WORLD BANK GROUP Removing Regulatory Barriers to Competition November 2021 Kosovo Country Economic Memorandum  1 Kosovo Country Economic Memorandum Removing Regulatory Barriers to Competition Table of Contents Abbreviations 6 Introduction  9 Economy-Wide Restrictions to Competition 15 Public Ownership 18 Simplification and Evaluation of Regulations 20 Involvement in Business Operations 21 Administrative Burdens on Start-Ups 22 Barriers to Trade and Investment 23 Sector-Specific Regulations 25 Professional Services 27 Electricity 29 Telecommunications  31 Transport 34 Retail 35 Policy Options for Increasing the Competitiveness of the Economy  39 Appendix Overview of the Product Market Regulation Methodology  43 References 47 2  Figures Fig 1.1  Market-based competition Fig 3.1  PMR scores for barriers in Fig 3.9  Number of countries with scores in selected economies, network and services sectors national, state, regional 2020 p.11 in selected economies, 2021 provincial or municipal/local Fig 1.2  Anti-monopoly policy scores p.26 governments hold equity in selected economies, 2020 Fig 3.2  PMR scores for professional stakes in the largest firm in p.11 services in selected retail mobile services (voice, economies, by profession, video and data), 2021 p.32 Fig 2.1  Overall PMR scores in selected countries, 2021 p.17 2021 p.26 Fig 3.10 High-speed fixed broadband Fig 3.3  PMR scores for network price as percentage of Fig 2.2  Decomposition of Kosovo’s sectors in selected disposable monthly income PMR score, 2021 p.17 economies, 2021 p.27 for bottom 40% of the Fig 2.3  PMR scores for distortions population, 2020 p.33 induced by public ownership Fig 3.4  PMR scores for regulated professions in selected Fig 3.11 PMR scores for transport in in selected economies, 2021 economies, 2021 p.28 selected economies, 2021 p.18 p.34 Fig 2.4  PMR scores for simplification Fig 3.5  PMR scores for electricity in selected economies, 2021 Fig 3.12 Rural Accessibility Index in and evaluation of regulations p.29 selected countries, 2021 p.35 in selected economies, 2021 p.20 Fig 3.6  Firms’ perceptions of Fig 3.13 PMR scores for retail constraints in the electricity distribution in selected Fig 2.5  PMR scores for involvement sector in selected economies, economies, 2021 p.36 in business operations in selected economies, 2021 2019 p.30 Fig 3.14 Number of countries in which p.22 Fig 3.7  PMR scores for regulations specify particular e-communications in selected opening or closing hours, Fig 2.6  PMR scores for administrative economies, 2021 p.31 2021 p.36 burdens on start-ups in selected economies, 2021 Fig 3.8  Decomposition of the Fig A.1  Schema of economywide p.22 PMR sub-indicator for PMR indicators p.44 Fig 2.7  Firm entry and exit rates in e-communications, 2021 p.32 Fig A.2  Schema of sectoral PMR selected countries, 2020 p.23 indicators p.46 Boxes Box 1.1  Methodology and structure of the 2018 OECD–World Bank Group Product Market Regulation (PMR) indicators p.12 Box 2.1  Overview of competition enforcement in Kosovo p.16 Box 2.2  Overview of state aid in Kosovo p.19 Box 2.3  Assessing regulatory impact on markets and competition in Mexico p.21 Box A.1  Brief description of economy- wide indicators and subindicators p.45  3 © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. 4  Acknowledgments This note was prepared by the World Bank Group Global Markets and Technology Unit, Competition Policy Team. The work was co-funded by the World Bank and the International Finance Corporation (IFC), as part of global data collection and work on the Kosovo Country Economic Memorandum. The main author is Cesar Borja Galan. Maciej Drozd contributed to sections of the note and supported its preparation with technical advice. Fisnik Salihu provided legal research. Georgiana Pop provided guidance and reviewed the note. The note benefited from exchanges with Enrique Blanco Armas (Lead Economist), Rhedon Begolli (Senior Energy Specialist), Lucio Castro (Senior Economist), Natalija Gelvanovska (Senior Digital Development Specialist), Silvia Martínez Romero (Senior Energy Specialist), Ramón Muñoz-Raskin (Senior Transport Specialist), Besart Myderrizi (Research Analyst), Blerta Qerimi (Senior Private Sector Specialist), and Temel Taşkın (Economist). This note has been prepared as part of the Kosovo Country Economic Memorandum led by Aslı Şenkal (Senior Economist, Task Team Leader). The work was overseen by Linda Van Gelder (Country Director, Western Balkans), Massimiliano Paolucci (Country Manager, Kosovo and North Macedonia), Jasmin Chakeri (Practice Manager, Macro, Trade, and Investment Global Practice), and Martha Martinez Licetti (Practice Manager, Finance, Competition and Innovation Global Practice). The note is embargoed under agreement with the Organisation for Economic Co-operation and Development (OECD). The Product Market Regulation (PMR) results included in this note are current as of November 2020 and may be updated by the OECD. To reuse graphs and boxes, please contact Cesar Borja Galan.  5 Abbreviations ARKEP Autoriteti Rregullativ i Komunikimeve Elektronike dhe Postare ERO Energy Regulatory Office EU European Union KBRA Kosovo Business Registration Agency KCA Kosovo Competition Authority OECD Organisation for Economic Co-operation and Development PMR Product Market Regulation POE Public Owned Enterprise 6  Executive summary Competition can drive productivity growth in Kosovo, especially in the context of the post-COVID-19 recovery. As the economy rebuilds, it is key that markets function smoothly, and that anticompetitive firm behavior or government intervention do not constrain the path to recovery. Competitive product markets can help a country recover from economic shocks more quickly. Competition in product markets can also prop-up economic recovery in a more inclusive way for the poorest households. Kosovo has made significant progress towards pro-competition regulation of product markets but there is still significant room for improvement. The Product Market Regulation (PMR) indicators of the Organization for Economic Co-operation and Development (OECD) and the World Bank Group suggest that the regulatory framework in Kosovo still lags that of OECD and EU countries on average. It is important to note that PMR indicators focus on regulatory measures as they appear “on the books” and do not cover informal regulatory practices nor the effective enforcement of regulations. According to PMR indicators, main barriers to competition in Kosovo mostly stem from restrictions on the public ownership of firms and the regulatory process. Preferential treatment granted to Public Owned Enterprises (POEs) through financial and non-financial advantages (such as state guarantees, loans and concessions of public property in more favorable conditions than those applicable to the private sector) risks creating an uneven playing field between public and private operators, especially in sectors in which private operators can compete, such as manufacture of basic metals and provision of urban, suburban and interurban passenger transport. Limited operational autonomy of POEs and other governance shortcomings may also give rise to conflicts of interest and inefficiencies. Obstacles to competition in key sectors may be leading to unsatisfactory market outcomes, dragging down firms’ competitiveness. Main regulatory restrictions identified through the PMR methodology relate to the following sectors: • Electricity: The existing bulking supply agreement between the main generator of electricity (KEK) and the historical supplier (KESCO) prevents operators from accessing the wholesale markets for electricity. The existence of tariffs below the EU average and limited deregulation further reduce the incentives to compete in the market. As a result, KESCO is the sole supplier of electricity in Kosovo, although the energy regulator has provided supply licenses to eight operators. In this context, this sector has been identified as one of the main constraints for firms, and a significant amount of them have experienced electrical outages. • Telecommunications: even though there are few regulatory restrictions to competition, delays in current plans for assigning new frequency bands prevent operators to increase their market shares, and blocks market entry for potential competitors (in case that the introduction of new operators were feasible). In addition, lack of access to international submarine cables limits international connectivity, driving up prices in high speed broadband services. • Transport: Suboptimal regulation may be hindering opportunities for the growth of transport services. In the railways sector, obstacles to the development of a competitive freight corridor may hamper the development of international rail freight and passenger services. In the taxis’ sector, caps to the total number of taxis, fixed price lists and their exclusive right to provide ride-hailing services substantially limit competition. For intercity buses, direct allocation of routes by the government and burdensome requirements for obtaining new routes results into an allocation of markets, which appears to have 1 contributed to a decrease in the quality of the services offered by incumbent companies. • Professional services: Lawyers and notaries are subject to price recommendations and controls from the government for setting up their fees, which paired with exclusive rights for the provision of certain 1 The scope of this analysis activities give them the ability and the incentive to set high prices for their services. In the case of is limited to PMR data notaries, quotas and territorial restrictions limit the number of operators in the same geographical and thus the report is area, further restricting competition. Accountants benefit for an exclusive right to conduct book- not meant to provide a keeping activities, granting them an important degree of market power when setting their fees. comprehensive competition assessment of Kosovo’s • Retail: although Kosovo’s regulatory framework on retail distribution is less restrictive than in other markets. Such an countries, nonprescription medicines (which generally are considered to be less risky for human assessment would require health) cannot be sold outside pharmacies, preventing other type of businesses to compete for the sale an in-depth analysis of of these products. each specific markets including elements, Although the PMR indicators are limited in scope and should therefore be considered as an entry including barriers to entry, point for further analysis,1 this assessment allows to identify potential constraints to competition and capacity constraints, possible policy reforms. Kosovo could increase competition by (a) eliminating POE–related barriers to vertical structure, product competition to ensure a level playing field for private and public operators in markets where they compete, differentiation, regulations that affect market (b) improving the regulatory process and facilitating business registration to boost market entry, and (c) performance, market introducing policy reforms in network sectors and professional services to eliminate regulatory barriers outcomes, and business to competition and avoid anticompetitive practices. In this regard, the table below provides a set of policy behavior. These are beyond options that could further strengthen the competition regulatory framework in Kosovo. the scope of these inputs.  7 1. 01 Introduction 1. Productivity growth was low in Kosovo before the pandemic. Average growth of labor productivity declined every year between 2013 and 2017, and revenue total factor productivity (TFPR) growth, a revenue-based measure of productivity, increased by a mere 0.7 percent a year. Labor productivity in Kosovo is only one-third the EU average and significantly lower than in aspirational economies, suggesting substantial barriers to productivity growth (see the chapter on firm dynamics and productivity). 