (OP 4.36)Pest Management (OP 4.09)Cultural Property (OPN 11.03)Indigenous Peoples (OD 4.20)Involuntary Resettlement (OP 4.30)Safety of Dams (OP 4.37)Projects on International Waterways (OP 7.50)Projects in Disputed Areas (OP 7.60) _

F: SUSTAINABILITY AND RISKS

1. Sustainability:

As far as sustainability of the institutional reform/strengthening supported by the project isconcerned, the project has been designed in close consultation with the relevant stakeholders tostrengthen the already existing institutions- the Commercial Court, and the Kosovo JudicialInstitute- and finance the creation of a new registry. As far as financial sustainability is concerned,an analysis of the financial sustainability of the registry indicates that the registry could be self-sustaining after one year.

The sustainability of non-revenue generating component/subcomponents will be achieved throughcareful selection of the types of technical assistance that are suitable to local conditions andrequirements of the new commercial framework.

20

2. Critical Risks: (see Annex 1)

Risk Risk Risk Minimization MeasureRating_

From Outputs to Objective

Continued commitment to improve the N UNMIK's plan to create a new business enabling legalbusiness enabling environment and framework and its desire to meet the goal of the Bank's EAG IIIapproval of additional conunercial project.regulations;Local support for acceptance of new H The Project team has discussed this issue with the localbusiness enabling environment after authorities and UNMIK, and it is generally agreed that thepossible departure of UNMIK; project will not suffer as a consequence. However, strong and

close supervision of the project will be maintained with strongpolicy dialogue and public informnation campaign to support thereforms.

Acceptance by the Legal profession of M Commitment from legal community, policy dialogue, and Publicnew legal environment Information Campaign.

|From Components to Outputs

Advisor-s are not appointed in time. S The procurement procedures to hire the services planned willstart early in the project.

Continued CFA's capability to perform M The Project will fund one Financial Management Specialist andFinancial Management activities three local staff to assist with the Financial Management andrequired by the Project Procurement requirements of the project.The project coordination/management S The design of the project built in some unallocated/contingencywill be carried out effectively given funds and sufficient flexibility in case there is a need tohigh turnover of staff in Kosovo reinforce support to project management.Recommendations of advisors are not S/M LJNMIK commitment to establish a new commercial framework.implemented.Overall Risk Rating S

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), and N (Negligible or Low Risk)

21

G. MAIN LOAN CONDITIONS

1. Effectiveness Conditions:

There are no conditions of effectiveness for this project.

2. Other [classify according to covenant types used in the Legal Agreements.]

(a) A mid-term review to be conducted by March 31, 2002 based on satisfactory TORs.(b) The CFA is to maintain satisfactory Financial Management Systems, including records

and accounts, and prepare financial statements in accordance with accounting standardssatisfactory to the Bank; and the CFA is to provide annual project accounts andinstitutional audits to the Bank within six months of each fiscal year (with the audit to becarried out by independent auditors in accordance with international auditing standards,and TORs satisfactory to the Bank).

H. READINESS FOR IMPLEMENTATION

The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

I. COMPLIANCE WITH BANK POLICIES

This project complies with all applicable Banpolicies.

(signature)Team Leader: Corrochano

(signature) 4 1Sector Manager: ham

(signature)Country Director: Christiaa a

22

Annex 1: Project Design Summary



Hierarchy of 6Objevti Ky;0e -.- i, |0 Kion

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (fr. Goal to Bank Mission)

* To encourage the private sector-led growth. * Increased share of GDP produced by the private * Country and sector economic * Continued peace process;

sector. reports. * Continued political stability.

Project Develpmt. Object.: Outcome/lmpact Indicators: Project reports: (from Objective to Goal)

* To itmprove the business enabling environment * Number of registered enterprises and tssmover time * ESW on Private Sector * Continued implementation of other

fbr private sector growth by: of registration process Development; economic policies and reforms;

- supporting the establishment and operation of a * Availability of infornnation from the business * Report on court statistics; * Sustained comsnitment to judicial

iodemn business registry system; registry for tax purposes; * Surveys ofjudicial end legal reform.

strerigtiheninig the courts and helping improve 'the * Number of completed cases at the Comnnercial services;

quality of legal services; Courts; * Bank supervision reports.

assisting in the development of accounting * Number of Judges and Lawyers completed the

stanidards, providing training to accountants and training programs

creatiaig an association of accountants. * Improved compliance on accounting standards.

Output from components: Output Indicators: Project reports: (from Outputs to Objective)

* Modem fully-fledged business registry system. * FuDly-fledged business registry fuDy operational; * Report on court statistics; * Continued conmiitment to improve the

* Launch registrabon process. * Bank supervision reports; business enabling environment and

Progress reports submitted by the approval of additional commercial

. Upgraded skills of commercial judges and legal * All commercial judges trained; CFA; regulabons;

professionals; * Legal professionals trained; * Surveys to users of business * Local support and acceptance to new

. Legal libraries in the courts; * Legal hlbraries operational; registration, legal services, and business enabling environment after

* Conimentaries to the 4 conmmercial regulations; * Regulaton's commentaries published; accounting services. possible Departure of UNMIK;

* Legal aid scheme for private business. * Legal aid center operational. * Acceptance of legal professionals ofnew legal environmnent;

* Accounting association and training program; * Estabhlishnment of accounting body;

* Number of trained accountant.

Project components: Inputs: (budget per comp.) Project reports: (fr. Components to Outputs)

* Development of a new fally-fledged business * US$ 1.36 million. * Progress Reports submitted by * Tinnelyappointmentofadvisors

registry the PIU; * Continued CFA's capability to perform

* Bank supervision reports. Financial Management activities required

* Prograin for strengthening capacity of the courts * US$ 0.89 million. by the Project

aisd increasing the quality of legal services. . The design of the project built in some

unallocated/contingency funds and

. Development of basic accounting standards, and * US$ 520 thousand. sufficient flexibility in case there is a need

provision of training, and establishment of an to reinforce support to project

association of accountants. managenment.* Implenmentation of reconmendations by

* Project Implementation Support. * US$ 230 thousand. advisors.

23

Annex 2: Detailed Project Description



The project consists of four components.

By Component:

Project Component 1 - Development of a new fully-fledged business registry- US$1.36 million

A Regulation on Business Organizations was recently adopted in Kosovo. There is every expectationthat this Regulation will be adopted fairly soon, possibly by early 2001. The Regulation contemplatesthat a system of registration will be established to provide the business registration required by theRegulation.

There is currently in effect a Provisional Registration Unit (PRU) that was established to support asystem of taxation and to provide data on the Kosovo economic activity. Data on the registration andeconomic records is entered into a computerized system and stored by the Statistical Office. As it iscurrently constituted, this provisional registration system will not provide the support required by theRegulation.

After a careful assessment of the regulations, laws, and procedures dealing with the current (provisional)registration activity as well as the registrations that took place prior to 1989, UNMIK has decided toestablish the new business registration system at the Commercial Court. The business registry isexpected to operate as a semi autonomous administrative body, independent from the judicial activitiesof the Commercial Court. The location of the business registry was a controversial issue and severalsolutions, including the setting up of an independent institution, were reviewed and evaluated. Locatingthe business registry at the Commercial Court received the support of the president of the Court, theAdministrative Department of Justice, and the general business and legal community.

However, the Commercial Court would have to be staffed, equipped, and trained to operate the newsystem. To overcome this and to facilitate the rapid implementation of the new fully-fledged BusinessUnit, a Business Registration Unit will start with a six to nine months transitional period. During thisperiod, the current PRU will be incorporated into the proposed registration system including the transferof its data, staff, and facilities. As discussed earlier, the project management for the set-up, transitionand operation of the new business registry will be developed under a turnkey contract with anexperienced international firm. The key elements of this plan include the following:

(a) Advisory services to assist UNMIK's ADJ in drafting the new legislative/administrativeinstrument which will establish the new business registry; to design the transitional mechanismby which the existing registration functions will be transferred to the registry under theCommercial Court; and to explore the possibility of developing a pledge registry;

(b) Procurement of hardware, software, and other MIS to implement the transfer of functions andthe development of the new registry;

(c) Advisory services on business registry application and database development;

24

(d) Advisory services to develop a public information campaign on the new business registrationsystem and training of key personnel at the Commercial Court;

(e) Advisory services to assist UNMIK with the establishment of a new pledge registry using theresources of the new fully-fledged business registration unit. Further donor funds will be soughtfor this activity.

A turnkey management contract will be sought to manage the set-up, establishment, and smoothtransition of the existing Provisional Business Registry to a fully-fledged business registry. The newfully-fledged business registry is expected to be operational by the fourth quarter 2001 and the contract isexpected to last up to nine months (April-December 2001). The contract will include a three-monthperiod during which the satisfactory management of transfer and function of the new registration systemto local registrars will be required.

Project Component 2 - Program for strengthening capacity of the courts and increasing thequality of legal services - US$0.89 million

The Component will comprise two sub-components: (i) strengthening capacity of the Commercial Courtand the Supreme Court, and (ii) improving quality of legal services for small and medium businesses.

The following activities will be carried out under the first sub-component:

i. In order to "stand up" the existing commercial judicial system, an emergency training programnfor commercial judges and commercial lawyers, will be designed and executed. The trainingprogram will be aimed at sitting commercial judges in the Commercial Court (10) and in theSupreme Court (3), and selected practicing lawyers. The program's main goal will be to preparethe newly appointed judges and lawyers for their duties. The program will focus on all the newlegal concepts recently introduced in Kosovo4 as well as developing new skills and best practicesassociated with the decision-making processes. Economics, finance, business administration,accounting and other business disciplines will be integral parts of the proposed training program.

ii. The above training program will be complemented by a study tours of the Kosovo commnercialjudges to one or two countries with well functioning commercial court systems and anapprenticeship program in the courts of neighboring countries. The main purpose of the studytours will be to give the comnmercial judges an opportunity to exchange experiences with theircolleagues in other countries and to be exposed to the best judicial practices. The main purposeof the apprenticeship program is to facilitate a fast accumulation of relevant judicial experience.Under this program, Kosovo's commercial court judges will study judicial operational practicesfor approximately two months in functioning commercial courts. In order to be successful, theprogram should be conducted in a country (i) with a more developed judicial system; (ii) with asimilar institutional and legal framework; and (iii) without language barriers. It has beententatively agreed upon with the Kosovo judges and the Croatian Ministry of Justice and thepresidents of the commercial courts in Croatia that this program will be conducted in Croatia.

4' the regulation on business organizations (referred to also as company regulation), the regulation on contractsfor the sale of goods, the regulation of pledges and the regulation on foreign investments".

