JuNe 2008 45600 About the Author A conflict's Impact on Project Goals and KArl bAch reputation risk: lessons from Kosovo operations officer, IFc Private enterprise Partnership, Kazakhstan. between 2002 Privatization Program and 2006, Karl was based in Pristina, Kosovo, where he was a legal advisor on the When designing and implementing a project in a conflict-affected eu- and uSAID-funded team country, some of the conflict's more obvious impacts--damage to that designed and implement- ed the Kosovo privatization infrastructure and energy supplies--are apt to immediately come to program. mind. However, based on the experiences with the Kosovo privati- zation program, there are additional problems related to a conflict's aftermath that may be overlooked during a project's design but which should be addressed, and these form the basis for this Smart- Lesson paper. Background Kosovo was the last region of the former Yu- goslavia to start privatizing its so-called socially this SmartLesson for Kosovo is timely, given owned enterprises (Soes) commercial, manu- the province's declaration of independence facturing, mining, and agricultural business from Serbia on February 17, 2008. this declara- entities analogous to state-owned enterprises. tion is the latest chapter in Kosovo's long his- the Kosovo trust agency, established by Un- tory, which includes centuries of close links to mIK legislation, was charged with selling the Serbian cultural identity, the conflicts of the approximately 300 Kosovar Soes in order to 1990s between ethnic albanians and Serbians, prevent further deterioration of the assets and the 1999 nato bombings, which ejected Ser- to promote economic development. after bian forces from the province, and the subse- many stops and starts, the privatization pro- quent nine years of governance by the United gram started in earnest in mid-2004, and most nations Interim administration mission in expected sales have recently been completed. Kosovo (UnmIK). 1 Lessons Learned 1) An official policy regard- ing the conflict should be established and should be incorporated into a project's design and implementation plan every conflict is different, tak- ing into account the historic build-up to the conflict, ac- tions that took place during the conflict, and how the con- flict was resolved. It is vital that a policy regarding the Italian NATO Kosovo Force patrol, Gjakova conflict and its aftermath be adopted by IFC (and agreed to by any donor organization 1 This SmartLesson tries to use legal terminology that was appropriate during 20022006 and refers to political policies in place by donor countries and the providing funding) at the United Nations during that period. IFC SmartLeSSonS -- JUne 2008 1 outset and incorporated into a project. the lack of such a In Kosovo, the privatization agency had field offices policy can impact local buy-in with the project, cause repu- throughout the province in both albanian and Serbian ar- tation risk, and, in extreme situations, undermine political eas. Because there was very little intermingling between reconciliation. the ethnic groups, advisory services experts in these offices were often exposed to only the albanian or the Serbian PolIcy eFFect oN ProJect DeSIGN perspective of the conflict, rather than to both. Vigilance was necessary to maintain the official policy of neutrality Un Security Council resolution 1244, which established Un- with regard to the conflict, often through the staff's over- mIK in 1999, created a temporary political solution in Koso- reliance on the agency's international lawyers to catch ac- vo with the support of nato members and much of the tual, perceived, and inadvertent biases during legal reviews international community. UnmIK, along with the donor of privatization documentation. Some bias still occasionally countries for the privatization program, followed a policy slipped through: In one extreme example, a letter to the of not prejudicing Kosovo's eventual final status and equal editor from an international advisor printed in the Interna- treatment of ethnic groups. tional Herald tribune, calling for the independence of Kosovo, was a contributing factor in that advisor's the privatization program was therefore designed with dismissal. these policies in mind. From the design standpoint, the do- nor organizations advocated having the sale proceeds from If real or perceived bias is seen by the larger community in privatization held in trust, pending a resolution of Kosovo's everyday project activities, this can undermine trust estab- status. additionally, rather than selling ownership of land lished with local partners and the public, resulting in a dam- held by an Soe, a long-term leasehold arrangement was aged reputation for IFC, a potential weakening of donor developed. the board of directors of the Kosovo trust resolve, and ultimately jeopardizing the success of agency has both albanian and Serbian representatives, a project. along with a controlling number of international board members, owing to the UnmIK mandate over the province. 