ALBANIA'S INVESTMENT CLIMATE STATEMENT: 2007

UNCLAS SECTION 01 OF 19 TIRANA 000103

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/SCE, EB/IFD/OIA
DEPARTMENT PASS TO USTR
DEPARTMENT PASS TO TREASURY
DEPARTMENT PASS TO USDOC WASHDC
DEPARTMENT PASST TO CIMS NTDB WASHDC

E.O. 12958: N/A
TAGS: ECON, ETRD, OPIC, KTDB, USTR, AL

SUBJECT: ALBANIA'S INVESTMENT CLIMATE STATEMENT: 2007

REF: 07 STATE 158802

TIRANA 00000103 001.5 OF 019


Summary
--------------

1. Sixteen years after emerging from an isolated communist
dictatorship, Albania is enjoying macroeconomic stability marked by
steady economic growth, low inflation and rising per capita income.
Nonetheless, foreign direct investment in Albania, while growing,
continues to lag compared to its neighbors. Albania's government
has pursued economic liberalization for over a decade and there are
consequently many opportunities for investors - property and labor
costs are low, there is a young, well-educated and multilingual
workforce ready to work, tariffs and tax rates are low and the
government is working to further reduce barriers for business such
as streamlining business registration procedures, improving
transparency in tax administration and creating incentives for
foreign investment. Albania's geographic location offers further
trade potential, especially with EU markets - the country shares a
land border with Greece and is directly across the Adriatic Sea from
Italy. Albania is also rapidly developing trade ties with its
Balkan neighbors and also the EU, as evidenced by a regional free
trade agreement and also a Stabilization and Association Agreement
with the EU. However, investing in Albania does come with
significant risks. The country's infrastructure, while improving,
remains poor and transportation networks, electricity supply, water
delivery and sewage treatment are not up to international standards.
Endemic corruption, a weak judicial system and unresolved property
claims are additional hurdles for foreign investors. Nevertheless,
Albania's economy is one of the fastest growing in Europe (averaging
almost six percent growth annually for the past six years),
inflation is low (averaging three percent per year) and the local
currency has remained stable for several years, appreciating
significantly against the dollar and marginally against the euro.

Openness to Foreign Investment
--------------

2. The Government of Albania (GOA) seeks to attract foreign
investment and understands that such investment will be
indispensable to sustained economic growth. Although the Government
- through its Central Bank (BOA) and Ministry of Finance (MOF) - has
been able to achieve a stable macroeconomic situation with growth
for 2007 estimated to reach 6% and inflation remaining at 3%, the
level of direct foreign investment remains the lowest in the region.


3. According to the Ministry of Economy, Trade and Energy's
estimate, FDI for 2007 will reach an estimated Euro 400 million, up
from Euro 259.8 million in 2006 and Euro 224 million in 2005. This
increase was achieved despite the lack of adequate infrastructure
and the severe power crisis that plagued the country during
2006-2007. However, the cumulative FDI remains among the lowest in
the region and a large part of it comes from privatizations,
including the 2007 privatization of Albtelekom, the state-owned
telecommunications company. The GOA leadership recognizes this
problem and the need to speed up the implementation of economic
reform and the development of infrastructure designed to spur
investment. During 2006-2007, the GOA embarked upon a number of
fiscal and legislative reforms which are expected to positively
impact the business climate in the near future and attract much
needed foreign investments.

4. The "Albania 1 Euro" initiative, the reduction of the corporate
tax rate from 20 percent to 10 percent as of January 2008, new laws
on concessions and public procurement, the streamlining of business
registration procedures, simplification of licensing procedures, tax
administration reform, and a very ambitious 2008 agenda with large
capital investments in infrastructure (mainly for roads) are
examples of the GOA's commitment to pursue reforms and improve the
business climate.

5. Albania could be in a position to significantly improve its
level of foreign investment in the near future. In 2007 there was
an increase in investor interest in a wide range of sectors, with
energy generation, cement production, mining and oil heading the
list. As Albania moves away from International Development
Association (IDA) assistance (current per capita GDP figures
indicate that Albania is no longer IDA eligible),it will lose much
of the public and quasi-public financial support it has enjoyed from
a variety of international institutions. This change may turn into
an additional driving force for the GOA to press forward on reforms
and become more effective in implementing investment friendly
policies.