2. As a largely service-based economy, Kosovo has been particularly vulnerable to the COVID-19- induced economic shock. Productivity may pick up only sluggishly after the crisis ends. The pandemic likely forced local businesses to suspend, scale down, or close their operations, despite efforts by the government to support vulnerable firms. Tax administration data indicate a 9.5 percent decline in revenues in nominal terms in 2020 compared with the previous year. According to the Kosovo Business Registration Agency (KBRA 2020), 3,326 business shut down in 2020. Unlike other economic crises, the global pandemic struck most economic sectors in similar ways, hurting both more productive and less productive firms.2 The symmetric character of the external shock threatens to diminish the country’s productive potential in lasting ways. 3. Increased market competition could provide a boost to the post-COVID-19 economic recovery, increasing productivity and supporting job creation in the medium-run. As the economy rebuilds, it will be critical that markets function smoothly, and anticompetitive firm behavior or government intervention does not constrain the recovery. Competitive product markets can help speed recovery from economic shocks (Bergoeing and others 2004), because vigorous competition (a) amplifies the incentives of firms to innovate and upgrade production (productive efficiency) (Aghion and others 2005; Bloom, Draca, and Van Reenen 2011; and Nickell 1996); (b) improves resource allocation across firms and sectors (allocative efficiency) (Bartelsman and Dhrymes 1998; Olley and Pakes 1996); and (c) encourages the entry of more productive firms and the exit of unproductive ones (market selection) (Eslava and others 2013; Hopenhayn 1992; Jovanovic 1982). As economic sectors are interlinked, increased competition in one sector can also raise productivity in others, improving the competitiveness of the entire economy (Acemoglu and others 2012; Barone and Cingano 2011; Bourlès and others 2013; Égert and Wanner 2016). Even though competition and higher productivity may reduce the demand for labour in the short term (notably for low-skilled professions), can also stimulate job creation in the medium and long-term, and induce firms to raise wages (Dauda, 2020).3 4. Competition in product markets can also prop up a more inclusive economic recovery for the poorest households.4 A study of the Asian Development Bank showed that in all countries analyzed, most households experienced significant reductions in income and employment as a result of the COVID-19 pandemic, and half of them experienced financial difficulties (ADBI, 2021). Higher competition can help stimulate the economy in a more inclusive way, increasing households’ incomes and reducing businesses’ costs. For instance, competition in selling markets allows farmers to increase their income, and competition in input markets allows small businesses to obtain a wider variety of inputs at more affordable prices (Connor 2012; Banerji and Meenakshi 2004). 5. Perception indicators suggest that Kosovo lags in market-based competition and anti- monopoly policies compared to benchmark economies.5 According to the Bertelsmann Transformation Index, which analyzes transformation toward a market economy, Kosovo’s domestic markets are perceived as one of the least competitive in the region (figure 1.1). Anti-monopoly policies are also perceived to be the least effective among comparators (figure 1.2). 2 Primary production (agriculture and mining) and communication services were harmed less than other sectors (see World Bank (2020 d.) 3 See Dauda (2020) for a summary of evidence on the effects of competition on jobs and economic transformation. 4 See Begazo and Nyman (2016) for a review of the literature on the impacts of competition on welfare distribution. 5 Structural peers are Albania, Armenia, the Kyrgyz Republic, Moldova, and North Macedonia. Aspirational peers are the Czech Republic, Estonia, Latvia, Lithuania, Slovenia, and Uruguay. 10 Introduction Figure 1.1 Market-based competition scores in selected economies, 2020 Aspirational 9.4 OECD average 8.5 Albania 7.0 Serbia 7.0 Kosovo 5.0 0 2 4 6 8 10 Score 1-10, from worst to best Source: Bertelsmann Transformation Index 2020. Note: Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. Figure 1.2 Anti-monopoly policy scores in selected economies, 2020 Aspirational 10.0 OECD average 8.7 Albania 8.0 Serbia 7.0 Kosovo 6.0 0 2 4 6 8 10 Score 1-10, from worst to best Source: Bertelsmann Transformation Index 2020. Note: Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. 6. The right government policies can boost competition in Kosovo’s markets. Competition can be limited by market characteristics (such as high fixed costs, limited mobility of resources and its scarcity, or limited transparency of the market), firm behavior (such as cartels and abuses of dominance), and distortive government interventions (such as direct state participation in markets and selective subsidies). Governments can also foster competition, by identifying and sanctioning anticompetitive conducts or enacting pro-competition legislation (ensuring access to essential facilities owned by dominant suppliers in sectors typically characterized by important bottlenecks, such as electricity or telecommunications, for example). A comprehensive competition policy framework therefore rests on three pillars: pro-competition sectoral regulation, competitive neutrality and control of state aid, and antitrust regulation and enforcement. 7. This note identifies barriers to competition in product markets in Kosovo based on the OECD– World Bank Group Product Market Regulation (PMR) methodology (Box 1.1). PMR indicators focus on regulatory measures as they appear “on the books”; they do not cover informal regulatory practices or the enforcement of regulations. PMRs and other government interventions have a positive impact on productivity and employment and should thus be periodically reviewed. In Australia, implementation of the National Competition Policy increased GDP by at least 2.5 percent during the 1990s.6 In Ukraine, eliminating restrictions to competition in services led to a 3.6 percent increase in total factor productivity in the manufacturing sector between 2001 and 2007.7 In South East Asia, breaking up the trucking cartel on the Bangkok–Vientiane route and opening it to Thai companies reduced logistics costs by 30 percent (Arnold 2005). 6 The estimate of 2.5 percent is conservative and reflects productivity and price changes in key infrastructure sectors in the 1990s (Australian Productivity Commission 2005). 7 The Ukrainian government liberalized the regulation of banking, insurance, telecommunications, information, and business services (Shepotylo and Vakhitov 2012). Introduction 11 Box 1.1  Methodology and structure of the 2018 OECD–World Bank Group Product Market Regulation (PMR) indicators The aggregate economywide PMR indicator measures the incidence of regulatory barriers on competition via two pillars: distortions induced by state involvement and barriers that can hamper the entry of domestic and foreign firms and products into the market. The qualitative information is collected and coded based on a standardized questionnaire and aggregated into quantitative scores that range from 0 (least restrictive) to 6 (most restrictive) using standardized weights. The analysis in this note relies on primary data for Kosovo collected by the World Bank and validated by the OECD as well as comparative data for other countries collected by the World Bank and the OECD.a To ensure comparability across countries, the data are current as of January 1, 2020. The data were collected throughout 2020. The PMR indicators contained in the 2018 methodology capture information on economy-wide and sector- level barriers to competition (box figure 1.1.1). (See the appendix for a description of the PMR methodology and indicators.) The indicators rely on qualitative information on over 1,000 features of economy-wide and sectoral regulations. Economy-wide aspects include distortions from state involvement and barriers to firm entry. Sector-level information includes barriers in network sectors (energy, transport, e-communications); professional services; and retail services. As the sectors covered by the PMR are closely connected to economy-wide outcomes, some sectoral information feeds into economy-wide indicators and some economy-wide information feeds into the sector-level indicators (hence the overlapping area in the Venn diagram). Box figure 1.1.1 Economy-wide and sectoral level PMR indicators 55% Economy-wide indicators Sector-level indicators Distortions by state involvement (e.g., public ownership, procurement, price controls) Network sectors Barriers to domestic and foreign Professional services entry (e.g., licensing, tari s, barriers in services and network Retail sectors) Source: World Bank staff based on OECD 2020b. a. Initially built by the OECD for their members and OECD plus countries, the 2018 dataset covers 50 countries and 2 US states. It includes 12 non–OECD economies (Albania, Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Cyprus, Kazakhstan, Malta, Romania, Serbia, and South Africa.) 8. Public ownership, deficiencies in the regulatory process and barriers in networks and services sectors are the main drivers of regulatory restrictions in Kosovo according to PMR indicators. At the economy level, most restrictions are induced by (a) weak governance of public-owned enterprises (POEs), inadequate state aid control, and the relatively wide scope of public ownership in segments where private participation is usually viable and (b) gaps in the systems in place to design and assess regulations, particularly with regard to their impacts on markets and the private sector. At the sectoral level, limited implementation of pro-competitive regulation in electricity, telecommunications, and transport, along with restrictions on the legal and notary professions, are the key areas of concern. Sections 2 and 3 of this note present the findings. Section 4 proposes some policy options for addressing the identified gaps. 12 Introduction Introduction 13 2. 