25

iii. In order to increase the opportunities for self-study by the judges the libraries will be created inthe Commercial Court and the Supreme Court. The libraries will comprise relevant legal andjudicial literature, including commentaries on commercial laws and court precedents from othercountries. In addition, a personal "rescue package" of basic laws, manuals, guidelines and courtprecedents will be given to all sitting judges. For the first six months of the projectimplementation an advisor, preferably selected among experienced commercial judges, willadvise the Kosovo judges on an ad-hoc basis.

iv. A set of commentaries on the recently issued laws will be prepared. The goal of this projectactivity will be: (i) to secure the consistent and accurate interpretation of the laws, and (ii)toincrease the ownership and understanding of the relevant legal concepts. The commentaries,therefore, should be prepared through a participatory process.

The following activity will be carried out under the second subcomponent:

i. A pilot legal aide program focusing on the small and medium businesses will be designed andimplemented. The main goals of the program will be to compensate for the lack of relevant legalservice in the market and to assist in forming the core of specialized commercial lawyers. Underthis program, a group of about 20 young law faculty graduates will be financed for a year toprovide legal advice free of charge or for reduced fees. The group will be led and overseen by anexperienced international consultant.

Project Component 3 - Development of accounting standards, training of accountants, andcreation of an association of accountants - US$0.52 million

A Regulation on Accounting is currently being drafted, and the intention is that it should be adoptedbefore the end of June 2001. Its primary purpose is to support the introduction of the Profits Tax in2002, by introducing simplified requirements for the keeping of records and the preparation of enterprisefinancial statements. In addition, the provisions of the Regulation will pave the way for the introductionof more market-oriented financial reporting. Although the full introduction of International AccountingStandards (LAS) is neither necessary nor feasible in the current context of Kosovo, the new requirementswill be LAS-compatible, and will constitute the starting point for a process of convergence, over time,with full IAS. This project component is intended to provide support to the continuing development ofthe accounting requirements laid down in the Regulation.

Successful implementation of the new financial reporting regime will require the retraining of theexisting stock of accountants in Kosovo, and the development of a new education, training andexamination program for those who wish to become accountants in the future. The project will supportthe development of the necessary training materials, the delivery of training courses, and the design andimplementation of an appropriate regulatory regime to govern the accreditation of accountingprofessionals.

The creation of an association of accountants is also considered necessary to provide a sustainableinstitutional framework for the continuing development of accounting capacity in Kosovo. The projectwill support the creation of such an organization. It is not intended that, at an early stage, any regulatoryfunctions will be delegated to the association, although this is an issue that will be kept under review asthe project progresses.

26

Project Component 4 - Project Implementation Unit- US$0.23 million

A financial management specialist will be hired under the grant for the CFA in order to prepare PMRs asrequired by the Bank. Two local accountants will also be hired using grant funds by the CFA to be trained bythe financial management specialist. In addition, one local consultant will be hired by Central ProcurementAuthority to assist with the procurement requirements of the project.

27

Annex 3: Estimated Project Costs



LOCAL I FOREIGN TOTALProject Cost By Component US $ million

Development of a new fully-fledged business registry 0.40 0.86 1.26Program for strengthening capacity of the courts and 0.08 0.70 0.78increasing quality of legal services.

Development of basic accounting standards, provision of 0.10 0.42 0.52training, and establishment of an association ofaccountants.

Project Irnplementation Support 0.07 0.16 0.23

Total Baseline Cost 0.65 2.14 2.79Physical Contingencies 0.02 0.08 0.10

Price Contingencies 0.02 0.09 0.11

Total Baseline Cost 0.69 2.31 3.00

Interest during construction Front-end fee

Total Financing Required 0.69 2.31 3.00

-- :- :- -;fL; lForeign Total

Ptotect C*ory u S _ _millioon

Goods 0.26 0.26WorksServices 0.39 1.72 2.11Training/Study tours 0.12 0.12Incremental Operating Cost 0.30 0.30Unallocated 0.21 0.21Total Project Costs 0.69 2.31 3.00

Interest during construction _.

Front-end feeTotal Financing Required 0.69 2.31 3.00

28

Annex 4: Cost Benefit Analysis Summary



(US$, FY 2001-2007)Cost 0enerit Analysis: New Pr,eset Value of Flows FISCAL IMPACT

,Qd!;SSu i~:i S;R ( ly;fji, Eeonomicy F inindil 0

Anasis V AnalOs!s Taxes SubsidiesBenefits_NPV of revenue using discount rate of $2,478,416.407% over 7 yearsNPV of revenue using discount rate of $2,205,892.681 0% over 7 yearsNPV of revenue using discount rate of $1,838,881.9015% over 7 years

CostsNPV of costs including investment cost $2,011,498.27using discount rate of 7% over 7 yearsNPV of costs including investment cost $1,897,228.11using discount rate of 10% over 7 yearsNPV of costs including investment cost $1,735,873.30using discount rate of 15% over 7 years

Net Benefats:Net benefit using discount rate of 7% $466,918.13over 7 yearsNet benefit using discount rate of I10% $308,664.56over 7 yearsNet benefit using discount rate of 15% $ 103,008.59over 7 years

IRR:ERR of the project based on the base 18.2%case scenarioIRR of the project based on 20% 8.6%reduction in revenue

Summary of Benefits and Costs:

SThe economic rate of return for the fully-fledged business registry is identical to its financial returns because the business registrywill not pay taxes and also because the analysis has not included the many externalities expected to benefit the Kosovo economy fromits introduction.

29

The above financial cost-benefit analysis was carried out for the new fully-fledged business registrationcomponent. The analysis is based on the estimated capital and operating costs and the forecast volumesand revenues contained in the detailed Kosovo Registries Modernization study (November 2000) as wellas subsequent input from the Provisional Registry Unit. The MIRR for the Business Registration Unit iscalculated at a healthy rate of 18.2 percent.

The financial analysis does not include the many externalities expected to benefit the Kosovo economyfrom the implementation of this component: improved credit access for businesses; more efficient useof existing asset stocks as collateral; lower transaction costs in the financial system; additionalemployment and output resulting from improved business access to credit.

Main Assumptions6:

* The time horizon for the financial projection is seven years.* The tariff and cost estimates are based on the finding of the Bank funded "Kosovo Registries

Modernization study of November 2000" as well as information provided by the PRU. The mainestimates are:

0 Four thousand new businesses will register in FY 2002 (and grow at a rate of 5% pa)at a cost of DEM 150 per unit.

0 Five thousand companies in Kosovo out of 28,000 registered will be required toprepare and submit financial statements to the new fully-fledged Business RegistrationSystem at an estimated cost of DEM 50 per unit.

0 One thousand businesses are estimated to be terminated at a cost of DEM 10 per unit.0 The rate of growth for new businesses is assumed to be 5% over the next 7 years.

- The Exchange rate used is 2 DM = US$ 1.* The project is expected to be fully operational by Quarter 4, 2001.- Cost and tariff estimates are expressed in constant terms, using costs calculated in early 2001.- Due to potential productivity increases, the operating cost will remain the same while the number

of businesses registered will increase.

Sensitivity analysis / Switching values of critical items:

The Analysis above illustrates that the project's sustainability is strong and not overly sensitive toreduction to revenue.

6 More detailed financial analysis is provided in the project implementation plan.

30

Annex 4: Cost Effectiveness Analysis Summary



NOT APPLICABLE

31

Annex 4: Other

NOT APPLICABLE

32

Annex 5: Financial Summary



Years Ending FY 2001 and 2003

lYearl l Year 2 lYear 3 lYear 4 l YearS l Year 6 lYear7_OTotal Financing Required 1,394,900 158,900 158,900

lProject Costs

Investment Costs 1,236,000 0 0Recurrent Costs 158,900 158,900 158,900

Total Project Costs 1,394,900 158,900 158,900

Interest duringconstruction

Front-end Fee

Total Financing 1,394,900 158,900 489,618

Financing

IBRD/IDA 1,282,400 0 0Government 0 0 0

CentralProvincial

Co-financiersUser Fees/Beneficiaries 112,500 513,178 489,618OthersOthersOthersOthersOthers 489,618

Total Project Financing 1,394,900 513,178 489,618 0 0 0 0

33

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7OTotal Financing Required 1,394,900 158,900 158,900 158,900 158,900 158,900 158,900lProject Costs

Investment Costs 1,236,000 0 0 0 0 0 0Recurrent Costs 158,900 158,900 158,900 158,900 158,900 158,900 158,900

Total Project Costs 1,394,900 158,900 158,900 158,900 158,900 158,900 158,900

Interest duringconstruction

Front-end Fee

Total Financing 1,394,900 513,178 489,618 514,099 539,803 566,794 595,133

Financing

IBRD/IDA 1,282,400 0 0 0 0 0 0Government 0 0 0 0 0 0 0

CentralProvincial

Co-financiersUserFees/Beneficiaries 112,500 513,178 489,618 514,099 539,803 566,794 595,133

OthersOthersOthersOthersOthers

1,394,900 513,178 489,618 514,099 539,803 566,794 595,133Total Project Financing'

Main assumptions:* The time horizon for the financial projection is seven years.* The tariff and cost estimates are based on the finding of the Bank funded "Kosovo Registries Modernization

study of November 2000" as well information provided by the PRU. The main estimates are:0 Four thousand new businesses will register in FY 2002 ( and grow at a rate of 5% pa) at a cost of

DEM 150 per unit.0 Five thousand companies in Kosovo out of 28,000 registered businesses will be required to prepare

and submit financial statements to the new fully-fledged Business Registration System at an estimatedcost of DEM 50 per unit.

0 One thousand businesses are estimated to be terminated at a cost of DEM 10 per unit.0 The rate of growth for new businesses is assumed to be 5% over the next 7 years.

34

* The Exchange rate used is 2 DM = US$ 1.* The project is expected to be fully operational by Quarter 4, 2001.* Cost and tariff estimates are expressed in constant terms, using costs calculated in early 2001.* Due to potential productivity increases, the operating cost will remain the same while the number of

businesses registered will increase.

Project Financing Plan (2001-2007) in US$

35

Annex 5: Financial Summary for Revenue Earning Project Entities

NOT APPLICABLE

36

Annex 6: Procurement and Disbursement Arrangements



'I." PROCUREMENT

Procurement methods (Table A)

Section I. Consultants' Services

Part A: General

Consultants' services shall be procured in accordance with the provisions of the Introduction and SectionIV of the "Guidelines: Selection and Employment of Consultants by World Bank Borrowers", publishedby the Bank in January 1997 and revised in September 1997 and January 1999 (the ConsultantGuidelines), and the following provisions of this Section I.