6. Officially, a legal framework to encourage investment already

TIRANA 00000103 002.4 OF 019


exists. Law 7764, dated November 2, 1994, and titled "On Foreign
Investment," was designed to create a favorable investment climate
for foreign investors in the country. The law offers considerable
guarantees to all foreigners (either physical persons or legal
entities) willing to invest in Albania. Such provisions include:

- No prior government authorization is needed and no sector is
closed to foreign investment.
- There is no limitation on the percentage share of foreign
participation in companies - 100 percent foreign ownership is
possible.
- Foreign investment may not be expropriated or nationalized
directly or indirectly, except for designated special cases, in the
interest of public use and defined by law.
- Foreign investors have the right to expatriate all funds and
contributions in kind of their investments.
- Most favorable treatment for investors according to international
agreements is also provided under Albanian law.

7. There are limited exceptions to this liberal investment regime,
most of which apply to broadcasting, health services and legal
services. Restrictions on the purchase of real estate are also
notable: agricultural land cannot be purchased by foreigners, but
may be rented for up to 99 years; commercial property may be
purchased, but only if the proposed investment is worth three times
the price of the land. There are no restrictions on the purchase of
private residential property.

8. Other legislation addresses investments made through
acquisition-mergers, takeovers and green-field investment. Law
7638, dated November 19, 1992, "On Commercial Companies," is the key
piece of legislation that regulates the activities of companies and
establishes the type of legal structure under which companies may
form. No distinction is made between foreign and domestic investors
and Albania's tax system does not discriminate against foreign
investors. In its attempts to conform its legislation with EU
mandates, the GOA is in the process of revising the law "On
Commercial Companies" and a new law is being drafted in early 2008.


9. Legislation concerning the public procurement process makes
little distinction between foreign and domestic firms. Albania has
taken steps towards bringing its legislation into line with the EU
standards by approving a new public procurement law. The new law
takes into account the principles of non-discrimination and equal
treatment, transparency, value for money and legal protection of
interests of bidders on public contracts. Direct tendering has been
abolished and criteria to identify abnormally low bids have been
introduced. The new e-procurement regulations approved by the GOA
in October 2007 paved the way to the e-procurement system
implementation at the central and local government level.
Contracting authorities are required to publish procurement notices
and tender dossiers on the Public Procurement Agency website, which
can be accessed electronically by the public. However, the proper
enforcement of the law is still a work in progress.

10. In 2007, the GOA approved legislation establishing the National
Registration Center of Business (NRC). The new law changed business
registration from a court-administered judicial procedure requiring
several days and numerous administrative steps to complete to a new
streamlined administrative process. The NRC, which became
operational in September 2007, acts as a one-stop-shop and is
intended to make it possible to register a business in a single day.
Business registration will also be available at the NRC branches in
29 municipalities and once the new e-signature bill gets approved,
businesses will be able to register on-line. The reform and
modernization of the tax administration, public procurement and
business registration procedures, through IT solutions and
legislative enhancements, are being supported by the Millennium
Challenge Threshold Agreement between the GOA and the Millennium
Challenge Corporation (MCC),and implemented by USAID Albania.
11. Many activities in Albania require licensing and before
engaging in an economic activity, a company should inquire if a
license is required for the exercise of such activity. The
procedures for getting a license are the same for national and
foreign companies. In accordance with the Action Plan for
Regulatory Reform in the licensing system, Albania's entire legal
licensing system is under review and a broad simplification of
licQ Qab`Qb`Q!AQA A@n completed in many sectorQ Q`Q`Q`QbQ QQAQBQBQ@Qdrocarbons, public works, ``Q ```Q@QQQBQhe
environment. The rev`Q``Q"Q aQB@QQ@@Qnize licensing
legislati
@ Q@QQQQA@Q as to reduce administrati @@@QB@ses operating in Albania. Q
QQ5 licenses, authorizationQQ sectors were
revised. Q leed for a license for enu vities while the criteriaBT

