An investor´s guide to Albania

Eng.ShpatiKoleka SurveyReportHAlbania

1. Introduction Albania, officially the Republic of Albania (Albanian: Republika e Shqipërisë), is a country located in South Eastern Europe. Albania is bordered by Greece to the southeast, Montenegro to the north, Kosovo to the northeast, and the Republic of Macedonia to the east. It has a coast on the Adriatic Sea to the west and on the Ionian Sea to the southwest. It is less than 72 km (45 miles) far from Italy, across the Strait of Otranto

which links the Adriatic Sea to the Ionian Sea. The country is a member of the United Nations, the Organization for Security and Cooperation in Europe, Council of Europe, World Trade Organization, Organization of the

Islamic Conference and Union for the Mediterranean. Albania is also a potential candidate for membership in the European Union and received a NATO membership invitation on 3 April 2008, the country is expected to join the

NATO in April 2009. Albania is a parliamentary democracy and is considered a transition economy going in the direction of a full free market economy. The Albanian capital, Tirana, is home to more than 800,000 of the country's 3.6 million people, and it is also the financial capital of the country. The free-market reforms have contributed in opening the country to foreign

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Eng.ShpatiKoleka SurveyReportHAlbania

2. Geography

Albania has a total area of 28,750 square kilometers. Its coastline is 362 kilometers long and extends along the Adriatic and Ionian Seas. The lowlands of the west face the A d r i a t i c S e a . T h e 7 0 % o f t h e c o u n t r y t h at is mountainous is rugged and often inaccessible from the outside. The highest mountain is Korab situated in the district of Dibra, reaching up to 2,753 meters. The country has a continental climate at its high altitude regions with cold winters and hot summers. Besides the capital city of Tirana, which has 800,000 inhabitants, the principal cities are Durrës, Elbasan, Shkodër, Gjirokastër, Vlorë, Korçë and Kukës.

The three largest and deepest tectonic lakes of the Balkan Peninsula are located in Albania. Lake Shkodër in the country's northwest has a surface of 368 km², out of which 149 km² belong to Albania. The Albanian shoreline of the lake is 57 km. The Ohrid Lake is situated in the country's southeast and is shared between Albania and Republic of Macedonia. It has a maximal depth of 289 meters and a variety of unique flora and fauna can be found there, including “living fossils” and many endemic species. Because of its natural and historical value, Ohrid Lake is under the protection of UNESCO.

Over a third of the territory of Albania - about a million hectares (2.5 million acres) - is forested and the country was very rich in flora. About 3.000 different species of plants grow in Albania, many of which are used for medicinal purposes. According to the WWF and Digital Map of European Ecological Regions by the European Environment Agency, the territory of Albania can be subdivided into three eco-regions: the Illyrian deciduous forests, Pindus Mountains mixed forests and Dinaric Mountains mixed forests. The forests are home to a wide range of mammals, including wolves, bears, wild boars, and chamois. Lynx, wildcats, pine martens and polecats are rare, but survive in some parts of the country.

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Eng.ShpatiKoleka SurveyReportHAlbania

3. Demographics The Albanian population is being considered as a young population. Its average age is 31.7 years old. After 1990 the Albanian population has faced new phenomena like migration, which greatly affected the distribution by districts and prefectures. Districts in the North have seen a decreasing population, while Tirana and Durrës districts have increased their population. In July 2007, Albania's population was 3,600,523, with an annual growth rate of 0.73%. Albania is a largely ethnically homogeneous country with only small minorities. The largest majority of the population is ethnically Albanian. Minorities include Greeks, Aromanians (Vlachs), Torbesh, Gorani, Macedonians, Roma, Montenegrins, Bulgarians, Balkan Egyptians and Jews. The dominant language is Albanian, with two main dialects, Gheg and Tosk. Many Albanians are also fluent in

English and Italian.