Part B: Quality- and Cost-based Selection

Except as otherwise provided in Part C of this Section, consultants' services shall be procured undercontracts awarded in accordance with the provisions of Section II of the Consultant Guidelines,paragraph 3 of Appendix 2 thereto, and the provisions of paragraphs 3.13 through 3.18 thereof toapplicable to quality- and cost-based selection of consultants.

Part C: Other Procedures for the Selection of Consultants

Individual Consultants

Services for tasks under project components A, C, and D that meet the requirements set forth inparagraph 5.1 of the Consultant Guidelines shall be procured under contracts awarded to individualconsultants in accordance with the provisions of paragraphs 5.1 through 5.3 of the ConsultantGuidelines.

37

Selection Based on Consultants' Qualifications

Services for technical assistance, under project component A and estimated to cost less than US$100,000 may be procured under contracts awarded in accordance with the provisions of paragraphs 3.1and 3.7 of the Consultant Guidelines.

Training

Training shall be procured on the basis of quotes obtained directly from training providers in accordancewith the procedure agreed upon with the Association.

Part D: Review by the Association of the Selection of Consultants

Selection Planning

Prior to the issuance to consultants of any requests for proposals, the proposed plan for the selection ofconsultants under the Activities shall be furnished to the Association for its review and approval, inaccordance with the provisions of paragraph I of Appendix 1 to the Consultant Guidelines. Selection ofall consultants' services shall be undertaken in accordance with such selection plan as shall have beenapproved by the Association, and with the provisions of said paragraph 1.

2. Prior review

(a) With respect to each contract for employment of consulting firms estimated to cost the equivalentof US$ 100,000 or more, the procedure set forth in paragraphs 1, 2 (other than the third subparagraph ofparagraphs 2(a)) and 5 of Appendix 1 to the Consultant Guidelines shall apply.

(b) With respect to each contract for employment of consulting firms estimated to cost less than theequivalent of US$ 100,000 the procedures set forth in paragraph 1, and the first and third subparagraphsof paragraph 2(a) of Appendix I to the Consultant Guidelines shall apply.

(c) With respect to each contract for the employment of individual consultants the qualifications,experience, terms of reference and terms of employment of the consultant shall be furnished to the Bankfor its prior review and approval. The contract shall be awarded only after the said approval shall havebeen given.

3. Post review

With respect to each contract not governed by paragraph 2 of this Part, the procedure set forth inparagraph 4 of Appendix 1 to the Consultant Guidelines shall apply.

Section II. Procurement of Goods

Part A: General

38

Goods shall be procured in accordance with: (a) the provisions of Section I of the "Guidelines forProcurement under IBRD Loans and IDA Credits" published by the Bank in January 1995 and revised inJanuary and August 1996, September 1997 and January 1999 (the Guidelines); and (b) the provisions ofthe following Parts of this Section H

Part B: International Competitive Bidding

Except as otherwise provided in Part C of this Section, goods shall be procured under contracts awardedin accordance with the provisions of Section II of the Guidelines and paragraph 5 of Appendix I theretc.

Part C: Other Procurement Procedures

1. International Shopping

Readily available off-the shelf goods of standard specifications estimated to cost less than US$ 100,000equivalent per contract, up to an aggregated amount not to exceed US$ 200,000 equivalent, may beprocured under contracts awarded on the basis of international shopping procedures in accordance withthe provisions of paragraphs 3.5 and 3.6 of the Guidelines.

2. National Shopping

Goods estimated to cost less than US$ 50,000 equivalent per contract, up to an aggregated amount not toexceed US$ 100,000 equivalent, may be procured under contracts awarded on the basis of nationalshopping procedures in accordance with the provision of paragraphs 3.5 and 3.6 of the Guidelines.

Part D: Review by the Association of Procurement Decision

1. Prior review

(a)With respect to each contract for goods estimated to cost the equivalent of US$ 100,000 or more th.procedure set forth in paragraphs 2 and 3 of Appendix I to the Guidelines shall apply.

(b) With respect to the first two contract to be procured in accordance with the procedures referred to inPart C 1 and 2 above, the procedure set forth in paragraphs 2 and 3 of Appendix 1 to the Guidelinesshall apply.

2. Post review

With respect to each contract not governed by paragraph I of this Part the procedure set forth inparagraph 4 of Appendix 1 to the Guidelines shall apply.

39

DISBURSEMENT

Allocation of loan proceeds (Table C)

The proposed Grant would be disbursed against the project components as shown in Table C. It isexpected that the proceeds of the Grant will be disbursed over a period of two years. As there is nostandard disbursement profile for Kosovo, the disbursement forecast is based on previous experience. Theproject Completion Date is March 31, 2003.

Retroactivefinancing

Due to the immediate requirement of the project to recruit a qualified FMS at the CFA and an advisor tothe registrar at the Commercial Court, the funding for these positions will be made using retroactivefinancing method. Expenses up to US$ IOOK procured after February 13, 2001, for the purposesidentified above would be subject to refund from the grant funds. The refund will only be available afterthe project becomes effective. The recruitment for these positions will be procured using World Bankguidelines.

Use of statements of expenses:

Some of the proceeds of the grant are expected to be disbursed on the basis of Statement of Expendituresas follows: (a) goods costing less than US$100,000 equivalent for each contract; (b) service contracts forindividuals costing less than US$50,000 equivalent each; (c) service contracts for firms costing less thanUS$100,000 equivalent each; and (d) training and study tours for less than $20,000 equivalent each.Disbursements against goods and services exceeding the above limits will be made against fulldocumentation and respective procurement guidelines. Statement of expenses will be certified locally bythe Central Fiscal Authority. Related documentation in support of statement of expenses will not besubmitted to the Bank, but will be retained by the CFA for at least one year, after receipt by the Bank ofthe audit report for the year in which the last disbursement is made. This document will be madeavailable for review by the auditors and supervision missions. If ineligible expenditures, including thosenot justified by evidence furnished, are financed from the Special Account (SA), the Bank will have theright to withhold further deposits in the SA. The Bank may exercise this right until the Recipient hasrefunded the amount involved; or (if the Bank agrees) submitted evidence of other eligible expendituresthat can be used to offset the ineligible amounts.

Special account:

To facilitate timely project implementation, UNMIK will establish, maintain and operate, underconditions acceptable to the Bank, a Special Account in US dollars, in a commercial bank acceptable tothe Bank. An initial authorized Special Account allocation of US$250,000 will be established. Anauthorized allocation of the Special Account will be US$500,000 once the aggregate disbursements ofthe Grant total US$ 750,000 or more. This relatively large Special Account is justified for severalreasons: (i) being able to authorize payments directly from the Special Account to contracts rather thanrequesting any direct disbursements will be administratively easier for the CFA to manage; (ii) frequentSpecial Account replenishment applications would be an undue administrative burden on the CFA; (iii)the Special Account will be held in a very secure banking environment as it will be a sub-account of the

40

bank account containing all donor funds supporting the Kosovar consolidated budget; and (iv) theProject has a short implementation period (two years), requiring a very quick disbursement method. Theminimum amount of each application should be 20% of the authorized allocation. Replenishmentapplications should be submitted by the CFA at least every four months, and must include reconciledbank statements as well as other appropriate supporting documents.

Project Accounting

The Central Fiscal Authority (CFA), acting under the authority of the Special Representative of theSecretary-General, is responsible for the overall financial management of the Kosovo Budget and thebudgets under the responsibility of the municipalities, which together form the Kosovo ConsolidatedBudget (KCB). Specifically, the CFA is responsible for budget process and preparation, treasuryfunctions, revenue analysis, tax collection and customs administration. Currently, the CFA is fundedprimarily through the International donor community and its day-to-day management is conducted byinternational experts. One of its key objectives is to allocate, commit and track funds for public sectorspending through an automated system to enhance accountability and government financial operations.

To ensure that expenditures are consistent with the amounts and purpose set out in the KCB, regulationshave been approved by the Special Representative of the Secretary-General. To prevent abuse and fraud,explicit administrative instructions and procedures are in place for the commitment and expenditure ofpublic money. Also, in order to minimize the risk of fraud and malfeasance, an independent officer fromthe procurement process checks and confirms that these rules have been adhered to. Detaileddescriptions of the instructions and procedures are found in the Project Implementation Plan (PIP).

The mission discussed with the representatives of the Central Fiscal Authority (CFA), the Bank'sreporting requirements for projects and the need for the establishment of a proper financial managementsystem to produce Project Management Reports (PMR). The representatives of the CFA explained tothe mission that the Treasury Department of the CFA was in the process of modifying its accountingsystems for the KCB, and for its single treasury account (STA), which would consolidate payments andreceipts of all line ministries and municipalities. The chart of accounts is based on the GFMIS. As theparticipants under the project fall under the umbrella of the KCB, all project related payrnents would bemade via the STA, and the accounts would be maintained as part of the CFA's accounting system. Thecurrent system, at the moment will not be able to produce the integrated PMRs (Financial report,Progress Report and Procurement Management Report), as required by the IDA. However, themodifications that are being carried out would enable it in the future to produce PMRs. In order for theCFA to produce PMRs acceptable to the Bank the following steps will be taken:

* A chart of accounts will be developed for the project by the CFA in coordination with theJudicial Affairs Department, and will be incorporated into CFA's own chart of accounts withbudget classification codes based on the GFMIS;

* An expatriate staff (funded out of the project) assigned to the Treasury Department of the CFAwill be in charge of producing the PMR as required by the Bank. He will have a counterpart inthe Judicial Affairs Department, who will coordinate project implementation and assist in thepreparation of the PMRs.

* Modify the existing database to produce quarterly PMRs no later than September 30, 2001;

41

* The CFA will utilize traditional Bank disbursement procedures and move to PMR baseddisbursements once a Bank FMS has reviewed and certified the PMRs as acceptable fordisbursements.

* The selection of an auditor acceptable to the IDA, to audit the project accounts no later thanOctober 31, 2001.

The Treasury Department of the CFA has:

* adequate financial management capacity to properly handle the tasks of disbursement andaccounting required for implementation of the project objectives; and

* proper monitoring mechanisms to report accurately on the status of the expenditure for theproject as a whole, its various components, and each expenditure category as represented in theGrant Agreement, by each funding source.

Project records will be maintained in accordance with International Accounting Standards (LAS) asissued by the International Accounting Standard Committee (IASD). An action plan for theestablishment of the Financial Management System is attached to the PIP.