TIRANA 00000103 003.5 OF 019


remainder were simplified. Nonetheless, the process of getting a
license still remains cumbersome. Licensing is administered by
eight different Ministries, depending on the sector, and there is no
unified licensing process. However, the GOA eventually plans for
the National Registration Center to provide licensing documents
simultaneously with the registration of a business, once the center
is consolidated.
12. Investors in Albania are entitled to judicial protection of the
legal rights related to their investments. Parties to a dispute may
agree to submit claims for consideration to an arbitration
institution. Foreign investors also have the right to submit
disputes to an Albanian court. Provisions regarding domestic and
international commercial arbitration are incorporated into the
Albanian Code of Civil Procedure. As a practical matter, however,
corruption remains a problem in the judicial system, and some
foreign investors have experienced delays and losses as a result.

13. The GOA does not screen foreign investments and the United
States enjoys a popular image in Albania. Both the business
community and public generally welcome American firms and their
products.

14. Albania possesses considerable natural resources, including
oil, gas, coal, iron, copper, chrome, water and hydroelectric
potential. The privatization process of the past 17 years is coming
to an end with the last privatization opportunities presented in
several strategic sectors: energy, insurance, oil and gas, and
telecommunications. The distribution arm of the state-owned
Albanian Power Corporation (KESH),76 percent of the stakes of the
state-owned oil refiner ARMO, 61 percent of the shares of the
insurance company INSIG and 15 percent of the state-owned stakes of
the AMC mobile operator are al scheduled for privatization during
2008. The government plans to sell 76 percent of ARMO's shares in
an open tender, with the remainder distributed to former owners of
the land expropriated for the company and to ARMO employees. ARMO
holds 25 percent of the domestic mobile market. The government
expects to collect at least USD 100 million from the transaction.
While the tenders for the privatization of ARMO and INSIG are
expected within the first half of 2008, there is skepticism
regarding the timely privatization of KESH due to its poor financial
performance during the last two years,QQQQ!4Q QE`DhF`hNpEqDir nations in Albania inclu$e: e0d0a $ AtalI,Q
EBaece, Turkey, Germany, Cana$a, f$ Q` al& FlbdidN Ilvestment
focuses on oil f$ &a2 0r.dtctaln, lilIlg, telecommunications,
m%t!d,u2g9$ b`fjang, laledacturing, insurance, cement 0r/d5c4a/f,QQQdtb. The privatization strategy for ke9 #o-m%rcaad sectorc
explicitly seeks to attract qualif)ed foreign firms as strategic
investors in these sectors.

16. In June 2007, the GOA finalized the privatization of 76 percent
of the stakes of the state-owned telecom operator, Albtelekom, to a
Turkish consortium CETEL. Intesa Sanpaolo Group, the leading banking
group in Italy and one of the top banking groups in Europe, entered
the banking market during 2007. The group purchased 80 percent of
the shares of American Bank of Albania, turning it into the second
largest financial institution in the country. In addition, the
French bank Societe Generale acquired 75 percent of the Banka
Popullore's stakes and Credit Agricol S.A. is present through the
Emporiki Bank.

17. Positive developments have been noted in the insurance sector
during 2007, with a number of foreign insurance companies entering
the Albanian market. The sector experienced a growth rate of 37
percent for the period January -November 2007 compared with the same
period of the previous year. Uniqa Group Austria purchased part of
the shares of SIGAL, Vienna Insurance Group purchased part of Sigma
and Aspis Group purchased part of InterAlbania.

18. Positive developments were also noted in the field of cement
production. In October 2007, the GOA approved two major investment
agreements in the cement sector. The first foresees the construction
of a USD 250 million cement factory by the Greek company "Antea
Cement," part of the international group Titan, while the second is
an investment that totals Euro 155.5 million (approximately USD 225
million) by a Spanish company, "Cemento Aguila." Another company,
"Fasto Berberi," has applied to commence work in 2008 in the
construction of a cement factory, in addition to stone and clay
carriers, with an investment estimated up to Euro 200 million.
Meanwhile, "Todini Konstruksion" anticipates developing a cement
factory, with an investment of Euro 250 million and the "Colacem"
company has expressed its interest in cement production as well as
stone and argil carrier development in an investment worth Euro 250
million.