02 Economy-Wide Restrictions to Competition 9. Kosovo has made significant progress toward strengthening the regulatory framework for competition. It has a comprehensive competition policy, including a competition law and a competition authority, the Kosovo Competition Authority (KCA). Competition enforcement could nevertheless be enhanced (Box 2.1). In parallel, the state has progressively reduced the number of POEs through an ambitious privatization program conducted by the Kosovo Privatization Agency. Between 2003 and 2020, more than 60 waves of privatization and sales of POEs assets took place, and more than 400 POEs were privatized (EC 2020b). Privatization plans are still ongoing, although the transfer of land assets seems to be currently suspended. Box 2.1  Overview of competition enforcement in Kosovo Kosovo has carried out several reforms of its competition rules in order to strengthen enforcement and fully align with the EU Acquis. It approved a new law on protection of competition in 2010, which introduced important amendments, such as a merger review procedure and a leniency program (i.e. whistleblowing programs) to facilitate detection of cartel practices.a Reform of the competition law, including the right to compensation for damage caused by infringements of competition rules, is currently under discussion. The Kosovo Competition Authority (KCA) is empowered to start investigations, conduct inspections at businesses’ premises, impose fines and remedies, and prohibit anti-competitive mergers. Despite progress, implementation gaps remain, hindering the development of an effective competition enforcement system. The KCA seems to lack the necessary resources to fully implement competition rules, and coordination with the different sectoral regulators and public procurement bodies is inadequate. For instance, in 2019, the KCA conducted no dawn raids (i.e. competition inspections at businesses’ premises), and it did not apply the leniency procedure (EC 2020a). It also appears to issue a limited number of decisions (3 on anticompetitive agreements, 4 merger reviews, and 10 professional opinions).b The KCA strategy for 2020–23 acknowledges implementation pitfalls and proposes several solutions to address them, including conducting trainings to increase the functional capacity and operational independence of the KCA and carrying out sectoral studies and other advocacy activities to promote competition in specific sectors.c b. Several important reforms have taken place to further align Kosovo’s legislation with the EU acquis, such as the adoption of regulation on technology transfer and specialization agreements. See EC (2020a). c. For a list of the decisions, see https://ak.rks-gov.net/al/vendimet. d. The strategy is available at https://ak.rks-gov.net/assets/cms/uploads/files/KCA%20Strategy%20-%20ENGLISH%20ES%20 FINAL%2002022020%20(1).docx. 10. Despite progress with the adoption of a competition policy framework, the OECD-WBG PMR indicators suggest that Kosovo’s regulatory framework still lags most OECD and EU countries (figure 2.1). Restrictions on competition are associated mainly with distortions induced by state involvement in the economy, notably stemming from public ownership of firms, and the unsatisfactory design of the regulatory process. Barriers to domestic and foreign entry also persist, driven by high barriers to competition in service and network sectors—that is, sectors in which fixed infrastructure is necessary to deliver the goods or services to end users, for example electricity, transport or regulated professions (figure 2.2). 16 Economy-Wide Restrictions to Competition Figure 2.1 Overall PMR scores in selected countries, 2021 3 Score (0-6, from best to worst) 2.5 1.82 2 1.62 Total average 1.55 1.40 1.40 1.5 1.30 1.29 1.29 1.28 1.19 1 0.5 0 Serbia Turkey Austria Costa Rica Netherlands Norway Latvia Finland Chile ECA average Iceland Albania Romania Colombia Brazil Denmark Australia Slovenia Czech Republic Hungary Ireland OECD average Poland Slovak Republic Switzerland Greece France Mexico Korea Canada Cyprus Bulgaria Spain Germany Lithuania Estonia Italy Portugal Malta Luxembourg Belgium South Africa Sweden New Zealand EU average Croatia Japan Kosovo Kazakhstan United Kingdom Argentina Source: PMR database. Note: Scores range from 0 to 6. Higher values indicate more restrictive regulations. Figure 2.2 Decomposition of Kosovo’s PMR score, 2021 PMR score (0-6, from best to worst) 0.0 0.5 1.0 1.5 2.0 2.5 44% 56% Barriers to Domestic and Foreign Entry Distortions Induced by State Involvement 24% 27% 49% 42% 37% 21% Barriers to Trade and Investment Public Ownership Admin. Burden on Start-ups Simplification and Evaluation of Regulations Barriers in Service & Network sectors Involvement in Business Operations Source: PMR database. Note: Scores range from 0 to 6. Higher values indicate more restrictive regulations. Economy-Wide Restrictions to Competition 17 Public Ownership 11. The PMR score for the distortions induced by POEs in Kosovo is similar to the score in most benchmark economies but higher than in the average for OECD countries. Governance of POEs, scope of SOEs and government involvement in network sectors are the main drivers of the restrictions on competition (figure 2.3). State involvement in Kosovo could be justified in certain sectors by the limited size of the economy and high fixed costs for entry, especially in network industries, such as electricity, telecommunications, and rail transport. But the government also participates in competitive markets where private sector participation is more feasible, such as manufacture of basic metals8 and urban, suburban, and interurban passenger transport,9 where, the rationale for public ownership is less clear. Figure 2.3 PMR scores for distortions induced by public ownership in selected economies, 2021 . . . . . . . . . OECD Average % % % % 2.14 Score (0-6, from best to worst) Governance of SOEs Scope of SOEs Gov’t Involv. in Network Sectors Albania % % % % 2.26 Direct Control Kosovo % % % % 2.26 Aspirational average % % % % 2.32 Serbia % % % % 3.95 Source: PMR database. Note: Scores range from 0 to 6. Higher values indicate more restrictive regulations. Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. OECD average includes 36 countries. 12. POE governance is not fully aligned with international practices; it may give public operators advantages over private operators. Although the government has introduced substantial reforms to reinforce POEs’ governance (such as internal audits10), some rules still restrict competition. In some sectors, for instance, such as energy, line ministries’ representatives sit on the boards of directors of POEs while acting as regulators of the markets in which they operate.11 In order to reduce conflicts of interest, it is recommended that POEs limit the number of board members from the government as much as possible (OECD 2020a). Similarly, POEs’ strategic decisions (such as mergers, equity, and restructuring issues) must be cleared by the government.12 This requirement may constrain POEs’ operational autonomy, leading to decisions based on criteria other than the best interests of the enterprise. 8 For instance, Trepča J.S.C., which is regulated by Law No. 05/L – 120, is a mining company that is also active in metallurgic activities. 9 POEs in urban transport are mostly owned by local governments. See, for instance, MPOE Trafiku Urban J.S.C. 10 See Article 38 of Law No. 03/L-087 on POEs. 11 See, for instance, Article 9.3 of Law No. 05/l-085 on Electricity, which allows the Ministry of Economic Development to develop secondary legislation regarding the level of fuel reserves that electricity producers should keep. 12 See Articles 5 and 9 of Law No. 03/L-087 on POEs. 18 Economy-Wide Restrictions to Competition 13. Granting preferential treatment to POEs in markets in which they compete with private operators reduces contestability and hinders market functioning. Although POEs are generally subject to private law, public operators still benefit from both legal and de facto advantages. First, although the Law on public financial management and accountability establishes a general prohibition for public authorities and POEs to issue any guarantees, loans and subsidies, the Law expressly enables the government to back up POEs through state guarantees and soft loans at below-market interest rates.13 A significant part of Kosovo’s SOEs operate at a loss, which makes them rely on government subsidies for their survival.14 Second, the public procurement law can be interpreted as allowing public contracts to be awarded to POEs without having to follow the public procurement proceedings, considering the provision of services from POEs as in-house purchases.15 For instance, the government has directly awarded some purchases to the POE Kosovo Telecom, which claimed being a public institution, and thus, exempt from the application of the public procurement law.16 However, this interpretation of the public procurement law is currently under legal review.17. Third, the government allows POEs to use public spaces, which places these companies at a privileged situation compared to private operators. For instance, the agreement between the Kosovo Postal Service and the Ministry of Internal Affairs allows the former to use public facilities and receive payments in their offices. The case is also under appeal in national courts.18 Forth, limited enforcement of state aid rules can provide undue advantages to certain private and public operators, exacerbating market distortions induced by government interventions (box 2.2). Box 2.2  Overview of state aid in Kosovo The government of Kosovo provides various forms of state support to POEs, including grants, subsidies, and tax exemptions. The annual value of these benefits is estimated at about 2 percent of GDP (World Bank 2019a), more than double of the estimated state aid granted at the EU level in 2019.19 At the end of 2020, the stock of loans from the government to companies exceeded ¤800 million; in 2019, direct grants and subsidies to POEs amounted to ¤135 million (Ministry of Finance, 2020), including ¤11.5 million of direct subsidies to cover operating costs (IMF 2021). Implementation of state aid rules is essential to prevent market distortions. Despite recent improvements in the state aid regulatory framework—such as the creation of a state aid authority, the development of state aid guidelines for the government, and adoption of a de minimis state aid system—implementation of state aid rules remains unsatisfactory (EC 2020b). Lack of information-sharing by ministries and regulators on state aid schemes may hinder competition assessments. Substantive assessments of state aid plans are not systematically carried out (EC 2020b). The State Aid Commission (SAC)—a recently created body in charge of assessing state aid programs in Kosovo and updating the state aid inventory—has started to evaluate some state aid schemes. For instance, it prohibited feed-in tariffs for additional production of 20 megawatts of solar energy because of the selective nature of the scheme.20 Similarly, it declared as illegal state aid the soft loans granted to Kosovo Energy Corporation J.S.C (KEK) by the Ministry of Finance in 2015 through the measure entitled “Capital Consolidation Agreement for Capital Investments in the New Southwest Sibovc Mine and the Credit Consolidation Agreement for investments in the KEK Power Plant.” State aid could not be recovered, however, because it was provided before the introduction of the State Aid Law in 2017.21 13 See, Articles 49 and 50 of Law No. 03/L-048 on public financial management and accountability. 14 See also US Department of State (2020). 15 See ,for instance, the position of the American Chamber of Commerce on the interpretation of the public procurement law: https://www.amchamksv.org/amcham-position-on-public-procurement/ 16 This is the interpretation given by Kosovo Telecom in the Vala Case. See: USAid. 2018. High-Level Review of Kosovo Public Procurement Legal Framework and Recommendations for Improvement. https://usaid-team.net/ wp-content/uploads/2021/05/Review-of-Public-Procurement-Legal-Framework-2018.pdf 17 See Article 9.4 of Law 04/L-042 on Public Procurement of the Republic of Kosovo, as amended by Law No. 04/L- 237. 18 See: Kallxo. 2017. Autoriteti i Konkurrencës i Bie Pishman Vendimit për Postën. https://kallxo.com/gjate/analize/autoriteti-konkurrences-bie-pishman-vendimit-per-posten/ 19 This comparison only represents an estimation, as data is not fully comparable. Data for Kosovo is an estimate of all state aid granted to MSMEs in all sectors, whereas data for the European Union excludes agriculture, fisheries and railways. 20 State Aid Commission’s decision no. 17/2020. 21 State Aid Commission’s press release: “SAC decides on the assistance that the Government of Kosovo provided to KEK in the form of loans with subsidized interest rate in 2015”; available at https://knsh-rks.net/knsh- vendos-rreth-ndihmes-qe-qeveria-e-kosoves-i-dha-kek-ut-ne-forme-te-kredive-me-norme-te-subvencionuar- te-interesit-ne-vitin-2015/ Economy-Wide Restrictions to Competition 19 Simplification and Evaluation of Regulations 14. The regulatory process does not fully consider competition assessments. The main shortcomings relate to the assessment of regulatory impact on competition and the interaction of the regulator with interest groups (figure 2.4). Kosovo has introduced a procedure for ex ante regulatory analysis through the development of concept documents, which allow the government to consider some of the expected outcomes of new legislation.22 Several limitations persist, however. First, the regulatory impact assessment procedure does not require regulators to carry out a cost–benefit analysis of the effects of the regulation on competition. Second, regulators are not required to analyze the baseline, or “do-nothing,” option when conducting the impact assessment, which could lead to over-regulation. Third, there is no obligation for a government body outside the ministry sponsoring the regulation to review the quality of the regulatory impact assessment. Fourth, the regulatory impact assessment procedures are not always implemented systematically, as they are in other countries. Figure 2.4 PMR scores for simplification and evaluation of regulations in selected economies, 2021 . . . . . . . . Aspirational average % % % 1.44 Score (0-6, from best to worst) Assessment of Impact on Competition Interaction with Interest groups Complexity of Regulatory Procedures OECD average % % % 1.55 Kosovo % % % 1.98 Serbia % % % 2.48 Albania % % % 3.12 Source: PMR database. Note: Scores range from 0 (best) to 6 (worst). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 36 countries. 15. Effective regulatory impact assessment procedures have shown the potential to halt the implementation of regulations that have a negative effect on competition. For instance, in Peru, INDECOPI (the competition and intellectual property authority) declared unlawful a regulation that aimed to increase the purity of the oxygen from 99 percent to 100 percent, as this would de facto exclude 2 of the 5 operators in that market. In Mexico, COFECE (the national competition authority) halted the application of several anticompetitive rules, despite having formal capacity to issue binding opinions (box 2.3). 22 See Article 29 Regulation No. 09/2011 of Rules and Procedure of the Government of the Republic of Kosovo and Republic of Kosovo (2017) 20 Economy-Wide Restrictions to Competition Box 2.3  Assessing regulatory impact on markets and competition in Mexico The Comisión Federal de Competencia Económica (COFECE), the Mexican competition authority, has implemented an ambitious regulatory impact assessment program in Mexico. It is empowered to provide advisory opinions for a wide range of regulations; administrative acts, such as draft laws, decrees, ordinances, public policies, licenses, and authorizations granted by the government; and public tenders. Acts subject to regulatory impact assessment are prioritized based on different criteria, such as economic and social impact, sectors affected, or risks of anticompetitive practices in the sector. Opinions within the regulatory impact assessment process are subject to two checklists. The first includes a set of generic questions, including one question on competition that requires a preliminary analysis of any potential competition concerns that may arise from the act or regulation. The second focuses exclusively on competition. It assesses whether the act or regulation (a) restricts entry (by, for example, granting exclusive rights to any companies or establishing additional licenses or requirements to operate in a given sector); (b) reduces choice and information available for consumers (by, for example, making it more difficult for consumers to switch operators); or (c) reduces the incentives for companies to compete (by, for example, encouraging self-regulation or co-regulation regimes or allowing competitors to share sensitive information). If any of the questions in the competition checklist is answered affirmatively, an in-depth study on the impact of the act/regulation is carried out. Despite COFECE’s opinions are non-binding, this procedure has allowed halting the implementation of some regulations that created an anticompetitive effect in Mexican markets. For instance, private companies used COFECE’s opinion on the Agreement regulating imports and exports of oil products to challenge this regulation in front of the national courts, as it had the effect of preventing free access to the market of oil products. Similarly, COFECE successfully managed to render null the application of a draft law on reforms for the Electric Industry, that prevented private companies to get access to the electricity grid, by challenging this regulation in front of the Constitutional Court. Source: COFECE 16. Regulations of conduct between public officials and business associations and some other stakeholders are not properly set up. The government has developed a public platform on which laws are placed for comments from the public for 15 days. However, legitimate interaction of interest groups with public officials during the regulatory process is not regulated, which could influence the regulatory process and promote policies that protect incumbents and prevent market entry. Additionally, public officials involved in the regulatory process are not required to make their agendas available to the public, which reduces the transparency of the proceedings and may facilitate vested interests and cronyism. Involvement in Business Operations 17. The state’s involvement in business operations appears to be in line with OECD countries. However, Kosovo’s scores for the use of command-and-control regulation and price controls are higher (figure 2.5). Command-and-control regulation means that the government uses coercive as opposed to incentive-based regulation. In Kosovo, these restrictions to competition are found mainly in the retail and transport sectors. In the retail sector, setting limits on opening and closing hours reduces shops’ flexibility to choose their own business model and limits consumers’ access to products. In the transport sector, firms that provide long-distance coach services need approval to serve new routes, limiting the number of competitors in each region and thereby reducing price competition and the availability of services. 18. Prices still remain under the government’s control in sectors in which such regulation is not necessary. Price regulation can be used to promote certain economic and social protection goals, such as granting access to essential goods. But price controls can act as a reference point for collusion and lead to an inefficient allocation of resources, with a corresponding increase in government expenditure to sustain the policy. It is therefore critical to limit price controls to situations in which they address specific market failures, such as natural monopolies or external shocks (World Bank 2020a). In Kosovo, most price Economy-Wide Restrictions to Competition 21 regulation has been phased out, but retail tariffs are still controlled in sectors that could be fully open to competition, such as the taxi sector. In addition, even if price controls in terms of regulated tariffs are relatively common in the network sector, in Kosovo, that regulation departs from international best practices. Figure 2.5 PMR scores for involvement in business operations in selected economies, 2021 . . Albania % % % 1.00 Score (0-6, from best to worst) Public procurement Price controls Aspirational average % % % 1.05 Command & control regulation Kosovo % % % 1.16 OECD average % % % 1.16 Serbia % % % 1.17 Source: PMR database. Note: Scores range from 0 (best) to 6 (worst). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 36 countries. Administrative Burdens on Start-Ups 19. Procedures to legally start and formally operate a company are relatively simple. Kosovo’s score on the sub-indicator for the administrative burden on start-ups is slightly higher than the OECD average (figure 2.6). Restrictions are driven by burdensome licenses and permits; administrative requirements for setting up a business do not restrict competition. Businesses can register via a one-stop shop at the Kosovo Business Registration Agency (KBRA). The costs for starting up a business are low, and there is no minimum share capital required to set up personally owned or limited liability companies.23 Figure 2.6 PMR scores for administrative burdens on start-ups in selected economies, 2021 Score (0-6, from best to worst) Aspirational average % % 0.82 Licenses and permits OECD average % % 1.12 Admin. requirements for limited liability companies and personally-owned enterprises Kosovo % 1.17 Albania % % 1.88 Serbia % % 1.94 Source: PMR database Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 36 countries. 23 See Law No. 06/L-016 on Business Organizations. 22 Economy-Wide Restrictions to Competition 20. Kosovo’s entry and exit rates for firms are higher than in most EU countries (figure 2.7). Entrants are generally larger than the exiting firms, but smaller than incumbents, which may be an indicative of high entry barriers.24 However, some administrative hurdles remain for firms’ exit, notably in the deregistration process (such as the obligation to physically collect a tax deregistration certificate and submit it to KBRA in 7–10 days), limiting the ability of Kosovo firms to formally close their businesses. The lack of mechanisms to mandate and ensure administrative deregistration of closed businesses leads to a divergence between formal and real exit of firms.25 Figure 2.7 Firm entry and exit rates in selected countries, 2020 a) Entry (Number of firms) b) Exit (Number of Firms) , , Economic Economic , Administrative , Administrative , , , , , , , , Note: Activities: B-N (excluding K 64.2) of NACE Rev. 2. “Administrative” defines entry and exit using the firm’s registration year in the Tax Agency registry while “Economic” defines entry and exit according to firm sales. See the Productivity Chapter for more detail. Source: World Bank Group (2021). 21. Limited procedural efficiency of the licensing and permit system may create administrative hindrances for new market players and limit firm growth. Kosovo issues about 480 different business licenses and permits at the central level alone (they are being streamlined, with support from the World Bank Group and other donors). In addition, the lack of a “silence is consent” rule for issuing authorizations and licenses may result in delayed administrative proceedings, which could lead to de facto denials. The government has established a one-stop shop (KBRA) for obtaining information on all notifications, permits, and licenses required to open a business in Kosovo. But the e-signature law has not been operationalized, and KBRA requires firms to show up at its business registration centers to submit hard copies of documents (OECD 2019). Barriers to Trade and Investment 22. Kosovo’s trade and investment framework appears to discriminate against foreign firms in certain product markets. The Law on Strategic investments provides preferential status to some sectors rather than improving the overall business environment to attract investors.26 Some degree of preferential treatment persists in public procurement, where domestic firms are granted 10 additional points, which may lead to discriminatory outcomes.27 In the road freight sector, cabotage (the right to operate transport services within a particular territory) is not allowed, which protects domestic markets from international competition.28 Mutual recognition agreements have not been put in place for architects or civil engineers, which restricts competition in the professional services sector and imposes numerous restrictions on domestic professionals.29 24 See World Bank, 2021. Productivity Chapter. 25 Between 2010 and 2018, 3,400 companies a year “exited” on average, but fewer than 200 formally deregistered. The discrepancy between economic entry and administrative registration rates is far less pronounced, suggesting fewer major regulatory obstacles to creating new companies. See the productivity chapter for a more detailed discussion. 26 See Article 2 of Law No. 05/L-079 on Strategic Investments in the Republic of Kosovo. 27 See Article 60/A of Law No. 04/L-237 on Amending and Supplementing the Law No. 04/L-042 on Public Procurement in the Republic of Kosovo. 28 See Article 44 of the Law No. 04/L-179 on Road Transport. Cabotage is restricted in the majority of countries covered by the PMR data, including EU member states. Regulations on cabotage in Kosovo are more restrictive than in the European Union. 