PROJECTAUDITAND OTHER REPORTING

Project Audits

UNMIK is in the process of appointing Auditors to undertake annual audits of the entire consolidatedbudget. It is proposed that the audit of the project accounts will be included within this audit. Duringnegotiations, arrangements for this audit and the terms of reference will be confirmed. If a separateindependent audit is necessary, then the costs for this audit will be considered as part of the Grantexpenditure. Project accounts, financial statements, the Special Account and Statement of Expenditureswill be audited in accordance with the Guidelines for Financial Reporting and Auditing for ProjectsFinanced by the World Bank (March 1982) as well as the Financial Accounting Reporting and AuditingHandbook (January 1995). In particular, International Auditing Standards (IAS) as published by theInternational Federation of Accountants (IFAC) will be consistently applied. The CFA will provide theBank (within six months of the end of each fiscal year), an audit report of such scope and detail as theBank may reasonably request, including an opinion by an independent auditor acceptable to the Bank, ondisbursements against certified SOEs, or against PMRs. The opinion should mention whether theSOEs/PMRs submitted during the fiscal year, together with the procedures and internal controlsinvolved in their preparation, can be relied upon to support the related withdrawal applications.

Project Reporting

The CFA will ensure that proper project documents are prepared and submitted to the Bank in a timelyfashion. These include comprehensive quarterly reports covering project financing, implementationprogress (including variance reporting), procurement progress and contract expenditure. The reportingsystem will be in compliance with the formats provided by the Bank in the Project FinancialManagement Manual (Exposure Draft, February 1999). A copy has been given to the CFA. Theseinclude: project status reports, reflecting: (i) the status of implementation progress, problemsencountered, corrective actions needed, rationale for actions; (ii) the current state of project indicators;and (iii) the current costs of each project component and estimated costs of completion Procurement

42

reports, including those that describe the progress of procurement activities against the plans set forth inthe PIP, variations in progress, reasons for variations, and remedial actions; and bid evaluation reports,as they arise in the procurement processes.

43

Annex 6, Table A: Project Costs by Procurement Arrangements7

(in US$million equivalent)

Expenditure Category P N D 0. OMet..od.

, s -KB-:: -te , ,

1. Goods 0.180 0.083 0.263(0.180) (0.083) (0.263)

2. Services 2.132 2.132() (2.132) () (2.132)

3. Study tours and training 0.093 0.093() ~~(0.093) ()(0.093)

4. Incremental Operating 0.300 0.300cost

( (0.300) 0 (0.300)5. Unallocated 0.212 0.212

() (0.212) (0.212)Total 0.180 2.82 3.00

(0.180) (2.82) (3.00)

Note: N.B.F. = Not Bank-financed (includes elements procured under parallel cofinancing procedures,consultancies under trust funds, any reserved procurement, and any other mniscellaneous items). Theprocurement arrangement for the items listed under "Other" and details of the items listed as "N.B.F." needto be explained in footnotes to the table or in the text.

Figures in parenthesis are the amounts to be financed by the Bank loan/IDA credit

7For details on presentation of Procurement Methods refer to OD 11.02, "Procurement Arrangements for InvestmentOperations." Details on Consultant Services can be shown more easily in the Table Al format (additional to Table A,where applicable).

44

Annex 6, Table Al: Consultant Selection Arrangements (optional)

(in US$million equivalent)

QCBS QBS SFB LCS CQ Other N.B.F

A. Firms 1.35 0.05 1.4

() () (0.05) ( (1.4)(1.35)

B. Individuals 0.732 0.7320) 0) 0) 0) 0) (0.732) ( (0.732)

Total 1.35 0.05 0.732 2.132(1.35) 0 (0.05) (0.732) 0 (2.132)

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of ConsultantsGuidelines), Commercial Practices, etc.

N.B.F. = Not Bank-financed.Figures in parenthesis are the amounts to be financed by the Bank loan.

45

Annex 6, Table B: Thresholds for Procurement Methods and Prior Review8

'. ~~ ' , . ,', MB e *e ? .-7 - 'j

US $ thousands US $ millions1. Works

2. Goods ->100,000 ICB =>0. 10<100,000 International First two packages

Shopping<50,000 National shopping First two packages

3. Services >=100,000 QCBS >=0.10

<100,000 SBCQ <=0.1Individual AllConsultant

4. Miscellaneous

Total value of contracts subject to prior review: 2.2

Overall Procurement Risk Assessment:HighAverageLow

Frequency of procurement supervision missions proposed: One every 6month(s) includes special procurement supervision for post-review/audits)

8Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation"and contact the Regional Procurement Adviser for guidance.

46

Annex 6, Table C: Allocation of Loan Proceeds

0~~~~~~~~~~~~

Goods 0.263 100%Works

Services 2.132 100%

Training/Study tours 0.093 100%

Incremental Operating 0.30 100%CostUnallocated 0.212 100%Total Project Costs 3.00 100%

Interest duringconstruction __

Front-end Fee __3.00 100%

Total __ _

47

Annex 7: Project Processing Budget and Schedule



Project Schedule (b) Planed(c) Actual

Time taken to prepare the project 5(months)First Bank mission (identification) 10/16/2000 10/16/2000Appraisal mission departure 01/17/2001 01/17/2001Negotiations 02/22/2001Planned Date of Effectiveness

Prepared by: UNMIK, ADJ, CFA, and World Bank

Preparation assistance: None

Bank staff who worked on the project included:

Core Team

Gerardo Corrochano Team Leader, Sr. Financial EconomistRamin Shoiai Task Manager, Private Sector SpecialistLubomira Zimanova Beardsley Sr. Public Sector Mgmt. Spec.Peter Kyle Sr. CounselYves Duvivier Lead Financial AnalystHiran Heart FMS, Sr. Financial AnalystEszter Kovacs PASJoseph Formoso Sr. Disbursement OfficerKishor Uprety Sr. Counsel

Field implementation staffAurora Ferrari PSD Specialist

Quality AssurancePaul Siegelbaum Sector Directorliham Zurayk Sector ManagerJohn Hegarty Regional Financial Management Advisor

Peer ReviewersDouglas Alan Webb Managing CounselWaleed Haider Malik Sr. Public Sector Mgmt. Spec.

48

Annex 8: Documents in the Project File*



A. Project Implementation PlanThe Project Implementation Plan consists of Terms of References for the implementationof technical assistance.

C. Bank Staff AssessmentsKosovo Judicial Assessment, November 2000, By Lubormira Beardsley

C. OtherKosovo Registries Modernization Report, November 2001 by Booz Allen Hamilton

*Including electronic files.

49

Annex 9: Statement of Loans and Credits



NOT APPLICABLE

50

Annex 10: Country at a Glance



NOT APPLICABLE

W-1773.docLegal DepartmentCONFIDENTIAL REPORT(Subject to Change)KUpretyFebruary 20, 2001

TF-

Trust Fund Grant Agreement

(Private Sector Development Technical Assistance Project)

between

UNITED NATIONS INTERIMADMINISTRATION IN KOSOVO

and

INTERNATIONAL DEVELOPMENT ASSOCIATION(Acting as Administrator of the Trust Fund for Kosovo)

Dated , 2001

TF-

TRUST FUND GRANT AGREEMENT

AGREEMENT, dated as of , 2001 between UNITEDNATIONS INTERIM ADMINISTRATION IN KOSOVO (the Recipient) andINTERNATIONAL DEVELOPMENT ASSOCIATION (the Administrator).

WHEREAS (A) the Board of Governors of the International Bank forReconstruction and Development (the Bank), acting on the recommendation of its Board ofExecutive Directors, decided on September 30, 1999, to transfer from Bank surplus, by wayof grant, $25,000,000 to a trust fund (the Trust Fund) for Kosovo, Federal Republic ofYugoslavia (Serbia and Montenegro) (Kosovo), established by Resolutions of theExecutive Directors of the Bank (Resolution No. 99-7) and the Administrator (ResolutionNo. IDA 99-4) and to be administered by the Administrator, to be used for financing anemergency reconstruction program in Kosovo;

(B) the Board of Governors of the Bank further decided on September 27,2000, to transfer from Bank surplus, an additional amount of $35,000,000, (AdditionalContribution) to the Trust Fund;

(C) the Recipient, having satisfied itself as to the feasibility and priority ofthe project described in Schedule 2 to this Agreement (the Project), has requested theAdministrator to assist, from the Additional Contribution, in the financing of Part A ofthe Project; and

WHEREAS the Administrator has agreed, on the basis, inter alia, of theforegoing, to extend a grant to the Recipient for the benefit of Kosovo upon the termsand conditions set forth in this Agreement;

NOW THEREFORE the parties hereto hereby agree as follows:

-2 -

ARTICLE I

General Conditions; Definitions

Section 1.01. The "General Conditions" (the General Conditions) set forth inSchedule 4 to this Agreement constitute an integral part of this Agreement.

Section 1.02. Unless the context otherwise requires, the several terms defined inthe General Conditions and in the Preamble to this Agreement have the respectivemeanings therein set forth and the following additional terms have the followingmeanings:

(a) "ADJ" means the Recipient's Administrative Department of Justice;

(b) "CFA" means the Recipient's Central Fiscal Authority;

(c) "Eligible Category" means the category set forth in the table in Part A ofSchedule I to this Agreement;

(d) "Eligible Expenditures" means the expenditures for goods and servicesfor the Project;

(e) "Project Management Report" means each report prepared in accordancewith Section 4.02 of this Agreement; and

(f) "Special Account" means the account referred to in Part B of Schedule 1to this Agreement.

-3 -

ARTICLE II

The Grant

Section 2.01. The Administrator agrees to make available to the Recipient, onthe terms and conditions set forth or referred to in this Grant Agreement, a grant in anamount of three million United States Dollars($3,000,000).

Section 2.02. The amount of the Grant may be withdrawn from the GrantAccount in accordance with the provisions of Schedule 1 to this Agreement forexpenditures made (or, if the Administrator shall so agree, to be made) in respect ofreasonable cost of goods and services required for the Project and to be financed out ofthe proceeds of the Grant.

Section 2.03. The Closing Date shall be September 30, 2003, or such later dateas the Administrator shall establish. The Administrator shall promptly notify theRecipient of such later date.

-4 -

ARTICLE III

Execution of the Project

Section 3.01. The Recipient declares its commitment to the objectives of theProject, and, to this end, shall carry out the Project with due diligence and efficiency andin conformity with appropriate financial, technical and administrative practices, and shallprovide, promptly as needed, the funds, facilities, services and other resources requiredfor the Project.

Section 3.02. Except as the Administrator shall otherwise agree, procurement ofthe goods and services required for the Project and to be financed out of the proceeds of theGrant shall be governed by the provisions of Schedule 3 to this Agreement.

