FINANCING DEVELOPMENT

Development Banking Case Study -

Lignite Power Technical Assistance Project for Kosovo

At the turn of the century, following several years of escalating violence that culminated with the NATO bombing campaign of 1999, Kosovo’s economy lay in ruins. After the termination of hostilities the international community began offering technical and financial assistance in the reconstruction effort. The World Bank played a significant role in this effort, and the following project is representative of many other similar efforts throughout the country.

The World Bank’s Lignite Power Technical Assistance Project for Kosovo was designed to help build an enabling investment environment in Kosovo that would attract private investors to develop lignite mines and build new capacity for lignite thermal power generation. Because Kosovo was not a member of the World Bank group it was not eligible to receive loans from the Bank and so all assistance had to be provided in the form of grants.

Many of the issues that arose in the course of this project are inherent in all development banking projects, but some are specific to Kosovo and/or development banking in a post-conflict environment.

Kosovo

In 1989 Kosovo’s status as an autonomous province within Yugoslavia was revoked. Throughout the 1990s tension between Kosovo’s largely ethnic Albanian population and the rest of Yugoslavia’s Serbian population increased. By 1998 open conflict erupted between the Kosovo Liberation Army and Serbian troops. During the ensuing war large-scale violations of human rights took place, precipitating a military intervention by NATO forces in March of 1999. In June of 1999 the United Nations stepped in to provide peacekeeping forces and an interim government. By 2001 the United Nations began reducing its role in the region. In late 2006 it became clear that the UN favored granting Kosovo independence, assuming that significant protections of Serbian rights were enshrined in its laws. Most of the population of the rest of the former Yugoslavia opposed such action.

At the time of this project, power was split between the United Nations in Kosovo (UNMIK) and the Provisional Institutions of Self-Government (PISG). The UNMIK retained official authority but the PISG purported to represent the people of Kosovo and it was understood that it would eventually assume power.

The economy of Kosovo suffered significantly during the conflict. Basic infrastructure was destroyed or had deteriorated. Unemployment hovered at over 40%, and Kosovo’s young population ensured that each year a large number of people attempted to enter the workforce. Foreign investment was minimal as the political instability and lack of infrastructure reduced the potential profitability of most ventures.

Social and Political Risks

Although violence had largely subsided since international forces intervened in 1999, at the time of the project ethnic tensions remained quite high in Kosovo. There was a real possibility that the eventual withdrawal of peacekeeping forces would allow those tensions to escalate into violence. This precarious social and political environment created several problems for the Bank.

First, renewed violence and social upheaval would fundamentally undermine the project. Much of the project focuses on creating a stable, effective investment climate – which simply cannot exist in the face of widespread violence. Outside investors, even if happy with the legal framework in place, will rarely tolerate the risks associated with civil strife.
Second, Bank involvement risked exacerbating political tensions. This would be a particular concern if its activities were viewed as conferring disproportionate material benefits on one segment of the population. There were already widespread perceptions that NATO was supporting Kosovo’s Albanian population while Russia was more supportive of the Serbian position. Any development project that increased the risk of escalating ethnic tensions or violence clearly would be counter-productive.
Finally, these sensitivities also complicated the consultation process. It was important to involve local groups in the planning process but recognition by an international organization like the World Bank could lend undue credibility to a local faction attempting to make a claim on power. Even the legitimacy of relying on the PISG was unclear because it lacked the kind of a democratic accountability of a permanent government.

Environmental Risks

Lignite is considered one of the dirtiest possible energy sources. Not only is the strip mining process generally employed for excavation destructive, but the burning of lignite releases numerous pollutants. Given the World Bank’s own emphasis on sustainable development, the decision to promote reliance upon such an environmentally damaging energy source was questionable. However, a number of other considerations had to be taken into account. First, the lack of a stable energy supply was seriously affecting virtually every industry in Kosovo. Second, alternative energy sources were not readily available. Finally, lignite is one of the only natural resources in the region, and given the desperate need for income in the region it would be difficult to ignore the potential economic benefits of mining the lignite. Recognizing that relying on lignite was not an ideal strategy the grant included a number of environmental provisions, including provisions for investment in renewable energy resources.

Economic Risks

Post-conflict regions always face serious economic challenges. While the potential for rapid economic growth exists (especially if the population is highly educated), corruption, inflation, and uneven sectoral development can severely impede progress.

Questions for discussion

What is the rationale for not providing loans to entities outside the World Bank group?
What is the rationale for making loans only to government entities and is such a policy likely to be successful in a post-conflict situation where many non-governmental organizations may wield considerable power and influence?
What conditions were placed on the funds disbursed in Kosovo?
Were these conditions appropriate given the risks discussed above and the project’s goals? Should more conditions have been put in place?
Did local authorities have an appropriate level of input when determining the conditions to be placed on the funding?
Was the Bank obligated to consult with PISG, or was such consultation unnecessary while the United Nations still retained its administrative role over the region?
Do the environmental provisions in the grant go far enough? Do they go too far? Can Kosovo be expected to take investment in renewable energy sources seriously when it has access to cheap lignite? Should Kosovo even be expected to worry about environmental considerations given the serious economic and social challenges it faces? If not, is it appropriate for the World Bank to force environmental protections upon them? At what point in the reconstruction effort should environmental considerations rival political and economic ones?
How were projects divided between the various organizations involved in the Kosovo reconstruction effort? Who coordinated these efforts, and was any organization able to partake in planning the development strategy?
What distinctive resources could the World Bank provide that other agencies could not? Were those resources used effectively? If not, what tasks should the Bank have focused upon instead?
Should any other agencies have been involved in the project? Should the IDA have been the primary granting institution, or would a regional development bank such as the European Bank for Reconstruction and Development have offered greater technical expertise?