29 Such agreements do not exist, according to Kosovo’s International Agreement database (https://gzk.rks-gov. net/InternationalAgreementsList.aspx). However, lawyers from the United States and the European Union are entitled to exercise their profession in Kosovo, by virtue of Article 40, para. 4 of Law No. 04/L-193. Economy-Wide Restrictions to Competition 23 3. 03 Sector-Specific Regulations 23. Kosovo’s score for barriers in network and services sectors is among the highest relative to benchmark economies (figure 3.1), while regulations in retail are generally less restrictive. While Kosovo markets are relatively small, entry barriers can hold back market entry and expansion of more efficient firms. This is notably the case of professional services, which face more restrictive entry regulations than the average of OECD countries, except for lawyers (figure 3.2). The requirements for accountants are more demanding in Kosovo than in other countries, limiting the number of qualified professionals. The number of notaries is limited by law. Membership in professional chambers is required across professions, even though such a requirement may encourage collusive behavior. Regulatory restrictions also remain in the electricity, telecommunications and transport sectors, which are key inputs to production in the broader economy (figure 3.3). Restrictions in these network sectors relate largely to lack of pro-competitive regulations. In retail, the PMR indicators point out to several regulatory barriers, notably for the sale of medicines. Empirical studies show that restrictions in services have a negative impact on TFP at the firm level, notably in countries with less strong institutional environments (Marel et al., 2016). Figure 3.1 PMR scores for barriers in network and services sectors in selected economies, 2021 Aspirational average % % 1.62 Barriers in Services sectors Barriers in Network sectors OECD average % % 1.74 Albania % % 1.89 Kosovo % % 2.10 Serbia % % 2.25 Source: PMR database Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 36 countries. Figure 3.2 PMR scores for professional services in selected economies, by profession, 2021 . Albania . . Kosovo 4.72 . . OECD Average . . Aspirational average . . Serbia . . 2.15 . . . 1.55 . . 1.45 1.40 . . . . . . . . . . Lawyers Notaries Accountants Architects Civil engineers Source: PMR database. Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 35 economies. Iceland and Cyprus are omitted from the sample because of missing data on individual indicators. 26 Sector-Specific Regulations Figure 3.3 PMR scores for network sectors in selected economies, 2021 . OECD Average Aspirational average . . Albania Kosovo . . . Serbia . . 2.00 . . 1.86 1.82 . . . 1.54 . . . . . . . . . . . Total network sectors Energy* Transport Ecomm Source: PMR database. Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 35 economies. Iceland and Cyprus were omitted from the sample because of missing data on individual indicators. *The energy subindicator shows the cumulative PMR score for electricity and natural gas subindicators for each country/region. Kosovo’s score refers only to regulatory restrictions in the electricity sector, because its gas sector is still under development. Professional Services 24. Kosovo’s regulations for professional services are particularly restrictive for lawyers and notaries, which are subject to entry and conduct restrictions. As in benchmark economies, notaries and lawyers are the regulated professions with the most restrictive entry and conduct regulations in Kosovo.30 In fact, the provision of exclusive rights for some of the activities performed by these professions, paired with price regulation, severely constraints their ability to compete in the market. Accountants are subject to stringent entry barriers, notably if they are compared to other countries. Entry and conduct regulations for architects and engineers are less restrictive and broadly in line with the OECD average (figure 3.4). Real estate agents are not a regulated profession in Kosovo (most OECD countries also do not regulate them).31 30 Entry regulations refer to the exclusive or shared right to conduct certain activities, as well as academic and experience requirements to access each regulated profession, including membership in professional chambers. Conduct regulations relate to any restrictions to the legal form of business and the fees imposed by these professions. 31 Countries that do not regulate the real estate profession include the Czech Republic, Estonia, the Netherlands, Poland, Turkey, and the United Kingdom. Sector-Specific Regulations 27 Figure 3.4 PMR scores for regulated professions in selected economies, 2021 Lawyers Notaries Score and composition Score and composition 0 1.00 2.00 3.00 4.00 5.00 6.00 0 1.00 2.00 3.00 4.00 5.00 6.00 % % 2.11 Albania % % 4.68 OECD average % % 2.15 Kosovo % % 4.72 Kosovo % % 3.15 OECD average % % 4.88 Lithuania % % 3.76 Aspirational average % % 5.29 Aspirational average % % 4.66 Serbia % % 5.45 Serbia Accountants Architects Score and composition Score and composition 0 1.00 2.00 3.00 4.00 5.00 6.00 0 1.00 2.00 3.00 4.00 5.00 6.00 % 1.15 Albania 0.00 Serbia 0.12 Aspirational average % 1.40 Kosovo % % 1.13 OECD average % % 1.50 OECD average % 1.55 Kosovo % 1.60 Serbia % % 1.86 Albania % % 1.76 Aspirational average Civil engineers Score and composition 0 1.00 2.00 3.00 4.00 5.00 6.00 % 1.15 Albania % % 1.29 OECD average % 1.45 Kosovo % % 1.64 Aspirational average % 1.85 Serbia Source: PMR database. Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 35 economies. Iceland and Cyprus were omitted from the sample because missing data on individual indicators. 28 Sector-Specific Regulations 25. Notaries and lawyers are subject to a combination of entry and tariff restrictions, limiting the number of professionals and fixing fees. Notaries are subject to quotas and territorial restrictions, unlike in France, the Netherlands, and Poland (World Bank Group 2020e). Notaries have the exclusive right to transfer real estate titles. In some countries, such as the United Kingdom, these rights are shared with other professionals.32 In other countries, such as Georgia and Norway, a notary does not need to be involved in conveyance. Kosovo’s government controls certain professional tariffs. It proposes nonbinding recommendations on minimum prices of lawyers’ fees,33 sets binding fees for notaries,34 and bans all forms of advertising by both professions.35 Price regulation in these markets generally reduces price competition and leads to high prices, which appears to correspond with current market perceptions in Kosovo. 26. Kosovo has more constraining regulations for accountants than most other countries in the region or the OECD. Accountants need more professional experience than in most OECD countries. Book-keeping, the task most commonly performed by accountants, can be outsourced only to professionals who meet qualification requirements and are members of a professional chamber.36 In addition, as for architects and civil engineers, the qualifying examination for accountants is administered by the professional chamber, which may allow it to limit the entry of new professionals.37 Electricity 27. The electricity sector is perceived as a major constraint by most domestic firms. Although PMR scores in the electricity sector are better than some neighboring countries (Figure 3.5), the level of competition in these markets is still not satisfactory. In fact, most firms interviewed as part of the WBG’s Enterprise Survey perceive the electricity sector in Kosovo as a major constraint, and a significant number of firms experience electrical outages. These constraints appear to be more prominent in Kosovo than in benchmark economies, which may be hampering firms’ competitiveness (figure 3.6). Figure 3.5 PMR scores for electricity in selected economies, 2021 0.0 0.5 1.0 1.5 2.0 2.5 3.0 OECD average 1.43 Aspirational average 1.70 Kosovo 1.86 Albania 2.43 Serbia 2.50 Source: PMR database. Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 35 economies. Iceland and Cyprus were omitted from the sample because of missing data on individual indicators. Figure refers only to the electricity score of the energy sub-indicator, because Kosovo’s gas sector is still under development. 32 In Britain, only solicitors could provide conveyance services in Britain until 1984, when the government abolished their legal monopoly and allowed licensed conveyancers to offer real estate services, in competition with solicitors (Stephen, Love, and Paterson 1994). 33 See http://www.oak-ks.org/sq/tarifa?. 34 The Ministry of Justice sets the fees charged by notaries, who are not allowed to deviate from them. See Article 16 of Law No. 06/L-010 on the Notary. See also Administrative Instruction No. 02/2012 on Provisional Notary Fees. 35 See Article 13, para. 1.a, of the Code of Ethics. 36 See Articles 8 and 3 of Law No. 06/L-032 on Accounting, Financial Requirements and Auditing. 37 See Articles 21 and 22 of Law No. 06/L-032 on Accounting, Financial Requirements and Auditing. Sector-Specific Regulations 29 Figure 3.6 Firms’ perceptions of constraints in the electricity sector in selected economies, 2019 a) Percent of firms identifying electricity as a major constraint b) Percent of firms experiencing electrical outages 62.6 59.9 58.7 49.5 43 26.1 27.4 15.1 Serbia Aspirational Albania Kosovo Aspirational Serbia Albania Kosovo average average Source: World Bank 2019a. Note: Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. 28. Limited access to electricity in wholesale markets prevents competition in the supply segment of the electricity market. Kosovo’s transmission and distribution system operator is legally and functionally unbundled from the generation and supply segments, which are formally open to competition.38 Kosovo Energy Corporation J.S.C. (KEK), a wholly owned POE, accounts for more than 90 percent of generated electricity. Private operators are also active in the generation segment, but their capacity and impact on the wholesale electricity market are small.39 In the supply segment, although there are eight licensed operators, the Kosovo Company for Supply and Energy (KESCO), the historical operator, holds 100 percent of the market shares.40 According to the Energy Regulatory Office (ERO), existing supply obligations arising from the bulk supply agreement between KEK and KESCO (under which all the electricity produced by KEK is sold to KESCO, at reduced prices in comparison with imported electricity)41 prevent other suppliers from accessing to the wholesale electricity market and offer competitive services in the retail segment of the market, protecting the incumbent operator.42 29. Lack of effective tariff deregulation in retail markets for some categories of consumers may further reduce the incentives to compete in the supply segment. In 2017, ERO adopted guidelines for liberalizing the electricity sector that define the manner, criteria, and timing of the deregulation of tariffs for the liberalization of the generation and supply segments. According to these guidelines, price tariffs should be phased out for low- and medium-voltage consumers (35 kV and 10 kV) by March 31, 2018 at the latest.43 That date was postponed several times; low- and medium-voltage supply is still subject to regulated 38 See Articles 11 and 27 of Law No. 05/L-085 on Electricity. 39 According to ERO’s decision of December 10, 2020 (ERO Code: V_1339_2020) on the “Evaluation of Competition in Electricity Market in Kosovo 2018–2019,” market concentration in the wholesale market is very high (with a Herfindahl-Hirschman Index of 9,115). 40 See ERO’s decision of December 10, 2020 (ERO Code: V_1339_2020) on the “Evaluation of Competition in the Electricity Market in Kosovo 2018–2019.” 