Section 3.03. For the purposes of Section 1.23 of the General Conditions andwithout limitation thereto, the Recipient shall:

(a) prepare, on the basis of guidelines acceptable to the Administrator, andfurnish to the Administrator not later than six (6) months after the Closing Date or suchlater date as may be agreed for this purpose between the Recipient and the Administrator,a plan designed to ensure the continued achievement of the Project's objectives; and

(b) afford the Administrator a reasonable opportunity to exchange viewswith the Recipient on said plan.

Section 3.04. The Recipient shall:

(a) maintain policies and procedures adequate to enable it to monitor andevaluate on an ongoing basis, in accordance with the indicators agreed upon from time totime between the Recipient and the Administrator, the carrying out of the Project and theachievement of the objectives thereof;

(b) prepare, under terms of reference satisfactory to the Administrator, andfurnish to the Administrator, on or about February 28, 2002, a report integrating the resultsof the monitoring and evaluation activities performed pursuant to subparagraph (a) above,on the progress achieved in the carrying out of the Project during the period preceding thedate of said report and setting out the measures recommended to ensure the efficientcarrying out of the Project and the achievement of the objectives thereof during the periodfollowing such date; and

(c) review with the Administrator, by March 31, 2002, or such later date asthe Administrator shall request, the report referred to in subparagraph (b) of thisparagraph, and, thereafter, take all measures required to ensure the efficient completionof the Project and the achievement of the objectives thereof, based on the conclusionsand recommendations of the said report and the Administrator's views on the matter.

- 5 -

ARTICLE IV

Financial Covenants

Section 4.01. (a) The Recipient shall maintain a financial management system,including records and accounts, and prepare financial statements in a format acceptableto the Administrator, adequate to reflect the operations, resources and expendituresrelated to the Project.

(b) The Recipient shall:

(i) have the records, accounts and financial statements referred to inparagraph (a) of this Section and the records and accounts forthe Special Account for each fiscal year audited, in accordancewith auditing standards acceptable to the Administrator,consistently applied, by independent auditors acceptable to theAdministrator;

(ii) furnish to the Administrator as soon as available, but in any casenot later than six (6) months after the end of each such year: (A)certified copies of the financial statements referred to inparagraph (a) of this Section for such year as so audited; and (B)an opinion on such statements, records and accounts and reportof such audit, by said auditors, of such scope and in such detailas the Administrator shall have reasonably requested; and

(iii) furnish to the Administrator such other information concerningsuch records and accounts, and the audit thereof, and concerningsaid auditors, as the Administrator may from time to timereasonably request.

(c) For all expenditures with respect to which withdrawals from the GrantAccount were made on the basis of Project Management Reports or statements ofexpenditure, the Recipient shall:

(i) maintain or cause to be maintained, in accordance withparagraph (a) of this Section, records and separate accountsreflecting such expenditures;

(ii) retain, until at least one (1) year after the Administrator hasreceived the audit report for the fiscal year in which the last

-6 -

withdrawal from the Grant Account was made, all records(contracts, orders, invoices, bills, receipts and other documents)evidencing such expenditures;

(iii) enable the Administrator's representatives to examine suchrecords; and

(iv) ensure that such records and accounts are included in the annualaudit referred to in paragraph (b) of this Section and that thereport of such audit contains a separate opinion by said auditorsas to whether the Project Management Reports or statements ofexpenditure submitted during such fiscal year, together with theprocedures and internal controls involved in their preparation,can be relied upon to support the related withdrawals.

Section 4.02. (a) Without limitation upon the provisions of Section 4.01 of thisAgreement, the Recipient shall carry out a time-bound action plan acceptable to theAdministrator for the strengthening of the financial management system referred to inparagraph (a) of said Section 4.01 in order to enable the Recipient, not later thanSeptember 30, 2001, or such later date as the Administrator shall agree, to preparequarterly Project management reports, acceptable to the Administrator, each of which:

(i) (A) sets forth actual sources and applications of funds for theProject, both cumulatively and for the period covered by saidreport, and projected sources and applications of funds for theProject for the four-month period following the period coveredby said report; and (B) shows separately expenditures financedout of the proceeds of the Grant during the period covered bysaid report and expenditures proposed to be financed out of theproceeds of the Grant during the four-month period followingthe period covered by said report;

(ii) (A) describes physical progress in Project implementation, bothcumulatively and for the period covered by said report; and (B)explains variances between the actual and previously forecastimplementation targets; and

(iii) sets forth the status of procurement under the Project andexpenditures under contracts financed out of the proceeds of theGrant, as at the end of the period covered by said report.

(b) Upon the completion of the action plan referred to in paragraph (a) ofthis Section, the Recipient shall prepare, in accordance with guidelines acceptable to theAdministrator, and furnish to the Administrator not later than forty-five (45) days afterthe end of each calendar quarter a Project Management Report for such period.

- 7 -

ARTICLE V

Effectiveness; Termination

Section5.01. This Agreement shall continue in effect until the Grant has beenfully disbursed and the parties have fulfilled their obligations thereunder.

- 8 -

ARTICLE VI

Representative of the Recipient; Addresses

Section 6.01. The Special Representative of the Secretary-General of the UnitedNations for Kosovo is designated as representative of the Recipient for the purposes ofSection 1.28 of the General Conditions.

Section 6.02. The following addresses are specified for the purposes of Section1.26 of the General Conditions:

For the Recipient:

United Nations IntenmAdministration in Kosovo

PristinaKosovo

Facsimile:

873-76219-2837

For the Administrator:

International Development Association1818 H Street, N.W.Washington, D.C. 20433United States of America

Cable address: Telex: Facsimile:

INDEVAS 248423 (MCI) or (202) 477-6391Washington, D.C. 64145 (MCI)

- 9 -

IN WITNESS WHEREOF, the parties hereto, acting through their duly authorizedrepresentatives, have caused this Agreement to be signed in their respective names as ofthe day and year first above written.

UNITED NATIONS INTERIMADMINISTRATION IN KOSOVO

ByAuthorized Representative

INTERNATIONAL DEVELOPMENT ASSOCIATION(Acting as Administrator of the Trust Fund for Kosovo)

By

Authorized Representative

- 10-

SCHEDULE 1

Withdrawal of the Proceeds of the Grant

A. General

1. The table below sets forth the Categories of items to be financed out of theproceeds of the Grant, the allocation of the amounts of the Grant to each Category andthe percentage of expenditures for items so to be financed in each Category:

Amount of theGrant Allocated % of(Expressed in Expenditures

Category Dollars) to be Financed

(1) Goods 260,000 100%

(2) Consultants' services, 2,110,000 100%including audit

(3) Training, 120,000 100%including study tours

(4) Incremental Operating Costs 30G,000 100%

(5) Unallocated 210,000

TOTAL 3,000,000

For the purpose of the table above, the term "Incremental Operating Costs"means the expenses incurred on account of Project implementation, management andmonitoring, including office space, office supplies, vehicle operation, travel andsupervision costs, and incremental staff salaries excluding salaries of officials andemployees of the Recipient.

2. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall bemade in respect of payments made for expenditures prior to the date of this Agreement,except that withdrawals, in an aggregate amount not exceeding the equivalent of$100,000, may be made on account of payments made for expenditures before that datebut after February 13, 2001.

3. The Administrator may require withdrawals from the Grant Account to be madeon the basis of statements of expenditure for expenditures for (a) goods, under contractscosting less than $100,000 equivalent each; (b) services of consulting firms, undercontracts costing less than $100,000 equivalent each; (c) services of individualconsultants, under contracts costing less than $50,000 equivalent each; and (d) training

- Il -

and study tours under contracts costing less than $20,000, all under such terms andconditions as the Administrator shall specify by notice to the Recipient.

B. Special Account

1. The Recipient shall open and maintain in dollars a special deposit account, in acommercial bank, on terms and conditions satisfactory to the Administrator, includingappropriate protection against set-off, seizure and attachment.

2. After the Administrator has received evidence satisfactory to it that the SpecialAccount has been opened, withdrawals from the Grant Account of amounts to bedeposited into the Special Account shall be made as follows:

(a) until the Administrator shall have received: (i) the first ProjectManagement Report referred to in Section 4.02 (b) of this Agreement; and (ii) a requestfrom the Recipient for withdrawal on the basis of Project Management Reports,withdrawals shall be made in accordance with the provisions of Annex A to thisSchedule 1; and

(b) upon receipt by the Administrator of a Project Management Reportpursuant to Section 4.02 (b) of this Agreement, accompanied by a request from theRecipient for withdrawal on the basis of Project Management Reports, all furtherwithdrawals shall be made in accordance with the provisions of Annex B to thisSchedule 1.

3. Payments out of the Special Account shall be made exclusively for EligibleExpenditures. For each payment made by the Recipient out of the Special Account, theRecipient shall, at such time as the Administrator shall reasonably request, furnish to theAdministrator such documents and other evidence showing that such payment was madeexclusively for Eligible Expenditures.

4. Notwithstanding the provisions of Part B.2 of this Schedule, the Administratorshall not be required to make further deposits into the Special Account:

(a) if the Administrator determines at any time that any Project ManagementReport does not adequately provide the information required pursuant to Section 4.02 ofthis Agreement;

(b) if the Administrator determines at any time that all further withdrawalsshould be made by the Recipient directly from the Grant Account; or

(c) if the Recipient shall have failed to furnish to the Administrator, withinthe period of time specified in Section 4.01 (b) (ii) of this Agreement, any of the auditreports required to be furnished to the Administrator pursuant to said Section in respectof the audit of: (A) the records and accounts for the Special Account; or (B) the records

- 12 -

and accounts reflecting expenditures with respect to which withdrawals were made onthe basis of Project Management Reports.

5. The Administrator shall not be required to make further deposits into the SpecialAccount in accordance with the provisions of Part B.2 of this Schedule if, at any time,the Administrator shall have notified the Recipient of its intention to suspend in whole orin part the right of the Recipient to make withdrawals from the Grant Account pursuantto Section 1.15 of the General Conditions. Upon such notification, the Administratorshall determine, in its sole discretion, whether further deposits into the Special Accountmay be made and what procedures should be followed for making such deposits, andshall notify the Recipient of its determination.

6. (a) If the Administrator determines at any time that any payment out of theSpecial Account was made for an expenditure which is not an Eligible Expenditure, orwas not justified by the evidence furnished to the Administrator, the Recipient shall,promptly upon notice from the Administrator, provide such additional evidence as theAdministrator may request, or deposit into the Special Account (or, if the Administratorshall so request, refund to the Administrator) an amount equal to the amount of suchpayment. Unless the Administrator shall otherwise agree, no further deposit by theAdministrator into the Special Account shall be made until the Recipient has providedsuch evidence or made such deposit or refund, as the case may be.