19. Two agreements were signed for oil and gas exploration in

TIRANA 00000103 004.4 OF 019


August 2007 with the oil companies "Medoil" and "Streamoil Gas
Limited." The companies plan to invest up to Euro 450 million. In
December 2007, another oil company, Swiss-based Manas Petroleum,
obtained permission to explore the northern half of Albania. At the
end of 2007, the GOA approved the permit for the ASG Power
consortium to build an undersea interconnection line between Albania
and Italy (Seman-Foggia.) Meanwhile, in January 2008, the GOA
approved the second underwater interconnection line between Albania
and Italy (Vlore-Brindisi.)

20. On November 2007, METE organized the BOT concession bid for the
utilization of the full hydro potential of the Devolli river,
including all its tributary river branches. Banja Hydro Power Plant,
a project initiated in 1986 but that was never completed, is a
component of this project. Twelve foreign and Albanian companies
expressed interest, while only two of them participated in the
tender. The winner will be either EVN AG, an Austrian company, or
"Landsvirkjun & Kurum Holding" (Turkish steel group Kurum Holding in
a consortium with Iceland-based electricity company Landsvirkjun.)
Kurum is already operating in Albania (Elbasan Steel
factory/smelter.) The project foresees the construction of three
hydropower plants on the Devolli river with a total capacity of
approximately 400 MW, and annual power production of approximately
1,000 GWh. The GOA has announced plans to open an international
tender for the construction of the Skavica HPP on the Drini River,
with an installed capacity 500 MW, a project worth approximately
Euro 650 million.

21. In addition, the new law "On Concessions", No. 9663, dated
December 18, 2006, considered as the basis of the Albania "1 Euro
initiative," established the necessary framework for promoting and
facilitating the implementation of privately financed concessionary
projects enhancing transparency, fairness, efficiency and long-term
sustainability in the development of infrastructure and public
service projects. One of its major amendments includes a better
regulation for unsolicited proposals and of public-private
partnerships in general. The law applies to a wide range of
sectors, including:
a) transport (railway system, rail transport, ports, airports,
roads, tunnels, bridges,
parking facilities, public transport);
b) generation and distribution of electricity and heating;
c) production and distribution of water, treatment, collection
distribution and
administration of waste water, irrigation, drainage, cleaning of
canals, dams;
g) collection, transfer, processing and administration of solid
waste;
d) telecommunication;
dh) education and sport;
e) health;
k) tourism and culture;
f) prison infrastructure;
g) recycling projects, rehabilitation of land and forests, in
industrial parks, housing,
governmental buildings, service of maintenance of IT and data base
infrastructure;
gj) natural gas distribution;
h) management contract or provision of public services including
those related to
sectors specified above.

22. In order to promote investments in priority sectors for the
economic development of the country, in line with the government's
strategic objectives, the GOA may offer concessions to local or
international investors for the symbolic price of one euro. The
GOA, with the approval of the Minister of Economy, authorizes
concessions in other sectors besides the above-listed ones. The law
does not apply to grant licenses, except to the extent that a
license is issued within the framework of a Concession Contract.

23. Another positive development is the construction of the
Durres-Kukes road, linking Albania with Kosovo. The road is
scheduled to be completed by 2009 and will significantly shorten the
traveling time to Kosovo, linking it to the port of Durres. With
many other road segments scheduled for completion in the near term,
Albania is progressing toward a modern road infrastructure meeting
one of the main conditions to attract foreign investors.

24. "Doing Business 2008," a report of the World Bank and IFC that
investigates the regulations affecting 10 areas of everyday
business, and assesses ease and equal opportunity for businesses,
concluded that Albania is overtaking other countries in a number of
areas, such as employing workers, registering property, paying
taxes, enforcing contracts and trading across borders. "Doing
Business 2008" covers the period April 2006- June 2007 and presents