41 The agreement was concluded in the context of universal supply obligations provided by the previous Law on electricity (article 18 of Law no. 03 / L -201 on electricity). The contract is available at the Ministry of Economic Development’s webpage: https://me.rks-gov.net/repository/docs/MARREVESHJE_PER_FURNIZIM_ME_ SHUMICE_-_tetor2012_KKDFE.pdf 42 Ibid. The expected operationalization of the recent agreement between Albania and Kosovo to integrate their day ahead markets in late 2021 could enhance competition by increasing access to wholesale markets, although its impact might be limited. 43 See Article 8 of the Guidelines on Liberalization of the Electricity Market in Kosovo, January 19, 2017. See also: Article 37 of Law No. 05/L-085 on electricity and the guideline on liberalization of electricity market in Kosovo, amended June 13 and October 30, 2018. 30 Sector-Specific Regulations tariffs.44 The small size of Kosovo’s electricity markets, the setting of tariffs at a level well below the EU average for an important part of consumers, and cross-subsidies between nonresidential and residential consumers by the incumbent supplier45 could limit the incentives for new operators to enter the supply market.46 Telecommunications 30. The PMR indicators for the telecommunications sector capture information on market regulations and the degree of state ownership. While market regulations in the telecom sector need to be carefully analyzed to ensure that the existing regulation does not introduce additional restrictions to competition and includes provisions to encourage competition where necessary, the impact of state presence is not necessarily detrimental to competition per se. However, it can be an indicative of potential market distortions. In this context, the PMR methodology considers the lack of such presence as a positive signal for market development. For instance, most OECD governments no longer own shares in mobile telecommunications companies, in contrast to Kosovo. 31. According to the PMR indicators, there are few regulatory restrictions to competition compared to its peers (figure 3.7). Decomposition of the PMR score shows that most of it relates to public ownership rather than regulatory restrictions on competition (figure 3.8). For instance, asymmetric regulation is formally established for operators with significant market power,47 and markets are formally open to competition. Some restrictions on competition remain, however. For example, the telecoms regulator—Autoriteti Rregullativ i Komunikimeve Elektronike dhe Postare (ARKEP)—does not appear to have conducted a formal assessment of market dominance in the provision of wholesale mobile call origination services, hindering the implementation of asymmetric obligations for operators with significant market power. Figure 3.7 PMR scores for e-communications in selected economies, 2021 . . . . . . Mobile Ecomm Albania 100% . Fixed Ecomm Aspirational average 31% 69% . average OECD Average 46% 55% . Kosovo 68% 32% 1.54 Serbia 54% 46% . Source: PMR database. Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 35 economies. Iceland and Cyprus were omitted from the sample because of missing data on individual indicators. 44 See Article 2 of the Guideline on Liberalization of the Electricity Market in Kosovo amended June 13, and October 30, 2018. See also ERO (2021). 45 For instance, the average tariff for household consumers for year 2019 was €5.68, whereas commercial, industrial consumers and public lightning were subject to higher tariffs: €8.55, €5.92 and €9.53, respectively. See: ERO’s database, available at: https://www.ero-ks.org/zrre/sq/te-dhena 46 See ERO’s decision of December 10, 2020 (ERO Code: V_1339_2020) on the “Evaluation of Competition in the Electricity Market in Kosovo 2018–2019.” See also Energy Community Secretariat (2020, 2021). 47 Some of the obligations provided by the law for dominant operators include the prohibition of cross- subsidizations between the operator’s different services, an obligation to separate the financial records of its various activities (accounting separation), transparency requirements, and an obligation to provide access to essential facilities (see Article 6 of the Regulation for the Market Analyses and Definition of the Providers with Significant Market Power). See also Article 32 and Law No. 04/L-109 on electronic communications. Sector-Specific Regulations 31 Figure 3.8 Decomposition of the PMR sub-indicator for e-communications, 2021 . . . . . . . 78% 22% . Public ownership Regulation Source: PMR database. Figure 3.9 Number of countries with national, state, regional provincial or municipal/local governments hold equity stakes in the largest firm in retail mobile services (voice, video and data), 2021 % % % 29 No Yes 23 Including Kosovo Source: PMR database 32. Kosovo’s relatively high PMR score is mostly driven by direct state participation in retail mobile services. In the mobile telecommunications segment, the historical operator Kosovo Telecom (“KT”) –a wholly owned POE— holds a significant market position in the mobile telephony market (59 percent in terms of subscribers), which is at odds with the majority of countries analyzed under the PMR methodology (Figure 3.9).48 As a result, mobile telephony markets are relatively concentrated, as shown by a Herfindahl-Hirschman Index (“HHI”) score of 4,513. While market concentration is not unusual in the telecommunications sector across countries, ex ante and ex post regulatory intervention may still be necessary to ensure competitive market dynamics and protect consumers and competitors from potential abuses of market power. In contrast, KT’s market power in the market for the provision of fixed broadband services remains quite limited (7.27 percent in terms of subscribers) and the market seems to be more open to competition compared to other countries of the region, with almost 40 active Internet Service Providers (“ISPs”). 49 However, the three largest operators –IPKO, Artmotion and Kujtesa — hold together more than 65 percent of the market shares, which results in some degree of market concentration (HHI score of 1,753).50 48 In the mobile telecom market, KT has a 59 percent market share in terms of subscribers through its brand Vala Telecom. Ipko (39 percent), and MTS (2 percent) hold the remaining market shares. 49 In the fixed telephony services market, Ipko holds 46 percent of the market shares, KT holds 33 percent, MTS holds 20 percent and Kujtesa.net holds 1 percent, all of the market shares being calculated in terms of subscribers. See: ARKEP (2021), Summary of key electronic communications indicators “electronic communications market overview” for Q4 2020. 50 In the internet segment of the market, Ipko is the main operator, with 26.71 percent of the market shares in terms of subscribers, followed by Kujtesa net (24.74 percent), Artmotion (20.73 percent), KT (7.27 percent). AE Holding (3.87 percent), Ardi (2.69 percent), Tel Communications (1.77 percent), Elektra (1.59 percent), TelKos (1.36 percent, Fiberlink (1.15 percent) and others (7.88 percent) hold the remaining market shares. See: ARKEP (2021), Summary of key electronic communications indicators “electronic communications market overview” for Q4 2020. 32 Sector-Specific Regulations 33. Inefficiencies on the regulatory side (e.g., spectrum management) along with some intrinsic country characteristics (e.g., landlock, mountain terrain) result in sub-optimal market outcomes. Although ARKEP approved an action plan to assign new frequency bands to mobile network operators and reduced spectrum fees, implementation of the plan is currently delayed, and no licenses were granted for new frequency bands51 which is causing the lack of transparency and certainty. This prevents potential competitors from entering the market and limits expansion plans of existing operators. Going forward, the regulator could consider competitive tenders to assign spectrum, as such tenders could stimulate market development by giving to smaller players an opportunity to challenge incumbents. In addition, lack of access to international submarine cables limits international connectivity, which results in lower quality of internet services and, among other factors, contributes to high prices for high-speed broadband packages at the retail level (Figure 3.10) (see the chapter on Digital Connectivity). Figure 3.10 High-speed fixed broadband price as percentage of disposable monthly income for bottom 40% of the population, 2020 Albania North Macedonia Kosovo Montenegro Serbia BiH Note: The affordability analysis compares 30 Mbps and comparable cheapest public service offerings (excluding promotions) from the biggest ISPs with cumulative consumer market share above 50 percent, as of March 17, 2020. Source: World Bank, 2021. Digital Connectivity Chapter. 51 In 2019 TK’s and IPKO’s licenses were reviewed in 900 MHz and 1800 MHz bands through direct assignment Sector-Specific Regulations 33 Transport 34. Transport regulation seems to be in line with the OECD average, although some restrictions remain. Most restrictions on competition are in rail transport, followed by restrictions on air and road transport (figure 3.11). Figure 3.11 PMR scores for transport in selected economies, 2021 . . . . . . . . OECD Average 47% 14% % % 1.85 Rail transport Air transport Road transport Kosovo 50% 33% % 2.00 Water transport Aspirational average 47% 17% % % 2.13 Albania 54% 11% % % 2.18 Serbia 36% 33% % % 2.98 Source: PMR database. Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 35 economies. Iceland and Cyprus were omitted from the sample because of missing data on individual indicators. The water transport sector does not exist in Kosovo. 35. Limited concessions of licenses and obstacles to the development of a competitive freight corridor may be limiting opportunities to attract international rail freight and passenger services. Although the Law on Kosovo Railways establishes an open market subject to a licensing procedure, Trainkos J.S.C. (a POE that is vertically integrated with the operator of railroad infrastructure, Kosovo Railways Infrakos J.S.C.) is the only licensed operator for passenger transport and one of two companies licensed to provide freight services (Railway Regulatory Authority 2019). Even given the possibility that the entry of new competitors may not be feasible because of the small size of Kosovo’s domestic markets, the quality and frequency of service seems limited. Burdensome administrative requirements for accessing Kosovo’s international rail link and an insufficient modernization of the railways’ infrastructure could be limiting Kosovo’s opportunities to attract international freight services vis a vis competing rail freight corridors. 36. Kosovo has signed an open-sky agreement in air transport with only one key market – the EU. However, similar agreements have not been reached with other important markets included in the PMR methodology, such as the United States, China, Japan, India, Brazil, Canada, the Republic of Korea, Australia, or Mexico.52 Introduction of these agreements could reduce air transport costs to those countries and improve trade. In the United States, for example, introduction of open-skies agreements in the 1990s is estimated to have reduced transport costs by 9 percent and increased trade by 12 percent (Micco and Serebrisky, 2008). 