(b) If the Administrator determines at any time that any amount outstandingin the Special Account will not be required to cover payments for Eligible Expendituresduring the six-month period following such determination, the Recipient shall, promptlyupon notice from the Administrator, refund to the Administrator such outstandingamount.

(c) The Recipient may, upon notice to the Administrator, refund to theAdministrator all or any portion of the funds on deposit in the Special Account.

(d) Refunds to the Administrator made pursuant to sub-paragraph (a), (b) or(c) of this paragraph 6 shall be credited to the Grant Account for subsequent withdrawalor for cancellation in accordance with the provisions of this Agreement.

- 13 -

Annex Ato

SCHEDULE 1

Operation of Special AccountWhen Withdrawals Are Not Made

On the Basis of Project Management Reports

1. For the purposes of this Annex, the term "Authorized Allocation" means anamount equivalent to $500,000 to be withdrawn from the Grant Account and depositedinto the Special Account pursuant to paragraph 2 of this Annex; provided, however, that,unless the Administrator shall otherwise agree, the Authorized Allocation shall belimited to an amount equivalent to $250,000 until the aggregate amount of withdrawalsfrom the Grant Account, plus the total amount of all outstanding special commitmentsentered into by the Administrator pursuant to Section 1.07 of the General Conditions,shall equal or exceed the equivalent of $750,000.

2. Withdrawals of the Authorized Allocation and subsequent withdrawals toreplenish the Special Account shall be made as follows:

(a) For withdrawals of the Authorized Allocation, the Recipient shallfurnish to the Administrator a request or requests for deposit into the Special Account ofan amount or amounts which in the aggregate do not exceed the Authorized Allocation.On the basis of each such request, the Administrator shall, on behalf of the Recipient,withdraw from the Grant Account and deposit into the Special Account such amount asthe Recipient shall have requested.

(b) For replenishment of the Special Account, the Recipient shall furnish tothe Administrator requests for deposit into the Special Account at such intervals as theAdministrator shall specify. Prior to or at the time of each such request, the Recipientshall furnish to the Administrator the documents and other evidence required pursuant toPart B.3 of Schedule I to this Agreement for the payment or payments in respect ofwhich replenishment is requested. On the basis of each such request, the Administratorshall, on behalf of the Recipient, withdraw from the Grant Account and deposit into theSpecial Account such amount as the Recipient shall have requested and as shall havebeen shown by said documents and other evidence to have been paid out of the SpecialAccount for Eligible Expenditures. Each such deposit into the Special Account shall bewithdrawn by the Administrator from the Grant Account under one or more of theEligible Categories.

3. The Administrator shall not be required to make further deposits into the SpecialAccount, once the total unwithdrawn amount of the Grant, minus the total amount of alloutstanding special commitments entered into by the Administrator pursuant to Section1.07 of the General Conditions, shall equal the equivalent of twice the amount of the

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Authorized Allocation. Thereafter, withdrawal from the Grant Account of the remainingunwithdrawn amount of the Grant shall follow such procedures as the Administratorshall specify by notice to the Recipient. Such further withdrawals shall be made onlyafter and to the extent that the Administrator shall have been satisfied that all suchamounts remaining on deposit in the Special Account as of the date of such notice willbe utilized in making payments for Eligible Expenditures.

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Annex Bto

SCHEDULE 1

Operation of Special AccountWhen Withdrawals are Made

On the Basis of Project Management Reports

I Except as the Administrator may otherwise specify by notice to the Recipient, allwithdrawals from the Grant Account shall be deposited by the Administrator into theSpecial Account in accordance with the provisions of Schedule I to this Agreement.Each such deposit into the Special Account shall be withdrawn by the Administratorfrom the Grant Account under one or more of the Special Account's Eligible Categories.

2. Each application for withdrawal from the Grant Account for deposit into theSpecial Account shall be supported by a Project Management Report.

3. Upon receipt of each application for withdrawal of an amount of the Grant, theAdministrator shall, on behalf of the Recipient, withdraw from the Grant Account anddeposit into the Special Account an amount equal to the lesser of: (a) the amount sorequested; and (b) the amount which the Administrator has determined, based on theProject Management Report accompanying said application, is required to be depositedin order to finance Eligible Expenditures during the six-month period following the dateof such report; provided, however, that the amount so deposited, when added to theamount indicated by said Project Management Report to be remaining in the SpecialAccount, shall not exceed the equivalent of $ 750,000.

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SCHEDULE 2

Description of the Project

The objectives of the Project are to: (i) facilitate the establishment and operation ofa modem business registry system; (ii) strengthen the capacity of the commercial andsupreme courts and improve the quality of legal services; and (iii) develop basic accountingstandards and to establish an association of accountants.

The Project consists of the following parts, subject to such modifications thereof asthe Recipient and the Administrator may agree upon from time to time to achieve suchobjectives:

Part A: Development of a Company Registry

1. Design, setting-up, and operation of the new business registry through: (i) theprovision of technical advisory services to assist ADJ in drafting the newlegislative/administrative instrument which will establish the new business registry, designthe transitional mechanism by which the existing registration functions will be transferredto the registry under the Commercial Court, and explore the possibility of developing apledge registry; (iii) the provision of technical advisory services on business registryapplication and database development; (iv) provision of technical advisory services todevelop a public information campaign on the new business registration system andtraining of key personnel at the Commercial Court; and (v) provision of technical advisoryservices to assist the Recipient with the establishment of a new pledge registry using theresources of the new fully-fledge business registration unit.

2. Acquis..ion of hardware, software, and other management information system(MIS) to carry out the activities described in I above.

Part B: Strengthening of Court Capacity and Improvement of LegalServices

1. Strengthening capacity of the Commercial Court and the Supreme Courtthrough: (i) the provision of training aimed at the ten sitting judges in the CommercialCourt and three judges in the Supreme Court, and selected practicing lawyers; and (ii)preparation of a set of commentaries on the recently issued laws to promote consistent andaccurate interpretation of the laws and to increase the ownership and understanding of therelevant legal concepts.

2. Inproving quality of legal services for small and medium businesses through thedesign and carrying out of a pilot legal aide program focusing on the small and mediumbusinesses to compensate for the lack of relevant legal service in the market and to assist informing the core of specialized commercial lawyers, including provision of group of about20 young law faculty graduates to provide legal advisory services free of charge or forreduced fees.

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3. Acquisition of hardware, software, advisory services, and training to carry outthe activities described in 1 and 2 above.

Part C: Development of Accounting Standards

Provision of technical advisory services and equipment to facilitate thecontinuing development of the accounting requirements, including the development ofthe necessary training materials, the delivery of training courses, and the design andimplementation of an appropriate regulatory regime to govern the accreditation ofaccounting professionals, and the creation of an association of accountants.

Part D: Project Implementation

Provision of technical advisory services, equipment and logistical assistance in thecarrying out of Parts A, B and C of the Project.

* * *

The Project is expected to be completed by March 31, 2003.

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SCHEDULE 3

Procurement

Section I. Procurement of Goods

Part A: General

Goods shall be procured in accordance with the provisions of Section I of the"Guidelines for Procurement under IBRD Loans and IDA Credits" published by theBank in January 1995 and revised in January and August 1996, September 1997 andJanuary 1999 (the Guidelines) and the following provisions of Section I of this Schedule.

Part B: International Competitive Bidding

Except as otherwise provided in Part C of this Section, goods shall be procuredunder contracts awarded in accordance with the provisions of Section II of theGuidelines and paragraph 5 of Appendix 1 thereto.

Part C: Other Procurement Procedures

1. International Shopping

Goods estimated to cost less than $100,000 equivalent per contract, up to anaggregate amount not to exceed $200,000 equivalent, may be procured under contractsawarded on the basis of international shopping procedures in accordance with thepTovisions of paragraphs 3.5 and 3.6 of the Guidelines.

2. National Shopping

Goods estimated to cost less than $50,000 equivalent per contract, up to anaggregate amount not to exceed $100,000 equivalent, may be procured under contractsawarded on the basis of national shopping procedures in accordance with the provisionsof paragraphs 3.5 and 3.6 of the Guidelines.

Part D: Review by the Bank of Procurement Decisions

1. Procurement Planning

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Prior to the issuance of any invitations to bid for contracts, the proposedprocurement plan for the Project shall be fumished to the Bank for its review andapproval, in accordance with the provisions of paragraph 1 of Appendix 1 to theGuidelines. Procurement of all goods and works shall be undertaken in accordance withsuch procurement plan as shall have been approved by the Bank, and with the provisionsof said paragraph 1.

2. Prior Review

(a) With respect to each contract estimated to cost the equivalent of$100,000 or more, the procedures set forth in paragraphs 2 and 3 of Appendix 1 to theGuidelines shall apply.

(b) With respect to the first two contracts to be procured in accordance withthe procedures referred to in Part C 1 and 2 above, the following procedures shall apply:

(i) prior to the selection of any supplier under shopping procedures, theBorrower shall provide to the Bank a report on the comparison andevaluation of quotations received; and

(ii) the procedures set forth in paragraphs 2(f), 2(g) and 3 of Appendix I tothe Guidelines shall apply.

3. Post Review

With respect to each contract not governed by paragraph 2 of this Part, theprocedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply.

Section II. Employment of Consultants

Part A: General

Consultants' services shall be procured in accordance with the provisions of theIntroduction and Section IV of the "Guidelines: Selection and Employment ofConsultants by World Bank Borrowers" published by the Bank in January 1997 andrevised in September 1997 and January 1999 (the Consultant Guidelines) and thefollowing provisions of Section II of this Schedule.

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Part B: Quality- and Cost-based Selection

1. Except as otherwise provided in Part C of this Section, consultants' servicesshall be procured under contracts awarded in accordance with the provisions of SectionII of the Consultant Guidelines, paragraph 3 of Appendix 1 thereto, Appendix 2 thereto,and the provisions of paragraphs 3.13 through 3.18 thereof applicable to quality- andcost-based selection of consultants.

Part C: Other Procedures for the Selection of Consultants

1. Selection Based on Consultants' Qualifications

Services for technical assistance under Part A of the Project, estimated to costless than $100,000 equivalent per contract, may be procured under contracts awarded inaccordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines.

2. Individual Consultants

Services for tasks that meet the requirements set forth in paragraph 5.1 of theConsultant Guidelines shall be procured under contracts awarded to individualconsultants in accordance with the provisions of paragraphs 5.1 through 5.3 of theConsultant Guidelines.

