Global Policy Forum

US Ousted Tyrant There, Too;
Now World Body Struggles with a Privatization Drive

By Andrew Higgins

As the world looks to the United Nations to help calm turmoil in Iraq, another volatile Muslim land freed from tyranny by American firepower has the international body tied in knots. The problem: what to do with a decrepit plastics plant on Bill Clinton Boulevard?

Bombed by a U.S. jet in the war that broke the grip of Serbian dictator Slobodan Milosevic, the Plastika Co. factory emerged from the 1999 conflict with a hole in the roof, rent by ethnic strife and hobbling toward bankruptcy. U.N. officials decided that the best way to kick-start the economy was to sell off Plastika and dozens of other remnants of a defunct socialist order in the former Yugoslav territory of Kosovo.

Instead, the privatization program has kicked up little but resentment. And Kosovo, once touted as a model of international cooperation, has become a showcase for the difficulties and dangers of trying to heal a fractured society through a lumbering international bureaucracy.

The U.N.'s Kosovo chief, a retired Finnish politician, quit in May, pleading fatigue. Rioting in March left more than 20 dead, scores of buildings destroyed and more than 100 U.N. vehicles ablaze. Both electricity and water are in short supply. More than half of Kosovo's population, Europe's youngest, is unemployed, and hostility among ethnic groups shows scant sign of subsiding. The International Crisis Group, a Brussels-based research unit, has warned that Kosovo risks becoming "Europe's West Bank."

It's a troubling turn at a time when the White House has asked the U.N. to help stabilize Iraq. Once sidelined by Washington, the U.N. helped to shape the interim Iraqi government installed on June 28, and it has a big role in preparing for future Iraqi elections. Washington also looks to the U.N. to help with relief work and to shore up the legitimacy of Iraq's shaky new order -- a far tougher task than stabilizing Kosovo.

"Kosovo is a fairly friendly environment, but the U.N. is falling apart here," says Blerim Shala, editor of Zeri, a daily newspaper. "How can it expect to function in a place like Iraq?"

Kosovo, unlike Iraq, mostly welcomed foreign military intervention. Ethnic Albanians, more than 90% of the population, cheered a U.S.-led air campaign in 1999 and later renamed a central street after Mr. Clinton. That conflict marked the final death rattle of Yugoslavia, a multiethnic federation set up in 1929, held together by Communist dictator Tito from 1945 to 1980 and torn apart by wars of secession in the 1990s.

The U.N., which took charge in Kosovo after the 1999 war, also got a warm reception, winning praise for rebuilding homes and other work. A beleaguered Serb minority, though furious at the end of Serbian control of the region, looked to the U.N. and peacekeeping troops for protection from vengeful Albanians.

With time, however, the mood curdled. Ethnic Albanians, mostly Muslim by heritage but now largely secular, began to bridle at Kosovo's status: still technically part of Serbia but ruled by foreigners and uncertain of its future. This contrasts with the situation in other breakaway regions of Yugoslavia: Slovenia, Bosnia-Herzegovina, Croatia and Macedonia, which all had become independent states.

Elections in Kosovo produced a local government but it had little power. The U.N. -- thanks to a Security Council resolution that left Kosovo in constitutional limbo -- still runs police and courts, sets economic policy, controls power and telephone utilities and provides a currency, the euro. The vehicle of power is something called the United Nations Interim Administration Mission in Kosovo.

Soon after arriving in Kosovo, the U.N. began to look for ways to relieve joblessness, an explosive social problem that played into the hands of Albanian militants demanding immediate independence. Aided by the European Union, the U.N. embraced privatization. For 18 months, U.N. lawyers haggled over the ground rules. Finally, in June 2002, U.N. officials here created a property office called the Kosovo Trust Agency.

It took control of both large state-owned companies, such as a crumbling electricity utility, and around 400 smaller, worker-run firms. The agency got off to a halting start. Its first chief, an elderly, cigar-smoking German with a heart condition, quit after 19 days. His successor put armed guards outside his office and fretted about his personal liability in the event of legal action by Serbia, which claims Kosovo's assets. He quit after five months. Colleagues gave him a farewell gift: an old suit stapled with writs. They called it the "law suit."

After months of further fine-tuning, the U.N. last summer gave a green light to a modest privatization program that focused on smaller worker collectives. Few of these produced anything of value, but they controlled half of Kosovo's prime real estate, land that needed to be freed up for the economy to develop.