52 Open-sky agreements are bilateral agreements between countries or regions that open up the air transport sector by liberalizing the provision of commercial civil aviation services between the parties. For instance, the third and fourth air freedoms –generally included in open-sky agreements— allow to carry traffic from a home country to another country, and to pick up traffic from another country to the home country for the purpose of commercial services. For a description of the nine freedoms of the sky, see: United Nations’ International Civil Aviation Organization (ICAO) at: https://www.icao.int/pages/freedomsair.aspx. 34 Sector-Specific Regulations 37. Implementation of licensing systems prevent entry in the intercity buses and taxi transport sector, which may have a negative impact on the price and quality of the service. The line ministry assigns licenses and routes to inter-city bus operators; there are no public procurement calls to open new routes to new operators. Administrative barriers make it difficult for current operators to expand the number of assigned slots, resulting in the allocation of markets, with negative effects on competition and service quality (including infrequent service and long delays).53 In the taxi sector, establishment of a cap on the total number of licenses, paired with a list of prices approved by each municipality, prevents market entry and may lead to artificially high prices. In fact, taxi fares are generally fixed by most municipalities, in consultation with the taxis association, which prevents competition in prices.54 Moreover, ride-hailing companies are not allowed un Kosovo, preventing competition from other operators in the market for the provision of for-hire passenger services. 38. The weak performance of the transport and logistics sectors may be related to the lack of key infrastructure, such as motorway and railway networks. The Rural Accessibility Index—which measure the share of the rural population that lives within 2 kilometers of an all-season road—lags all aspirational peers and some countries in the region (figure 3.12). Kosovo’s roads and railway lines also appear to be less developed in terms of length and density than the average for EU countries.55 Figure 3.12 Rural Accessibility Index in selected countries, 2021 99% 98% 93% 93% 92% 89% 83% 75% Czech Rep. Estonia Lithuania Slovenia Latvia Albania Kosovo Serbia Source: rai.azavea.com. Retail 39. Kosovo’s regulatory framework on retail distribution is less restrictive than that of its peers (figure 3.13). However, some restrictions on competition remain. Unlike the majority of benchmark economies, Kosovo regulates shop opening hours, limiting consumer access to goods and services (Figure 3.14). In Pristina, for instance, municipal regulations specify opening and closing hours. Longer opening hours can be authorized in exceptional cases.56 53 See Article 17 of the Law No. 04/L-179 on Road Transport. 54 See Article 26 of the Regulation on Conditions and Criteria on Exercising the Activity of Taxi Transportation in Pristina. Other municipalities have adopted similar regulations. Taxi rides of more than 25 kilometers are not subject to regulation; parties are free to negotiate any price conditions. 55 See Eurostat (2018), online data codes road_if_motorwa, rail_if_line_tr, reg_area3, and demo_gind. 56 See Article 6, para. 3 of the Regulation on Working Hours of Municipality of Pristina. Sector-Specific Regulations 35 Figure 3.13 PMR scores for retail distribution in selected economies, 2021 0 0.2 0.4 0.6 0.8 1 1.2 1.4 Albania 0.78 Serbia 0.82 Kosovo 0.84 Aspirational average 0.99 OECD average 1.25 Source: PMR database. Figure 3.14 Number of countries in which regulations specify particular opening or closing hours, 2021 % % % 38 No / Not applicable Yes 14 Including Kosovo Source: PMR database. Note: Scores range from 0 (least restrictive) to 6 (most restrictive). Aspirational countries for which information was available include the Czech Republic, Estonia, Latvia, Lithuania, and Slovenia. The OECD average includes 35 economies. Iceland and Cyprus were omitted from the sample because of missing data on individual indicators. 40. Although the retail sale of medicines is not subject to significant entry barriers, special authorizations are still needed to sell them. The retail sale of medicines in Kosovo is aligned with most international best practices.57 However, some restrictions remain. Nonprescription medicines appear to be subject to the same regulations as prescription medicines and can be sold only in pharmacies.58 This practice is at odds with most OECD countries, where regulations on the sale of over-the-counter drugs are more flexible. This is because the consumption of these drugs is considered to be less risky— and thus can be sold outside pharmacies in non-specialized retail outlets. Self-care medical devices (i.e., medical devices that do not require the involvement of a health professional, such as blood pressure gauges) are subject to similar restrictions. Improved inspections could mitigate the risks of market liberalization, such as the sale of counterfeit or dangerous medicinal products. 57 In contrast to the regulatory restrictions found in some other countries that were part of Yugoslavia, such as Croatia, Kosovo does limit the number of pharmacies or impose territorial limitations on the set-up of a new pharmacy. Retail prices of nonprescription medicines are not regulated, and medicines can be sold online, enhancing competition and increasing the transparency of the market. 58 See Article 2, para. 2 of Administrative Instruction (Health) No. 11/2015 Retailers for Medicinal Products and Medical Devices. Nonprescription medicines fall within the definition of a medical product, as ascribed in Article 3, para. 1 of Law No. 04/L-190 on Medicinal Products and Medical Devices. 36 Sector-Specific Regulations Sector-Specific Regulations 37 4. 04 Policy Options for Increasing the Competitiveness of the Economy 41. The PMR data highlights several key entry points for policy intervention to allow for more competitive markets in Kosovo. The benchmarking exercise carried out shows that Kosovo’s product market regulation still has room for improvement at the economy-wide and sectoral levels. 42. According to the PMR data, three areas pose regulatory challenges to competition in Kosovo: • State involvement in the economy. Preferential treatment to POEs favors public against private operators, especially in sectors in which private operators could provide services in a competitive manner, such as manufacture of basic metals and urban, suburban, and interurban passenger transport. The limited operational autonomy of POEs and other governance shortcomings may give rise to conflicts of interest and inefficiency. • Shortcomings in the regulatory process. Despite the reforms made, the regulatory impact assessments conducted by the government do not sufficiently take competition issues into consideration in their analysis. Moreover, interaction between interest groups and public officials during the regulatory process is not regulated, which could result in policies that protect incumbents and limit market entry. • Barriers in services and network sectors. Remaining tariff regulation in some competitive segments and limited access to electricity in domestic wholesale markets prevents effective competition in the electricity sector. Stringent licensing systems and lack of effective implementation of ex ante regulation may be hindering market entry in the telecom and rail transport sectors. Some professionals, such as accountants, are subject to stringent entry requirements that increase business costs. 43. Table 4.1 summarizes policy reforms that could improve the regulatory framework in Kosovo. Although the PMR indicators are limited in scope and should therefore be considered as an entry point for further analysis, this assessment allows to identify potential restraints to competition and possible policy reforms. It classifies recommendations based on their feasibility in the short and medium terms and identifies the institutions responsible for implementing them. Table 4.1  Entry points for strengthening the regulatory framework on competition in Kosovo Policy option Possible responsible institution Priority* Economywide 1. Improve the governance of Public Owned Enterprises (POEs) by preventing Ministry of Economy Short term representatives of sector regulators from sitting on supervisory boards and ensuring the participation of qualified professionals through an open application process. 2. Ensure a level playing field for public and private operators by not Ministry of Economy Short term bestowing any advantages (such as state guarantees and soft loans) on POEs. 3. Review Law 04/L-042 on Public Procurement of the Republic of Kosovo (as Ministry of Finance, Labor and Transfers Short term amended by Law No. 04/L-237) to ensure that it is applied equally to POEs and private operators. 4. Enhance the quality and control of the regulatory process by developing a Office of the Prime Minister Medium term clear regulation on the interaction between regulators and interest groups and by strengthening the regulatory impact assessment of new legislation through cost–benefit analysis and review by an independent authority. 40 Policy Options for Increasing the Competitiveness of the Economy Policy option Possible responsible institution Priority* 5. Facilitate business registration by introducing the silence is consent Ministry of Economy; Ministry of Finance, Medium term principle and developing an effective e-signature system to allow full online Labor, and Transfers registration. Sector-specific Professional services 1. Reform entry and conduct regulations for notaries by eliminating or Ministry of Justice; Ministry of Economy Short term relaxing quotas, lifting their exclusive rights to convey property, removing any predefined binding fees, and eliminating specific legal form restrictions. 2. Stop setting nonbinding tariffs for legal services. Ministry of Justice; Ministry of Economy Short term 3. Consider removing the exclusive right of accountants to carry out book- Ministry of Economy Short term keeping activities and participation of the professional association’s board in entry exams and assessments. 4. Review the need to belong to professional chamber organization to be Ministry of Justice; Ministry of Economy Medium term able to provide legal, accounting, notary, architectural, or civil engineering services. Electricity 1. Consider reviewing KESCO’s priority access to wholesale markets under the Ministry of Economy Short term bulk supply agreement, in order to promote access to the wholesale market by other licensed suppliers. 2. Ensure full liberalization of the electricity market by deregulating tariffs Ministry of Economy Short term in the supply segment for all consumers, as provided by the guidelines on liberalization of the electricity market in Kosovo. E-communications 1. Expedite implementation of the second phase of the Frequency Release ARKEP Short term Plan ensuring that new spectrum is assigned in a timely and transparent manner. 2. Conduct an analysis of the wholesale mobile call origination service market; ARKEP Medium term identify whether there is (are) MNO(s) holding significant market power and, if so, impose relevant ex-ante obligations to prevent the abuse of market power. Transport 1. Improve enabling environment for intercity bus operators to compete Ministry of Environment, Spatial Planning, Short term for service provision and operationalize of existing mechanisms to revoke and Transport licenses in case of substandard performance. 2. Improve enabling environment to lift barriers to entry and regulate service, Ministry of Environment, Spatial Planning, Short term environmental and road safety standards, while facilitating penetration of ride- and Transport; municipal authorities (for hailing digital technologies for taxis. example Directorate for Strategy and Sustainability in Pristina) 3. Consider adopting open-sky agreements with other countries/regions. Ministry of Environment, Spatial Planning, Medium term and Transport 4. Explore the possibility of extending cabotage to foreign firms in the road Ministry of Environment, Spatial Planning, Medium term freight market (to spur sectoral efficiency on a reciprocal basis and Transport 5. Analyze challenges and opportunities to attract international rail freight Ministry of Environment, Spatial Planning, Medium term services. and Transport Retail 1. Consider relaxing the regulation on opening and closing hours for retail Ministry of Economy Medium term shops. 