Part D: Review by the Bank of the Selection of Consultants

1. Selection Planninz

Prior to the issuance to consultants of any requests for proposals, the proposedplan for the selection of consultants under the Project shall be furnished to the Bank forits review and approval, in accordance with the provisions of paragraph 1 of Appendix 1to the Consultant Guidelines. Selection of all consultants' services shall be undertakenin accordance with such selection plan as shall have been approved by the Bank, andwith the provisions of said paragraph 1.

2. Prior Review

(a) With respect to each contract for the employment of consulting firmsestimated to cost the equivalent of $100,000 or more, the procedures set forth inparagraphs 1, 2 (other than the third subparagraph of paragraph 2(a)) and 5 of Appendix1 to the Consultant Guidelines shall apply.

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(b) With respect to each contract for the employment of consulting firmsestimated to cost less than the equivalent of $100,000, the procedures set forth inparagraphs 1, 2 (other than the second subparagraph of paragraph 2(a)) and 5 ofAppendix 1 to the Consultant Guidelines shall apply.

(c) With respect to each contract for the employment of individualconsultants estimated to cost the equivalent of $50,000 or more, the qualifications,experience, terms of reference and terms of employment of the consultants shall befurnished to the Bank for its prior review and approval. The contract shall be awardedonly after the said approval shall have been given.

3. Post Review

With respect to each contract not governed by paragraph 2 of this Part, theprocedures set forth in paragraph 4 of Appendix 1 to the Consultant Guidelines shallapply.

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SCHEDULE 4

General Conditions

Section 1.01. Application of General Conditions

Without lirmitation or restriction upon the scope of any other provisions of thisAgreement, these General Conditions set forth certain basic terms and conditionsapplicable to this Agreement.

Section 1.02. Definitions

The following terms have the following meanings wherever used in these GeneralConditions:

(a) "Administrator" means the International Development Association, actingas administrator of the Trust Fund;

(b) "Closing Date" means the date specified in Section 2.03 of this Agreementafter which the Administrator may, by notice to the Recipient, terminate the right of therecipient to withdraw from the Grant Account.

(c) "Dollars" and the sign "$" mean dollars in the currency of the UnitedStates of America.

(d) "Grant" means the grant provided for in this Agreement;

(e) "Grant Account" means the account opened by the Administrator on itsbooks in the name of the Recipient to which the amount of the Grant is credited;

(f) "Project" means the project for which the Grant is made, as described inSchedule 2 to this Agreement and as the description thereof may be amended from time totime by agreement between the Recipient and the Administrator; and

(g) "Taxes" includes imposts, levies, fees and duties of any nature, whether ineffect at the date of this Agreement or thereafter imposed.

Section 1.03. Grant Account

The amount of the Grant shall be credited to the Grant Account and may bewithdrawn therefrom by the Recipient as provided in this Agreement and in these GeneralConditions.

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Section 1.04. Currencies in which Withdrawals are to be Made

Except as the Recipient and the Administrator shall otherwise agree, withdrawalsfrom the Grant Account shall be made in the respective currencies in which theexpenditures to be financed out of the proceeds of the Grant have been paid or are payable.

Section 1.05. Valuation of Currencies

Whenever it shall be necessary for the purposes of this Agreement to determine thevalue of one currency in terms of another, such value shall be as reasonably determined bythe Administrator.

Section 1.06. Withdrawal from the Grant Account

The Recipient shall be entitled to withdraw from the Grant Account amountsexpended or, if the Administrator shall so agree, amounts to be expended for the Project inaccordance with the provisions of this Agreement and of these General Conditions. Exceptas the Administrator and the Recipient shall otherwise agree, no withdrawals shall be made:(a) on account of expenditures in the territories, other than the territory of Kosovo, which isnot a member of the Administrator or for goods produced in, or services supplied from,such territories; or (b) for the purpose of any payment to persons or entities, or for anyimport of goods, if such payment or import, to the knowledge of the Administrator, isprohibited by a decision of the United Nations Security Council taken under Chapter VII ofthe Charter of the United Nations.

Section 1.07. Special Commitments by the Administrator

Upon the Recipient's request and upon such terns and conditions as shall be agreedupon between the Recipient and the Administrator, the Administrator may enter intospecial commitments in writing to pay amounts to the Recipient or others in respect ofexpenditures to be financed out of the proceeds of the Grant notwithstanding anysubsequent suspension or cancellation by the Administrator or the Recipient.

Section 1.08. Applications for Withdrawal or for Special Commitment

When the Recipient shall desire to withdraw any amount from the Grant Accountor to request the Administrator to enter into a special commitment pursuant to Section 1.07of the General Conditions, the Recipient shall deliver to the Administrator a writtenapplication in such form, and containing such statements and agreements, as theAdministrator shall reasonably request. Applications for withdrawal, including thedocumentation required therefor, shall be made promptly in relation to expenditures for theProject.

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Section 1.09. Reallocation

Notwithstanding the allocation of an amount of the Grant or the percentages forwithdrawal set forth or referred to in this Agreement, if the Administrator has reasonablyestimated that the amount of the Grant then allocated to any withdrawal category set forthin this Agreement or added thereto by amendment will be insufficient to finance the agreedpercentage of all expenditures in that category, the Administrator may, by notice to theRecipient:

(a) reallocate to such category, to the extent required to meet the estimatedshortfall, proceeds of the Grant which are then allocated to another category and which inthe opinion of the Administrator are not needed to meet other expenditures; and

(b) if such reallocation cannot fully meet the estimated shortfall, reduce thepercentage for withdrawal then applicable to such expenditures in order that furtherwithdrawals under such category may continue until all expenditures thereunder shall havebeen made.

Section 1.10. Evidence of Authority to Sign Applications for Withdrawal

The Recipient shall furnish to the Administrator evidence of the authority of theperson or persons authorized to sign applications for withdrawal and the authenticatedspecimen signature of any such person.

Section 1.11. Suprorting Evidence

The Recipient shall furnish to the Administrator such documents and otherevidence in support of the application as the Administrator shall reasonably request,whether before or after the Administrator shall have permitted any withdrawal requested inthe application.

Section 1.12. Sufficiency of Applications and Documents

Each application and the accompanying documents and other evidence must besufficient in form and substance to satisfy the Administrator that the Recipient is entitled towithdraw from the Grant Account the amount applied for and that the amount to bewithdrawn from the Grant Account is to be used only for the purposes specified in thisAgreement.

Section 1.13. Treatment of Taxes

It is the policy of the Administrator that no proceeds of the Grant shall bewithdrawn on account of payments for any taxes levied in the territory in which theRecipient is located on goods or services, or on the importation, manufacture, procurement

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or supply thereof. To that end, if the amount of any taxes levied on or in respect of any itemto be financed out of the proceeds of the Grant decreases or increases, the Administratormay, by notice to the Recipient, increase or decrease the percentage for withdrawal setforth or referred to in respect of such item in this Agreement as required to be consistentwith such policy of the Administrator.

Section 1.14. Payment by the Administrator

The Administrator shall pay the amounts withdrawn by the Recipient from theGrant Account only to or on the order of the Recipient.

Section 1.15. Suspension by the Administrator

If any of the following events of suspension shall have occurred and be continuing,the Administrator may, by notice to the Recipient, suspend in whole or in part the right ofthe Recipient to make withdrawals from the Grant Account:

(a) The Recipient shall have failed to perform any other obligation under thisAgreement.

(b) As a result of events which have occurred after the date of this Agreement,an extraordinary situation shall have arisen which shall make it improbable that the Projectcan be carried out or that the Recipient will be able to perform its obligations under thisAgreement.

(c) After the date of the Agreement and prior to the effective date, any eventshall have occurred which would have entitled the Administrator to suspend theRecipient' s right to make withdrawals under the Grant if the Agreement had beeneffective on the date such event occurred;

(d) A representation made by the Recipient in or pursuant to the Agreement,or any statement furnished in connection therewith, and intended to be relied upon by theAdministrator in making the Grant, shall have been incorrect in any material respect.

(e) Any action shall have been taken for the dissolution, disestablishment orsuspension of operations of any Project implementation entity.

(f) Any other event specified in this Agreement for the purposes of thisSection shall have occurred. The right of the Recipient to make withdrawals from the GrantAccount shall continue to be suspended in whole or in part, as the case may be, until theevent or events which gave rise to suspension shall have ceased to exist, unless theAdministrator shall have notified the Recipient that the right to make withdrawals has beenrestored in whole or in part, as the case may be.

Section 1.16. Cancellation by the Administrator

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If (a) the right of the Recipient to make withdrawals from the Grant Account shallhave been suspended with respect to any amount of the Grant for a continuous period ofthirty (3) days, or (b) at any time, the Administrator determines, after consultation with theRecipient, that an amount of the Grant will not be required to finance the Project's costs tobe financed out of the proceeds of the Grant, or (c) at any time, the Administratordetermines, with respect to any contract to be financed out of the proceeds of the Grant,that corrupt or fraudulent practices were engaged in by representatives of the Recipient orof a beneficiary of the Grant during the procurement or the execution of such contract,without the Recipient having taken timely and appropriate action satisfactory to theAdministrator to remedy the situation, and establishes the amount of expenditures inrespect of such contract which would otherwise have been eligible for financing out of theproceeds of the Grant, or (d) at any time, the Administrator determines that theprocurement of any item is inconsistent with the procedures set forth or referred to in thisAgreement and establishes the amount of the expenditures in respect of such item whichwould otherwise have been eligible for financing out of the proceeds of the Grant or, (e)after the Closing Date, an amount of the Grant shall remain unwithdrawn from the GrantAccount, the Administrator may, by notice to the Recipient, terminate the right of theRecipient to make withdrawals with respect to such amount. Upon the giving of suchnotice, such amount of the Grant shall be cancelled.

Section 1.17. Amounts Subject to Special Commitment not Affected by Cancellation orSusension by the Administrator

No cancellation or suspension by the Administrator shall apply to amounts subjectto any special commitment entered into by the Administrator pursuant to Section 1.07 ofthe General Conditions except as expressly provided in such commitment.

Section 1. 18. Effectiveness of Provisions after Suspension or Cancellation

Notwithstanding any cancellation or suspension, all the provisions of thisAgreement shall continue in full force and effect except as specifically provided in thisAgreement.

Section 1.19. Cooperation and Infornation

(a) The Recipient and the Administrator shall cooperate fully to assure thatthe purposes of the Grant will be accomplished. To that end, the Recipient and theAdministrator shall:

(i) from time to time, at the request of any one of them, exchangeviews with regard to the progress of the Project, the purposes ofthe Grant, and the performance of their respective obligationsunder this Agreement; and furnish to the other party all suchinformation related thereto as it shall reasonably request; and

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(ii) promptly inform each other of any condition which interfereswith, or threatens to interfere with, the matters referred to inparagraph (i) above.