2) Because missing information can raise unexpected In order to obtain local tie-in, experts did their best to ad- risks for advisory service goals and IFC reputation, the dress local concerns in the design, within the context of the issue of such information should be addressed during political mandate. For example, a high-level trade union both project design and implementation. official on the agency's board of directors was able to suc- cessfully lobby donors and UnmIK to ensure that a portion If damage during a conflict has been significant and wide- of each sale's proceeds were allocated to each Soe's em- spread, a policy should be developed to manage operation- ployees. Because on-going safety concerns made it difficult al and reputation risk resulting from missing information for albanians and Serbians to travel to each other's regions, related to key assets and personnel of local project partners privatization tender procedures allowed for the submission and clients. If a client or partner does not have a proper of bids in both a Serbian majority and an albanian majority relationship with its key assets and personnel, legal and city, and legal claims arising from privatization can be filed practical complications will inevitably occur. both in Pristina and Belgrade. When developing such a policy, a pragmatic balance needs PolIcy eFFect oN ProJect ImPlemeNtAtIoN to be struck between the reduction of such risks and the risk of operational paralysis; any policy must accept that sur- a project's management should also ensure that the con- prises will inevitably occur and that the risks can only be flict policy is incorporated into the day-to-day implementa- mitigated rather than eliminated. tion of the project. this is because the appearance of tak- ing sides in the conflict can arise even in the most innocuous mISSING crItIcAl oFFIcIAl INFormAtIoN of implementation actions. Within Kosovo's privatization program, there were frequent accusations of political deci- the 1999 conflict in Kosovo resulted in a large percentage sion-making whenever the Kosovo trust agency did or did of destroyed or missing government and company records not schedule a company for sale that was based in a Serbian related to land registration, title to assets, and liabilities of enclave. the Soes scheduled for privatization. For the privatization program, this frequently resulted in uncertainty as to all advisory staff should be instructed and reminded to fol- whether there was a legal right to sell certain assets if own- low the official conflict policy of their employer and donor: ership/registration could not be comfortably determined. remind them that they were hired for their advisory services our advisory services resulted in UnmIK-adopted legisla- expertise, not for political expertise. For USaID-funded per- tion aimed at establishing a form of eminent domain (gov- sonnel in Kosovo, our chief of party would brief consultants ernment appropriation of private property) over assets of on the U.S. policy toward the conflict upon their arrival in uncertain ownership in order to allow the Kosovo trust Kosovo, and remind them when their actions may have agency to sell these assets with clear title. Despite this leg- come close to violating that policy. Privatization line man- islation, litigation, human rights complaints, frequent bad agers were always open to discussing difficult ethical and press, and ad hoc protests resulted when competing evi- policy issues, and the privatization and UnmIK lawyers rou- dence of asset ownership surfaced. tinely reviewed privatization-related documentation and actions to ensure compliance with Un Security Council While such factual uncertainties are particularly important resolution 1244. for a privatization program, they can also pose a reputation 2 IFC SmartLeSSonS -- JUne 2008 risk for all types of advisory services providers and can un- 3) A policy should be developed regarding who should dermine the achievement of project goals. In order to miti- be excluded as project partners and clients, tailored to gate this risk, a policy of due diligence as to the ownership balance reputation risk, the need to achieve advisory of key assets should be developed something that might or investment goals, and the nature of the conflict. not be necessary in a non-conflict-affected country. When primary information is missing, ownership can often be in- regular people can get involved in wrongful behavior dur- ferred through court checks, indirect documentary evidence ing a conflict everything from smuggling and looting to such as tax records, and statements from disinterested par- war crimes. Further, in the fog of conflict, and in an ethni- ties. a contingency plan should also be developed for when cally or politically charged environment, current and past inevitable surprises arise. In the case of the Kosovo privati- accusations against individuals and eventual convictions zation program, there were periods during the tender and may not be based on accurate facts. sale completion processes during which claims against sale assets were reviewed before proceeding to final sale. When