4. Education The education system in the Republic of Albania is under the jurisdiction of the Albanian Parliament. The education system and the right to education is based on and defined by the Albanian Constitution, which proclames that education is a national

priority. In the Constitution of the Republic of Albania it is stated that: "Everybody has the right to be educated. According to law, 9- year schools education is compulsory. The pupil must be in school up to 16 years old. In compliance with the law, the members of national minorities have the possibility to teach and learn in their own language, to learn

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Eng.ShpatiKoleka SurveyReportHAlbania

5. Political environment

Since the end of the Communist regime in 1990, Albania has experienced major political, institutional, and socioeconomic changes. Breaking the barriers of a hermetically closed social order that was deeply apprehensive of the outside world was a dramatic achievement. The population at large was profoundly disillusioned by the country’s slide into anarchy and crisis in 1997 caused by the collapse of pyramid (Ponzi) schemes that accompanied the difficult transition, but Albania has pulled through these challenges. In 2006, Albania signed the Stabilization and Association Agreement establishing a new contractual relationship with the European Union. The country worked throughout 2007 to qualify for an invitation to join NATO in April 2008. Despite these positive achievements, Albania’s transition to democracy and a market economy seems to be a rather long journey. Albania still faces problems organizing elections in accordance with international standards, although shifts in power have been increasingly peaceful. More attention must be paid to reforming the public administration, improving the business climate, reforming the judiciary, and enhancing the fight against corruption and organized crime by embracing a systemic and strategic approach. Above all, stronger efforts are needed to bring the public back to politics to build trust in democratic institutions as tools for transformation.

The Government

The Government is composed of three branches:

1. Executive: President (chief of state), Prime Minister (head of government), Council of Ministers (cabinet).

2. Legislative: Unicameral People's Assembly or Kuvendi Popullor -140 seats

3. Judicial: Constitutional Court, High Court, multiple district and appeals courts.

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Eng.ShpatiKoleka SurveyReportHAlbania

The unicameral People's Assembly (Kuvendi Popullor) consists of 140 seats, 100 of which are determined by direct popular vote. The remaining seats are distributed by proportional representation. All members serve 4-year terms. The Speaker of Parliament has two deputies, who along with eight permanent parliamentary commissions assist in

the process of legislating Albanian affairs. The President is the head of state and elected by a three-fifths majority vote of all Assembly members. The President serves a term of 5 years with the right to one reelection. Although the position is largely ceremonial, the Constitution gives the President authority to appoint and dismiss some high-ranking civil servants in the executive and judicial branches, and this authority can have political implications. The President is also commander in chief of the armed forces, and chairs the National Security Commission. The Prime Minister is appointed by the President and approved by a simple majority of all members of the Assembly. The Prime Minister serves as the Chairman of the Council of Ministers (cabinet), which consists of the Prime Minister, Deputy Prime Minister, and other ministers. Members of the Council of Ministers are nominated by the Prime Minister, decreed by the President, and approved by a parliamentary vote. Albania's civil law system is similar to that of other European countries. The court structure consists of a Constitutional Court, a Supreme Court, and multiple appeal and district courts. The Constitutional Court is comprised of nine members appointed by the Assembly for one 9-year term. The Constitutional Court interprets the Constitution, determines the constitutionality of laws, and resolves disagreements between local and federal authorities. The Supreme Court is the highest court of appeal and consists of 11 members appointed by the President with the consent of the Assembly for 9-year terms. The President chairs the High Council of Justice, which is responsible for appointing and dismissing other judges. The High Council of Justice is comprised of 15 members--the President of the Republic, the Chairman of the High Court, the Minister of Justice, three members elected by the Assembly, and nine judges of all levels elected by the National Judicial Conference. The remaining courts are divided into three jurisdictions:

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Eng.ShpatiKoleka SurveyReportHAlbania

A college of three judges, who are sometimes referred to as a "jury" by the Albanian press, renders court verdicts.

Electoral Process.

Although anticipated as the “last year” of the electoral reform saga, which has hindered the democratization process in Albania’s transition, 2007 proved to be the contrary. For the first time, elections were rescheduled owing to the failure of the major political parties to agree on amendments to the Constitution and the electoral code. The last-minute amendments, completed only 35 days before the elections, affected the electoral preparations and the process itself. The local elections, which according to the OSCE Office for Democratic Institutions and Human Rights “only partly met OSCE commitments,” were followed by protracted litigation, with the final election results declared three months later.

Civil Society. Albania’s civil society reflects a dominant culture imported from the donor community and an underdeveloped philanthropic culture domestically. Limited financial resources hamper the development of human capacities within the sector. However, unlike 2006, when many prominent civil society activists joined the governmental sector, 2007 saw civil society increase in vibrancy. Activists were involved in monitoring and communicating the results of the February 2007 local elections in real time via the Internet. This was a successful endeavor that ultimately increased the transparency of the electoral process. Civil society actors participated actively in discussions on important new laws, such as the Law on Gender Equality, the Law on the State Police, and the Law on Independent Media.