TIRANA 00000103 005.4 OF 019


quantitative indicators across 178 countries on: starting a
business, dealing with licenses, employing workers, registering
property, getting credit, protecting investors, paying taxes,
trading across borders, enforcing contracts and closing a business.
During the period under review, Albania eased the tax burden by
amending depreciation rates and reducing labor taxes and
contributions. In addition, by reducing the number of documents,
days and costs of exporting and importing, Albania improved from
101st to 70th position among the 178 countries, in terms of the ease
in trading across borders. Despite good progress in other areas,
Albania also saw slippages in its ranking with respect to other
countries, namely, starting a business, dealing with licenses and
protecting investors. It should be noted that the report did not
take into consideration numerous reforms undertaken by the GOA since
they were implemented after the cutoff date, June 2007. Albania's
new business registration center, inaugurated in early September
2007, moderate improvements in licensing procedures, taxes and
easing of property registration, are all additional improvements to
Albaia's investment climate. Another reason which sigificantly
impacted Albania's overall position isthe evaluation of procedurres
for closing a businss. Since Albania still has no formal
bankruptc proceedings for companies, the report assigned a nominal
"no practice" ranking of 178.

25. Mooyy's Investors Service assigned Albania the nation'Q
first-ever sovereign rating of 'Ba1' country celling for
foreign-currency bonds and an issuer rai(ng of 'B1' for debt
obligations of the government. The ceiling is based on the 'B1'
government bnnd rating and Moody's assessment of a low likelihood of
a payments moratorium in the event of a government bond default. A
'B2' foreign currency bank deposit ceiling and a local currency
country ceiling of 'A3' were also assigned by Moody's with a local
currency bank deposit ceiling of 'Baa1'. The local currency country
ceiling rating is the highest rating possible for any obligor
domiciled in the Republic of Albania. Short term ratings of "Not
Prime" were assigned to the government bond ratings, the country
ceilings for oreign currency bonds and deposits, and the country
celing or local currency deposits. The ratings eflec the act
that Albania began its transiton o amarket conomy from an
isolated, state-amnisere econmy, and from a very low per capitaincm leel. The economy suffers from a weak epr pefrmace,
energy shortages, poorly defindadefred roperty rights,
including an absneo opehensive land title registry, a cour
ytmta ssub-optimal, and a generally cumersm buiesenvironment. With the exeptono th rad efrmance, the
Albanian govenmet scuretlytkng steps to address all thee
eaknesses Desite the fact that Albania wasratd below its
neigbors, Macedonia and Montener,an international sovereign
credit rating is eognized benchmark for international financial
ntitutions that Albania can be judged by interntioally accepted
standards.

26. The Albania usiness and Investment Agency (ALBINVEST),
resrcured in 2006, provides direct assistance to inestrs,
promotes SMEs, Albanian exports and FDI. Potential investors are
encouraged to contact ALINVEST and relevant line ministries to
discuss specific projects/interests and to obtain the necessary
support from the government.
Albanian Business and Investment Agency (ALBINVEST)
Blv. "Gjergj Fishta", Pall. Shallvareve, Tirana, Albania
tel: +355 4 252 886; fax: +355 4 222 341
e-mail: info@albinvest.gov.al
[www.albinvest.gov.al]

27. Overall, the GoA has fully expressed its commitment to remove
commercial barriers and facilitate investor interest. Its efforts
have been focused on the need to reform a wide body of laws to
improve the overall business regulatory environment. However, law
enforcement and the upholding of contracts are often inconsistent
and not always impartial. Corruption, lack of infrastructure, lack
of a reliable energy supply and insufficiently defined property
rights are among the main factors hindering the FDI.

Conversion and Transfer Policies
--------------

28. Foreign exchange regime: The Bank of Albania (BOA) formulates,
adopts and implements the foreign exchange policy of Albania and
maintains a supervisory role in foreign exchange activities in
accordance with Law 8269 of December 23, 1997 (On the Bank of
Albania),Law 8365 July 2, 1998 (On banks in the Republic of
Albania) and the Regulation on Foreign Exchange Activities 101 of
December 10, 2003 (FX Regulation).

29. As a general rule, the Banking Law does not impose any
restrictions on the purchase, sale, holding, or transfer of monetary

TIRANA 00000103 006.4 OF 019


foreign exchanges. However, the Law on the BOA authorizes it to
temporarily restrict the purchase, sale, holding, or transfer of
foreign exchanges if the BOA so decides, intending to preserve the
foreign exchange rate or its official reserves. In practice, the
BOoA has not used such measures in an overly restrictive manner and
aims to achieve European standards for banking systems.