designing the Kosovo privatization program, experts struggled over who should be allowed to bid for companies and assets. It was difficult to develop criteria that were pragmatic, even-handed, and politically acceptable to local interests, taking into consideration the repressive tactics of Serbian authorities against albanians before 1999 and atrocities committed by both ethnic groups in the lead-up to and the aftermath of the nato intervention. In addition to amL/CFt (anti-money laundering and combating the fi- nancing of terrorism) checks similar to what IFC performs, criminal background checks of winning bidders were car- riedout. Ultimately,theprivatizationrulesoftenderbarred people from bidding if they had been convicted of a felony after June 1999, with that date reflecting the end of major hostilities and the introduction of international administra- tion and nato control. this was not a fully satisfactory exclusionary policy, however, and after each wave of ten- ders, there was relief when criminal background checks failed to find legally and morally questionable bidders that were not excluded in the above policy. IFC should do its best to develop objective policies on whom it will or with not work with in a conflict-affected country. Such a policy should balance the typical exclusionary rules of IFC and the nature of the conflict. the policy likely needs to have more flexible standards than what might be devel- oped for a nonconflict-affected country; otherwise, it might be too restrictive to achieve project goals. 4) Design and implement a system for preserving proj- ect memory Historic buildings, Pristina In a conflict-affected country, a high turnover of inter- national staff is common, due to the hardships in such a mISrePreSeNtAtIoN by PeoPle wIth APPAreNt Au- posting and the fact that it is often unsuitable for de- thorIty pendents. the result can be a revolving door of foreign experts and the risk of endless reinvention of the another problem was the arrival of people who purported wheel. to be managers of an enterprise scheduled for privatization but who in fact had no such authority2. this can result in this problem was especially acute with the Kosovo embarrassment for the advisory services implementer and privatization program. Some foreign experts would put project goals at risk. therefore, this is another topic dump 20 lever arch files into a storage room on their worthy of supplemental due diligence in a post-conflict last day in the office and say, "all my files are there." country. Should primary information be missing, asking to With that act, a year or more of insights, lessons learned, see labor books (a type of work-history passport used in and the work product could become immediately ob- some countries) or other indirect evidence such as tax re- scured. When new managers or experts would arrive, cords and interviews with subordinate staff can help they would often be eager to "make their mark" and increase the comfort level. start designing new systems or policies that could direct- ly contradict a preceding policy or result in the throwing 2 Likely reasons for these ploys included: to facilitate asset stripping, to operate the enterprise assets for personal profit, and to try to start economic activity for a community using a defunct, out of months of work product. a frustrating example abandoned enterprise. In some cases, the purported manager claimed to have been the manager before the mass firings of Albanians started in 1989. of this was the endless renegotiation of the rules of IFC SmartLeSSonS -- JUne 2008 3 tender for privatization with all stakeholders Conclusion every time a new agency manager or expert would arrive. While the conflict in Kosovo was particularly complex and had an unprecedented post-con- to ameliorate this, as one of the project flict period with its status as a Un protector- members with the longest institutional mem- ate, universal lessons can still be drawn from ory, I began a file memorandum system, ex- the advisory services work conducted in fur- plaining in detail the policies that went into therance of Kosovo's privatization program. the development of key features of the priva- the lessons summarized above will hopefully tization implementation system and how I be useful for IFC's work in other conflict-af- conducted legal analysis of privatization fected countries, or for future IFC work in a deals. admittedly, this represented only a newly independent Kosovo. portion of all the policy and implementation work by the agency. It is therefore recom- mended to have an institutional memory plan from the outset of advisory service op- erations; this could include requiring consul- tants to produce such "memory memos" as a contract deliverable. DISclAImer IFc Smartlessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. the findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFc or its partner organizations, the executive Directors of the world bank or the governments they represent. IFc does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. IFC SmartLeSSonS -- JUne 2008 4