Higher Education.

The high number of daily newspapers and low number of sold copies indicate a

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Eng.ShpatiKoleka SurveyReportHAlbania

Distribution infrastructure is also poor throughout the country. Financial resources and ownership structures continue to be a concern for the media market. The current legal framework, including the Law on Digital Broadcasting, is not fully implemented and does not reflect developments in the growing digital broadcasting market in Albania. The human resources and enforcement capabilities of the National Council on Radio and Television remain limited.

Local Democratic Governance.

Since 1998, decentralization has become one of the major irreversible reforms in the country, with important implications for reforms in other areas. The broad consensus achieved to date and the high level of engagement suggests that there is a serious and solid political will to proceed with implementation of the reforms. After a tense relationship between the central and local governments in 2006, the political climate following the February 18, 2007 local elections could be characterized as one of cooperation. Jurisdiction over the Inspectorate of the Construction Police was transferred to the local governments, which are responsible for verifying that projects have gone through proper licensing procedures. During 2007, legal and institutional measures were taken to transfer competences for the value added tax, local taxation, water supply, and sanitation from the central government to municipalities.

Corruption.

An anticorruption platform dominated the electoral campaigns and promises of the current government. Yet the European Commission’s Albania 2007 Progress Report still considers corruption to be widespread and a serious problem in Albania. A series of measures were taken in 2007, including new legislation to simplify business registration and the introduction of the flat tax. However, the business climate is weak, and corruption is perceived as one of the factors that hinders economic development and investment.

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Eng.ShpatiKoleka SurveyReportHAlbania

6. Economical environment Since the April of 1992, a comprehensive package of structural reforms, including privatization, enterprise and financial sector reform and the creation of the legal framework for a market economy and private sector activity was launched. After severe economic contraction following 1989, the economy slowly rebounded, finally surpassing its 1989 levels by the end of the 1990s. Since prices have also risen, however, economic hardship has continued for much of the population. In 1995, Albania began privatizing large state enterprises. Following the signing of the Stabilization and Association Agreement in June/July 2006, EU ministers urged Albania to push ahead with reforms, focusing on freedom of press, property rights, institution building and respect for ethnic minorities and observing international standards in municipal elections. Albania has made an impressive recovery, building a modern and diversified economy. Recent administrations have also improved the country's infrastructure and opened competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution and airports. Albania’s economic growth during 2007 was around 6% and in the same year, the government approved a fiscal package which ticks all the right boxes for investors. It included a flat rate of 10% on personal income tax, corporate tax and capital gains tax. Tirana International Airport was upgraded in 2007 when a series of improvements including a new terminal building and airport access roads were made. The airport now has a capacity of around 1.5 million passengers and offers direct flights to and from London, New York and a range of European cities, attracting tourist and foreign investors from around the world. Tourism in Albania is a large industry and is growing rapidly. The most notable tourist attractions are the ancient sites of Apollonia, Butrinti, and Kruja. Albania's outstanding coastline is becoming increasingly popular

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Eng.ShpatiKoleka SurveyReportHAlbania

Economical challenges

There are many principal challenges that are facing this sector among which the following can be mentioned: improving the business climate, simplifying and lowering the cost of business registration and licensing, reducing informality and ensuring fair competition, educating and training human resources through the application of standards that promote learning, innovation and creativity in business. Increasing the opportunities of the Albanian economy, in order to adapt to the logic of internationalization and integration into the world markets, requires diversification of existing products and services and production of output with high added value. There is a need for policies in this sector to be better coordinated across institutions and concrete measures to be better prioritized, in order to guarantee their efficient implementation.

Strategic economic priorities and policies

In terms of improving the business climate, the Government has been undertaking a regulatory reform under the guidance of a Task Force established in October 2005 which is supported by a platform approved by the Council of Ministers. An action plan determines the main areas: (1) development and management of regulatory reform; (2) improvement of existing legal framework through removal of unnecessary barriers in the fields of licensing, customs, tax, land and construction, inspection, and administrative appeals; (3) monitoring and evaluation of the impact of the reform, including the establishment of a system of regulatory impact assessment. This reform will provide the basis for a sustainable and predictable regulatory environment to increase business competitiveness.