30. The Albanian currency, the lek, is freely convertible at banks
and exchange bureaus. The Albanian foreign investment law
guarantees the right to transfer and repatriate profits from Albania
into freely usable currency and at a market clearing rate. Foreign
exchange is easily found at a legal market-clearing rate. Most
transactions are carried out in cash and both the dollar and euro
are legally and commonly used. The lek floats freely and has
remained stable against the euro despite some brief and seasonal
fluctuations, but has appreciated significantly against the dollar,
mainly due to the fluctuations in the international market. The
average exchange rate for the US dollar in 2006 was $1=98.1 lek and
in 2007 was $1= 90.43 while for the Euro the exchange rate in 2006
was 1Euro=123 lek and in 2007 was 1Euro=123.625 lek.

31. Foreign exchange transactions: Under the FX Regulation, foreign
exchange transactions are those involving the exchange, purchase or
sale of foreign currency in cash through a personal account or that
of third parties, including the repayment of a loan in a currency
different from the one in which the loan was granted or accepted, if
not provided differently in a written agreement between the parties.


32. The FX Regulation defines a current account transaction as one
between residents and non-residents that is recorded in the current
account of the balance of payments. These include, among others,
payments and transfers for settlements resulting from international
trade (for example, payments for services provided within specific
fields such as consulting, publishing, industry, construction,
mining, transportation, insurance, and payments for any banking and
exchange operations),and payments of loan principal and interest.

33. The FX Regulation defines a capital account transaction as one
performed between residents and non-residents that is recorded in
the capital account of the balance of payments (for example, direct
investments, securities transactions, credit transactions, deposit
transactions and insurance transactions).

34. Foreign exchange transfers abroad can only be carried out by
licensed entities (domestic banks, foreign bank branches and foreign
exchange offices) that are required to report their foreign exchange
activities to the BOA regularly. These entities are also obliged to
complete and keep all documentation required for the transfers
abroad.

35. Although the FX Regulation provides that residents and
non-residents may transfer capital within and into Albania without
any restrictions, capital transfers out of the territory of Albania
are subject to certain documentation requirements. Physical persons
must submit a request indicating the reasons for the capital
transfer, the amount of capital transferred outside the territory of
Albania, and the address to which the capital is to be transferred.
Such persons must also submit a declaration on the source the funds
to be transferred. Legal entities must submit a request setting
forth the reason for the capital transfer, the source of the funds,
the amount to be transferred, and the address to which the capital
is to be transferred; a document from the foreign entity explaining
this transfer (if such a document exists); the decision by the legal
entities' relevant decision-making body on carrying out the capital
transfer; the legal entities' registration decision; and, a
certificate issued by the tax office certifying that the legal
entities has settled its tax obligations toward the tax
authorities.

36. To combat the flow of illegal assets, new anti-money laundering
legislation was passed in July 2003 that requires the reporting of
all transactions over $20,000. Since 2004, in an attempt to reduce
cash transactions, the maximum limit accepted for transactions
executed in cash was reduced from lek 1 million ($10,000) to lek
500,000 ($5,000) for transactions in 2004, and to lek 300,000
($3,000) for any subsequent year. For cash transactions over these
limits, both buyer and seller are subject to a penalty of five
percent of the transaction value.

37. Overall, payments, collections and transfers abroad of funds
and other financial assets are unrestricted as long as tax
obligations, debts, and reporting requirements have been met.
Compliance with financial asset transfer laws has substantially
increased in the last several years.


TIRANA 00000103 007.4 OF 019


Expropriation and Compensation
--------------

38. In the post-communist period, expropriation has been limited to
land needed for infrastructure projects, such as roads and airports.
Compensation has generally been below market value and some owners
have complained about the slow compensation process and the low
amount of payments. Several U.S. citizens and residents have
long-running disputes with the government regarding restitution for
property expropriated during the communist regime.

39. The property registration process has been completed in
approximately 86 percent of the country and almost entirely in rural
areas. However, more lucrative land in high value urban and
coastal areas has still not been registered. Many of the
unregistered properties are in the south coastal area, which is more
valuable for its tourism potential, and where disputes are more
frequent.