2. Evaluate the impact on competition and prices of allowing the sale of Ministry of Health Medium term nonprescription medicines outside pharmacies (in supermarkets and other stores). *Prioritization is made based on urgency and time needed to introduce the proposed measures. Policy Options for Increasing the Competitiveness of the Economy 41 Appendix Overview of the Product Market Regulation Methodology The PMR database contains a detailed set of internationally comparable indicators that measure the extent to which regulations foster or limit firm entry and competition in areas of the product market where competition is viable. The indicators are derived from answers to more than 1,000 questions based on a 2018 questionnaire sent to government officials. Some answers to the questionnaire are quantitative, others are qualitative. To facilitate analysis of qualitative answers, the Organisation for Economic Co-operation and Development (OECD) converts all responses into numerical scores ranging from 0 to 6, with higher scores indicating that regulations are more restrictive of competition. The numerical scores assigned to each answer are aggregated into economywide and sectoral scores following a standardized process. The economywide PMR indicators measure the extent of regulatory barriers to firm entry and rivalry in wide-ranging and important policy areas, such as the state’s involvement in economic activities, regulatory procedures and administrative burdens that inhibit business formation and growth, and tariff barriers and discriminatory treatment (box A.1). For the economywide indicators, the scores assigned to each answer are aggregated to capture the extent of regulations in 18 low- level policy areas. The low-level indicators are then aggregated into six midlevel indicators, which are further aggregated into two high-level indicators (distortions induced by state involvement and barriers to domestic and foreign entry). The two high-level indicators are aggregated into an overall PMR indicator (figure A.1). Figure A.1 Schema of economywide PMR indicators Product Market Regulation Distortions Induced by State Involvement Barriers to Domestic and Foreign Entry ( / ) ( / ) Public Simplification and Involvement Administrative Barriers in service Barriers to trade ownership Evaluation of in business burdens & network sectors and investment Regulations operations on start-ups ( / ) ( / ) ( / ) ( / ) ( / ) ( / ) • Scope of SOEs (1/4) • Assessment of impact • Retail price controls • Admin. Burdens • Barriers in services • Barriers to FDI (1/4) on competition (1/3) and regulation (1/3) for limited liability sectors (1/2) • Gov’t involvement in companies and • Tari barriers (1/4) network sectors (1/4) • Interaction with • Command and control personally-owned • Barriers in network stakeholders (1/3) regulation (1/3) enterprises (1/2) sectors (1/2) • Di erential treatment • Direct control over • Licences and permits of foreign suppliers enterprises (1/4) • Complexity of • Public procurement (1/2) (1/4) regulatory procedures (1/3) • Governance of SOEs (1/3) • Barriers to trade (1/4) facilitation (1/4) Distortions by the involvement of the state in the economy Includes information on the level of the barriers to entry and through ownership and control of firms, and other forms of controls expansion of domestic and foreign firms in various sectors of the and obligations imposed on private firms. economy. 44 Appendix Overview of the Product Market Regulation Methodology Box A.1  Brief description of economy-wide indicators and subindicators The PMR indicators measure the degree to which policies promote or inhibit competition in markets for products and services. The indicators contained in the PMR methodology include cross-sector regulatory domains; network; and service sectors, thus providing a good overview of how the regulatory set-up fosters competition and market entry. Distortions Induced by State Involvement captures the regulatory barriers that may hinder private sector participation at the economy-wide level. These restrictions can be the result of (a) involvement of the state in the economy through public ownership and control of firms (Public Ownership); (b) controls and obligations imposed on private firms, including on public procurement (Involvement in Business Operations); and (c) rules and procedures to consider competition policy issues in the public policy making, as well as regulations aiming at reducing the complexity of administrative procedures (Simplification and Evaluation of Regulations). The Public Ownership midlevel indicator encompasses four low-level subindicators: • Scope of State-Owned Enterprises (SOEs) measures government ownership in key sectors. • Direct Control over Business Enterprises measures restrictions on the sale of government assets and SOEs and the existence of special voting rights by the government in private and public firms. • Government Involvement in Network Sectors measures the size of the government’s stake in the largest firm in key network sectors. • Governance of SOEs measures the degree of political interference and market discipline SOEs, in line with the OECD Guidelines on Corporate Governance of SOEs. The Involvement in Business Operations midlevel indicator includes three low-level subindicators: • Retail Price Controls measures the extent and type of retail price controls in key sectors. • Command and Control Regulation measures the extent to which the government uses coercive (as opposed to incentive-based) regulations across key sectors. • Public Procurement measures the degree to which procurement rules ensure a level playing field in access to public contracts for the provision of goods, services, and public works. • The Simplification and Evaluation of Regulations midlevel indicator encompasses three low-level subindicators: • Assessment of Impact on Competition measures the level of assessment of the impact of new and existing regulations on competition, in line with the regulatory policy and governance (iREG) database developed by the OECD. • Interaction with Interest Groups measures the existence of rules for engaging stakeholders in the design of new regulations to reduce unnecessary restrictions to competition and ensure transparency in lobbying activities. This indicator partially relies on the iREG database developed by the OECD. • Communication and Simplification of Rules and Procedures measures the government’s efforts to reduce and simplify the administrative burden on firms interacting with it. Barriers to Domestic and Foreign Entry assesses regulatory barriers to the entry and expansion of domestic and foreign firms in various sectors of the economy. These barriers include (a) the administrative burdens that new firms have to face to start their business (Administrative Burden on Start-Ups), (b) the qualitative and quantitative barriers firms face when entering and operating in specific key economic sectors (Barriers in Service and Network Sectors), and (c) barriers that could limit the access to domestic markets of foreign firms and foreign investors (Barriers to Trade and Investment). Appendix Overview of the Product Market Regulation Methodology 45 The Administrative Burden on Start-Ups midlevel indicator encompasses two low-level subindicators: • Administrative Requirements for Limited Liability Companies and Personally Owned Enterprises measures the administrative requirements necessary to set up an enterprise, including the number of private and public bodies that need to be contacted and the costs of complying with requirements. • Licenses and Permits measures the existence of initiatives to simplify licensing procedures, such as one- stop-shops for issuing administrative licenses and programs to review and reduce number of licenses. The Barriers in Service and Network Sectors midlevel indicator covers two low-level subindicators: • Barriers in Services Sectors measures the extent of the qualitative and quantitative barriers to competition arising from existing regulation in key services sectors. • Barriers in Network Sectors measures the extent of qualitative and quantitative barriers to competition arising from existing regulation in network sectors. The Barriers to Trade and Investment midlevel indicator encompasses four low-level subindicators: • Differential Treatment of Foreign Suppliers measures whether there is a level playing field for foreign and domestic firms in public procurement processes and the barriers to entry foreign firms may experience compared with domestic firms in key sectors. • Barriers to Foreign Direct Investment (FDI) measures the restrictiveness of a country’s FDI rules in 22 sectors in terms of foreign equity limitations, screening or approval mechanisms, restrictions on the employment of foreigners as key personnel, and operational restrictions. This indicator reflects the value of the FDI Restrictiveness Index developed by the OECD. • Tariff Barriers reflect the value of a cross-product average of effectively applied tariffs, based on the UNCTAD Trade Analysis Information System database. Given that no data are available for Kosovo, this indicator was excluded from the score calculation. • Barriers to Trade Facilitation measures the level of complexity of the technical and legal procedures for international trade (for example, border procedures and the simplification and harmonization of trade documents). This indicator reflects the value of the average of a subset of the trade facilitation indicators developed by the OECD. If there are no data for a country and the country is not an OECD member, the average of all the non-OECD countries for which this indicator is available is used as a proxy. The sectoral indicators assess the extent of regulatory barriers to firm entry and competition in key enabling sectors, including network industries (energy, transport, and communications) and services (retail trade and professional services) (box A.2). These sectors are vital for the economy because their functioning has trickle-down effects for sectors that rely on them for production inputs. For the network sectors, the individual scores are aggregated into 22 low-level indicators, which are then aggregated into 7 midlevel indicators: electricity and gas (energy); telecom and post (communications); and rail, water, airlines, and roads (transport). The midlevel indicators are aggregated into an overall network market regulation indicator. For professional services, the overall indicator is an aggregation of six high-level indicators (for notaries, lawyers, accountants, architects, engineers, and real estate agents). In this context, the PMR provides sectoral assessment for both network and service industries covered by the database, organized as shown by the figure below (figure A.2). Figure A.2 Schema of sectoral PMR indicators Network Sectors Service Sectors Energy Transport E- communications Professional services Retail services ( / ) ( / ) ( / ) • Electricity ( / ) • Air ( / ) • Fixed E-communications Lawyers Engineers Retail sales of • Rail ( / ) ( / ) Notaries Estate Agents medicines • Natural Gas ( / ) • Road ( / ) • Mobile E-communications Retail Accountants Architects distribution • Water ( / ) ( / ) Source: OECD 2020b. 46 Appendix Overview of the Product Market Regulation Methodology References Acemoglu, Daron, Vasco Carvalho, Asuman Ozdaglar, and Alireza TahbazSalehi. 2012. The network origins of aggregate fluctuations. Econometrica 80, no. 5:1977–2016 Aghion, P; Bloom, N; Blundell, R; Griffith, R; and Howitt, P. 2005. Competition and Innovation: An Inverted-U Relationship. The Quarterly Journal of Economics, Vol. 120, No. 2 (May, 2005), pp. 701- 728. Oxford University Press. http://www.jstor.org/stable/25098750. Arnold, J. 2005. 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WORLD BANK GROUP Removing Regulatory Barriers to Competition Kosovo Country 52 November  2021 Economic Memorandum