The National Registration Centre, which was established in September 2007, is an independent agency whose mission is to ensure business registration in a short time through a ‘one-stop-shop’ on the basis of a Commercial Register that will serve as a unified electronic database. The National Registration Centre will ensure the simultaneous registration for fiscal, employment, social and health insurance purposes

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Eng.ShpatiKoleka SurveyReportHAlbania

and will be operational in 29 municipality offices. In the first years of its activity the

priority will be to build capacities and to consolidate the registration process.

The export promotion policy consists of: - Legislative measures, notably the harmonization of laws and rules related to the financing, production, and sale of goods made in Albania according to European

Union and World Trade Organization standards - institutional measures, such as: establishment of a competitiveness fund; creation of an export guarantee fund; creation of a public service for innovation and technology transfer; establishment and consolidation of public and private institutions that assess and certify the quality of products and services, such as raw materials, production conditions, and treatment until storage and consumption (metrology and calibration, standardization, conformity, accreditation, laboratory

and microbiological analyses, codification) - other measures, such as establishment of collection centers (for processing, standardization, packaging and market distribution) to support agro-industrial activity, encourage producer association, and add value to agricultural production,

and construction of export processing centers - promotion of competitive advantages; increase of production capacity of export sectors, such as expansion of the range of sectors and goods for export, particularly in the direction of new minerals, agricultural and agro-processing goods; encouragement of establishment of active processing production towards areas

with high unemployment and limited development opportunities The trade policy, in general, will continue to be determined by adherence to the World Trade Organization principles and the Interim Agreement commitments. In December 2006, Albania jointly with the countries in the region the countries replaced

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Eng.ShpatiKoleka SurveyReportHAlbania

and an extension of the Central European Free Trade Agreement, which will introduce further trade liberalization. Albania is a member of WTO since September 2000.

The foreign direct investment promotion policy is linked with the overall image of Albania to potential investors that owes as much to promotion activities as to policies on business climate. The following measures will be undertaken to increase foreign direct investment:

-The implementation of the law on concessions and of the ‘Albania one euro’ initiative, which is provided for in that law and includes a package of assets and services that the state offers to foreign investors at a symbolic price; development of investment projects in partnership with the private sector and application of concession schemes

-Improvement of the business climate, physical infrastructure, utilities and regulatory framework which have direct impact in reducing the cost of investment; establishment of competitive conditions and elimination of informality; guaranteeing of property rights and resolution of past conflicts; liberalization of market entry procedures

-Stimulation of the establishment of industrial parks and zones; establishment of new industries through domestic investment which will attract foreign capital

Development of information technology in urban centers and subsequently

- inrural areas and distribution of telecommunication and internet services across all regions

The acceleration of the privatization process, especially in strategic sectors,

- suchas electrical energy, oil and gas and transport

-Promotion of foreign direct investment in specific sectors such as clothes and shoes, service industry and construction materials

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Eng.ShpatiKoleka SurveyReportHAlbania

Market Challenges No sector in Albania is closed to foreign investors and there are no legal barriers to market entry. The National Center for Registration of Businesses, a project funded by the Millennium Challenge Corporation’s Threshold Program, became operational in September 2007 and is intended to serve as a one-stop-shop for business registration. The NCR is expected to streamline the registration procedures and shorten the time needed to start a business. The average time needed to register a new business went down significantly from 30 days in 2006 to 30 minutes in 2008. However, several major challenges still remain regarding business procedures, especially the lack of bankruptcy procedures, the relatively high cost of closing a business, the limitations of cadastral

records and the size of the informal economy. The country's physical plant remains under-developed while some progress has been made in its financial infrastructure. There are shortages of power and water, especially in rural areas, and also during certain periods of the year. Public administration is not considered to be efficient and, despite continuing efforts to improve their performance, tax and customs administration can be difficult and not transparent. Biased implementation of the law and corruption remain concerns for many investors. Cumbersome procedures for permissions or licenses for some commercial activities, such as tourism and construction, have caused investment delays. Overall, the business climate continues to suffer from poor infrastructure, lack of clearly defined property rights, and

corruption.

Market Opportunities The following market sectors have been touted as having the best future growth prospects: energy, oil and gas, telecommunications, agro processing and services, insurance, transportation, tourism and banking. Albania offers considerable natural resources, including oil, gas, coal, iron, copper, chrome, and water/hydroelectric potential. Increases in raw material market prices have made the energy and mining

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