Worried that no investor would buy businesses swamped in murky debts to Yugoslav entities, the U.N. decided to separate assets from liabilities, spinning off debt-free new companies for sale. It also ruled that 80% of proceeds go into a trust to cover future legal claims. The U.S. Agency for International Development, an arm of the State Department, applauded and brought consultants to assist the selloff. Serbia denounced the plan as illegal.

To launch the program, Ahmet Shala, an ethnic Albanian and deputy head of the property agency, flew to New York and posed with Mr. Clinton for a photograph. They grinned and held a sign reading "Privatization has Started."

An auction in September attracted 180 bidders. The offers were opened at a ceremony at the U.N. headquarters in Pristina, the Kosovo capital, and broadcast live on local television. The master of ceremonies was Count Nikolaus Lamsdorff, a career diplomat and German nobleman, who had just been named deputy head of the U.N. mission and chief of its economic-policy division, funded by the EU.

Among the properties up for auction was Plastika. Set up to make body panels for Yugoslavia's socialist car industry, the factory started as a multiethnic enterprise staffed and nominally owned by Albanian and Serb workers. After Mr. Milosevic came to power in 1989, though, Plastika "cleansed" many of the Albanian staff. Its Serbian boss, a hard-line nationalist, sheltered a brutal paramilitary group in a factory storeroom.

The 1999 war ended Serbia's control of Kosovo -- and also Plastika's main business serving factories in Serbia. For several months, foreign peacekeepers escorted its Serb managing director to work and stood guard outside his office. They withdrew the protection after learning of the director's previous ties to extremists. He fled. Ethnic Serb workers, fearful of attack by Albanian co-workers, also took flight.

Needing cash to pay staff, a new Albanian management of the company rented the departed Serb's executive suite to a foreign-aid group and a local publishing house. The plant's plumbing backed up, and wheezing machinery began to break down. A local telephone company put in orders for a few plastic signs, but the plant, like much of Kosovo's economy apart from hotels and restaurants serving foreigners, stumbled. Factory foreman Rrahmon Hoti says he now spends much of his time weeding factory flowerbeds. Salaries, he says, have been cut and are often paid months late.

At the September auction, Mr. Lamsdorff declared Nexhat Krasniqi, a local businessman, the winner for Plastika with a bid of about $3.6 million. Mr. Krasniqi outlined ambitious plans to develop Plastika's downtown property into a housing and office complex and move the plastics business to less valuable land. Factory workers, by now all Albanian, celebrated with fake champagne: The U.N.-drafted rules entitled them to 20% of the proceeds. They booted out their rent-paying tenants.

A few days later, Mr. Lamsdorff invited Mr. Shala, the man in the photograph with Mr. Clinton, to lunch and told him the showcase privatization program would have to be suspended. Mr. Lamsdorff says he made the decision after learning that a disgruntled businessman had gone to court in New York over a Kosovo lumber business. The suit quickly fizzled but, says Mr. Lamsdorff, it underscored the legal peril of tackling property rights in a territory whose own overall ownership is so unclear.

"There is not another place on earth where privatization is as complicated as it is here," he says. "People got scared."

Mr. Shala, aghast, demanded a written order, which arrived later in the day and triggered a firestorm of protest. Local politicians, trade unions and media reacted with fury. An investor roadshow at a New York hotel the same week flopped. Overnight, privatization became a lightning rod for disenchantment with the U.N. over a host of problems, from Kosovo's dire economic situation to its uncertain political status. Plastika was left once again in limbo.

Six members of the U.S. Congress wrote a letter to Mr. Lamsdorff saying they were "dismayed by your recent decision to freeze further privatization ... and we urge you to rescind this decision immediately."

Wary of experts paid by the U.S. government, whom he termed "hired guns," Mr. Lamsdorff retained an old family friend as his own adviser on privatization. The new recruit: the cigar smoker who had lasted just a few days as head of the Kosovo Trust Agency. He in turn recommended a former colleague for his old job as boss of the property agency. This new property chief, Marie Fucci, had extensive experience as well as a doctorate, but part of her résumé aroused immediate hostility: She'd also worked on a privatization plan in Serbia.

The Kosovo Trust Agency quickly split into feuding factions as the Italian-born Ms. Fucci set about trying to revamp a program she denounced as "quick and dirty." She brought in new staff and sidelined USAID hires. In a later report to the U.N., she suggested that privatization be placed on hold until the political status of Kosovo is decided, "given the legal uncertainties [and] given the proclivity of prominent Kosovars to align themselves with criminal figures." She offered no specifics of criminal activity. She also argued that the U.N., rushing to get privatization off the ground, had set up a system that served only ethnic Albanians while riding roughshod over the rights of ethnic Serbs.