Section 1.20. Insurance

The Recipient shall insure or cause to be insured, or make adequate provision forthe insurance of, the imported goods to be financed out of the proceeds of the Grantagainst hazards incident to the acquisition, transportation and delivery thereof to theplace of use or installation. Any indemnity for such insurance shall be payable in a freelyusable currency to replace or repair such goods.

Section 1.21. Use of Goods and Services

Except as the Administrator shall otherwise agree, the Recipient shall cause allgoods and services financed out of the proceeds of the Grant to be used exclusively forthe purposes of the Project.

Section 1.22. Plans and Schedules

The Recipient shall furnish, or cause to be furnished, to the Administratorpromptly upon their preparation, the plans, specifications, reports, contract documentsand construction and procurement schedules for the Project, and any materialmodifications thereof or additions thereto, in such detail as the Administrator shallreasonably request.

Section 1.23. Records and Reports

(a) The Recipient shall: (i) maintain records and procedures adequate torecord and monitor the progress of the Project (including its cost and the benefits to bederived from it), to identify the goods and services financed out of the proceeds of theGrant, and to disclose their use in the Project; (ii) enable the Administrator'srepresentatives to visit any facilities and construction sites included in the Project and toexamine the goods financed out of the proceeds of the Grant and any plants, installations,sites, works, buildings, property, equipment, records and documents relevant to theperformance of the obligations of the Recipient under this Agreement; and (iii) furnish tothe Administrator at regular intervals all such information as the Administrator shallreasonably request concerning the Project, its cost and, where appropriate, the benefits tobe derived from it, the expenditure of the proceeds of the Grant and the goods andservices financed out of such proceeds.

(b) Upon the award of any contract for goods or services to be financed outof the proceeds of the Grant, the Administrator may publish a description thereof, thename and nationality of the party to which the contract was awarded and the contractprice.

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(c) Promptly after completion of the Project, but in any event not later thansix (6) months after the Closing Date or such later date as may be agreed for this purposebetween the Recipient and the Administrator, the Recipient shall prepare and furnish tothe Administrator a report, of such scope and in such detail as the Administrator shallreasonably request, on the execution and initial operation of the Project, its cost and thebenefits derived and to be derived from it, the performance by the Recipient and theAdministrator of their respective obligations under this Agreement and theaccomplishment of the purposes of the Grant.

Section 1.24. Maintenance

The Recipient shall at all times operate and maintain, or cause to be operated andmaintained, any facilities relevant to the Project, and promptly as needed, make or causeto be made all necessary repairs and renewals thereof.

Section 1.25. Land Acquisition

The Recipient shall cause to be taken all such action as shall be necessary toacquire as and when needed all such land and rights in respect of land as shall berequired for carrying out the Project and shall furnish to the Administrator, promptlyupon its request, evidence satisfactory to the Administrator that such land and rights inrespect of land are available for purposes related to the Project.

Section 1.26. Notices and Requests

Any notice or request required or permitted to be given or made under thisAgreement and any other agreement between the parties contemplated by this Agreementshall be in writing. Such notice or request shall be deemed to have been duly given ormade when it shall be delivered by hand or by mail, telegram, cable, telex or facsimile tothe party to which it is required or permitted to be given or made at such party's addressspecified in this Agreement, or at such other address as such party shall have designatedby notice to the party giving such notice or making such request. Delivery made byfacsimile transmission shall be confirmed by mail.

Section 1.27. Evidence of Authority

The Recipient shall furnish to the Administrator sufficient evidence of theauthority of the person or persons who will, on behalf of the Recipient, take any action orexecute any documents required or permitted to be taken or executed by the Recipientunder this Agreement, and the authenticated specimen signature of each such person.

Section 1.28. Action on Behalf of the Recipient

Any action required or permitted to be taken, and any documents required orpermitted to be executed, under this Agreement on behalf of the Recipient may be takenor executed by the representative of the Recipient designated in this Agreement for the

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purposes of this Section or any person thereunto authorized in writing by suchrepresentative. Any modification or amplification of the provisions of this Agreementmay be agreed to on behalf of the Recipient by written instrument executed on behalf ofthe Recipient by the representative so designated or any person thereunto authorized inwriting by such representative, provided that, in the opinion of such representative, suchmodification or amplification is reasonable in the circumstances and will notsubstantially increase the obligations of the Recipient under this Agreement. TheAdministrator may accept the execution by such representative or other person of anysuch instrument as conclusive evidence that in the opinion of such representative anymodification or amplification of the provisions of this Agreement effected by suchinstrument is reasonable in the circumstances and will not substantially increase theobligations of the Recipient thereunder.

Section 1.29. Settlement of Disputes

Any dispute arising out of, or relating to, this Agreement which is not settled byagreement of the parties shall be finally settled by arbitration in accordance with the-JNCITRAL Arbitration Rules as at present in force.

Section 1.30. Execution in Counterparts

This Agreement may be executed in several counterparts, each of which shall be anoriginal.

AGREED MINUTES OF NEGOTIATIONSBETwEEN THE UNITED NAnONS INTERIM AD.MNSTELATION iN

Kosovo (REcpIPENT)AND

THE INRNATIONAL DEVELOPMENT ASSOCIATioN (IDA)REARDlING

THE Kosovo PRivATE SECTOR DEVELOPMENT TEcHNICAL ASSISTANCE GRANT

I. Negotiations for a proposed Trust Fund Grant of US$ 3.0 million for the PrivateSector Development Technical Assistance Grant were held between representatives of theUnited Nations Interim Administration Mission in Kosovo (Recipient), and IDA onFebruary 22, 2001. Representatives of the Recipient and IDA are listed in the Annex tothese minutes.

2. The objective of the proposed project is to improve the business-enablingenvironrent for private sector growth. Specifically the project would:

(a) support the establishment and operation of a modern fully-fledged businessregistry system;(b) strengthen the capacity of the Commercial Court and the Supreme Court andimprove the quality of legal services;(c) assist in the development of basic accounting standards, provide training forlocal accountants, and assist in the establishment of an association ofaccountants.

3. The Recipient and IDA representatives agreed on the draft Trust Fund GrantAgreement between the Recipient and IDA dated February 20th, 2001.

4. Conditions of Approval.

a) Appointment of Project Coordinators from ADJ and CFA, acceptable to the Bank.b) Appointment of a Financial Management Specialist for the CFA, acceptable to theBank.

5. Disbursement. IDA representatives noted that, in accordance with Section 1.13of the General Conditions. IDA does not finance taxes. The Recipient confirmed that,indeed, activities fimded under the Bank Grant will be tax-exempt.

6. Financial Management. The Recipient confirmed UNMIK's agreement to thedisbursement mechanisms proposed under the Grant Agreement. It was agreed that thetime-bound action plan required by Section 4.02 of the Grant Agreement would consist ofthe following:

Agreed Minutes of Negotiations 2 February 22, 2001

* the CFA will hire a financial management specialist acceptable to the Bank tobe financed from the grant. This specialist will prepare the required projectmanagement reports for all Bank financed Grants; and

* the CFA will prepare the full complement of project management reports bySeptember 30, 2001.

7. Accounts and Audits. It was agreed that Project accounts will be auditedannually by independent auditors acceptable to IDA. IDA agreed to UNMIK's proposalto contract an international auditor to undertake an audit of the Project accounts as part ofthe annual audit for the entire Kosovo budget.

8. Consultation with Recipient. For purposes of the Grant Agreement Article Vand Schedule I, the IDA representatives confirmed that before the Administratorexercises its remedies under the Grant Agreement or takes any action which would resultin suspension or cancellation, the Administrator will first consult with the Recipient.

9. Performance Monitoring Indicators. The Recipient and IDA representativesagreed that the indicators provided in Atachment I will be used to monitor Projectimplementation performance and impact. In respect to the performance indicator thatrelates to availability of information from the fully-fledged business registry for taxpurposes, if during IDA supervision this indicator is proven to be unfeasible andinapplicable it will be amended or discarded.

10. Disclosure of Information. The IDA delegation informed the Recipient that inaccordance with its policy, IDA has to release the Project Appraisal Document (PAD) tointerested parties on request through the Public Information Center after the Project'sapproval by IDA management. The Recipient confirmed that no text or data contained inthe project docunents were confidential or sensitive in nature and agreed that the PADmay be released by IDA after signing of the Grant Agreement.


On behalf of the On behalf of the IDARecipient

ony Prwo-h-Stanley G

Co-Head, CFA The World Bank's Representative inKosovo

Europe and Central Asia Region

Date:_ __ __ __Date: , _________

.. ~~~- lCHeadg Administrative Department of Justice

Date: f2 , re £

Agreed Minutes of Negotiations 4 February22,2001

Members of UNM1K

Anthony Preston-StanleyCo-HeadCentral Fiscal Authority

Sylvie PantzCo-HeadAdministrative Department of Justice

John CubbonOfficer-in-Charge, Prosecution Services and Court AdministrationAdministrative Department of Justice

Thuy MellorAccounting AdvisorCentral Fiscal Authority

Kozeta KojaGrant ManagementCentral Fiscal Authority

Elizabeth RolandoLegal OfficerAdministrative Department of Justice

Members of IDA Delegation

Gerardo CorrochanoProgram Team LeaderPrivate and Financial Sector DevelopmentEurope and Central Asia Region

Giuseppe ZampaglioneThe World Bank's Representative in KosovoEurope and Central Asia Region

Hiran HeratSenior Financial Management SpecialistPrivate and Financial Sector DevelopmentLurope and Central Asia Rtgion

Agreed Minutes ofNegotiations 5 Febmy 22,2001

Kishor UpretySenior CouncelLegal Operations (LEGOP)

Joseph Paul FormosoSenior Disbursement OfficerFinancial Management and Disbursement Group

Ramin ShojaiPrivate Sector Development SpecialistPrivate and Financial Sector DevelopmentEurope and Central Asia Region

Aurora FerrariConsultantPrivate and Financial Sector DevelopmentEurope and Central Asia Region


Attachment I

Key performance indicators:

The grant will finance consultant services, training and equipment. Progress in achievingthe development objecfive will be assessed on the basis of:

(a) Number of registered enterprises and turnover time of registration process;(b) Availability of information from the fully-fledged business registry for tax

purposes;(c) Number of completed cases at the Commercial Court;(d) Number of Judges and Lawyers completing the training programs;(e) Number of trained accountants, and the establishment of an association of

accountants.