Mr. Lamsdorff, impressed by her arguments, began to rethink the whole process. Privatization as initially conceived by the U.N., he says, had become "a last chance to get rich quick. It attracted all kinds of people and all kinds of money."

Thirty-six staffers of the property agency signed a petition protesting the halt, and ethnic Albanians on the agency's board started boycotting meetings. An EU consultant quit, denouncing Ms. Fucci and Mr. Lamsdorff as wreckers, and moved to a post in Afghanistan.

Paralysis at the property agency, which controls Kosovo's power company, also aggravated another big problem: frequent power cuts. Piet Faling, recruited last fall from South Africa to become the electricity utility's eighth managing director since 1999, was dismayed by the turmoil: "I came from South Africa expecting to join the august U.N. and EU, but instead I found total incompetence."

Confronted with a bureaucratic civil war, the U.N. in New York asked its legal office to adjudicate. Among other things, the office ruled that the Kosovo Trust Agency wasn't formally a part of the U.N., and therefore its officials had no immunity under international law. The office recommended that the agency get liability insurance and proceed with privatization. Rival camps in Kosovo each claimed victory and continued to argue.

By December, the feuding, covered in detail by the local media, had become a full-blown political crisis. Bajram Rexhepi, a former guerrilla-army surgeon who served as Kosovo's elected but largely powerless prime minister, publicly demanded Ms. Fucci's resignation and suggested she was working for Serbia. Ms. Fucci wrote to Mr. Lamsdorff threatening to sue the prime minister for defamation. The letter, leaked and read out on TV, stirred more outrage.

Mr. Krasniqi, Plastika's would-be buyer, and businessmen who had submitted winning bids on other properties complained bitterly: They'd handed over money but still hadn't received anything in return. Mr. Krasniqi got his money back in February.

In early March, Harri Holkeri, an aloof former Finnish prime minister in charge of the U.N. mission, asked Mr. Lamsdorff to at least endorse the results of the auction six months before. This was done -- minus Plastika and several other companies. The Plastika deal didn't go through because of concerns that Mr. Krasniqi, the winning bidder, had colluded with other bidders. Mr. Krasniqi, who had formed a consortium with some of the loser afterward to fund the project, denies any impropriety.

In March, to honor businessmen whose bids had been approved, Mr. Lamsdorff organized a cocktail party. None of the businessmen showed up. The following day, Kosovo erupted in rioting. The immediate trigger of the rampage, the worst violence here since the 1999 war, was a report, later proved false, that Serb youths had caused the drowning of three ethnic Albanian children.

The riots further darkened hopes of economic recovery. A visiting team from the International Monetary Fund fled Pristina in a U.N. evacuation helicopter.

In a subsequent report to the U.N. on the riots, Mr. Holkeri, the U.N. boss in Kosovo, said the U.N. mission had been shaken to "its foundations," adding: "The violence has forced us at [the mission] to take a long hard look at ourselves." On the eve of the Easter-weekend holiday, with Mr. Lamsdorff off on the ski slopes in Switzerland and Ms. Fucci away in Greece, Mr. Holkeri took another look at privatization. He phoned Mr. Lamsdorff to say he wanted Ms. Fucci to go. Mr. Lamsdorff grudgingly concurred.

In early May, Mr. Holkeri had a private meeting in New York with the U.N. secretary general, Kofi Annan. Rumors flew that Mr. Holkeri, too, was about to get axed. Stopping in France on his way back to Kosovo, he collapsed and was taken to a hospital. He announced he was quitting the U.N.

Shortly afterward, U.N. headquarters summoned Mr. Lamsdorff and several other officials to New York for urgent talks to try to break the privatization logjam. Ms. Fucci, though fired, also took part. The meetings ended with a pledge to restart stalled auctions -- once the rules had been revised yet again to incorporate some of Ms. Fucci's proposals, which require closer scrutiny of would-be buyers and changes in the auction system. Thirteen enterprises now are due to be auctioned off, starting this fall. Plastika isn't among them. Investigators, meanwhile, are looking into allegations of corruption in earlier sales.

At Plastika, staffers have been scrambling to survive. They recently rented out part of a factory yard for use as a disco and have been sending letters to the U.N. demanding compensation for the money lost when they kicked out their tenants last year. "We just sit here waiting and reading the newspapers," says Hysen Ramabaja, the plant's financial director. "Week after week, it's always the same: Wait until next week."