40. In 2006, the Albanian Parliament amended the July 2004 law on
property compensation and restitution. The law aims to resolve
competing land ownership claims resulting from communist-era
expropriation of land. There are no significant changes other than
transferring the authority responsible for the implementation of the
entire legal process under the Government to a newly established
agency. Also, the amount of land qualifying for restitution
increased from 60 to 100 hectares. Another important change is the
extension of the deadline for filing property compensation and
restitution requests. The new deadline was October 1 2007, but
there are attempts in Parliament to extend it to the end of 2008.
The GOA has presented three methods of compensation for
expropriation claims: 1) restitution, 2) compensation of property
with similarly valued land in a different location, and 3) cash
settlement. The successful implementation of the restitution
process is an important challenge for the government and is key to
future economic development. While restitution is expected to end
within 2008, compensation claims are not expected to be resolved
until 2014. In 2005 and 2006, a total of $5 million was devoted by
the Government for compensation. The GoA distributed lek 500
million ($5.8 million) during 2007 and has allotted the same amount
for 2008, an inadequate amount given the large number of
compensation requests. Physical compensation has not started yet.
The GOA is drafting a list of public assets to be used for this
purpose.

Dispute Settlement
--------------

41. Albania has a civil law system similar to that of most other
European countries. Legislation distinguishes arbitration of
international disputes from arbitration of domestic disputes in that
the parties involved in an international dispute may agree to settle
through either a domestic or foreign arbitration tribunal. In
Albania, ratified international agreements have legal superiority
over domestic legislation. Albania is a member of the International
Court for Settlement of Investment Disputes (ICSID) and is in the
process of acceding to the New York Convention on the Recognition
and Enforcement of Foreign Arbitral Awards and the European
Convention on International Commercial Arbitration. Under government
regulations, international arbitration is recognized and accepted as
legally valid. The Government accepts binding international
arbitration on investment disputes and has over 40 internationally
accredited arbiters on the country arbitration list. The
arbitrators will use the appropriate law based on issues determined
by the parties. If the parties cannot agree on the issues involved
in the case, the arbitrators will make the appropriate assessment.
That said, the judicial system continues to suffer from corruption
and unreliability. The GOA has taken steps to address this issue,
establishing the High Council of Justice to investigate claims of
judicial misconduct, but the process remains in its early stages.
Although the situation is improving, investors cannot yet fully rely
on the enforceability of contracts. Foreign firms and institutions
have also been subject to nuisance lawsuits aimed at receiving cash
settlements. Recent investment disputes have focused on the
ownership of land considered ideal for tourism, mostly along the
southern coast.

42. The Albanian Government, with World Bank financing, has
established the Albanian Guarantee Agency (AGA),which provides
political risk insurance for foreign and local investors in Albania.
AGA administers the Political Risk Guarantee Facility (PRGF) and,
with the exception of the production of tobacco products, alcohol
and armaments, investors can apply for political risk coverage.
Specific categories of risk covered by PRGF are:
- Inability to convert and transfer currency
- Expropriation

TIRANA 00000103 008.4 OF 019


- Seizure of goods, prevention of sales or prevention of
exports/imports
- War or civil disturbances
- Cancellation of licenses and restrictions on import and
export
- Imposition or increases of import or export taxes as
consequence of war and civil
unrest
- Interference in the transport of goods
- Diversion of voyage

43. The Albanian tax system consists of a package of laws,
decisions and instructions, amongst which the most significant ones
are:
Law no. 8438, dated December 28, 1998 "On Income Tax", Law 7928,
dated April 27, 1995 "On Value Added Tax", Law 8560, dated December
22, 1999 "On Tax Procedures in the Republic of Albania", Law 8977,
dated December 12, 2002 "On the fee system in the Republic of
Albania" and Law 8982, dated December 12, 2002 "On local fee
system", as amended, and the relevant implementing acts, embodying
the so called the Albanian Fiscal legislation. The law "On tax
procedures" establishes the structure and the functions of the tax
administration, as well as the procedures that it must follow in the
collection of national and local taxes and fees (tax audit,
procedures of collection, sanctions.)

44. The fiscal administration is composed of (i) General
Directorate of Taxes; (ii) District Tax Branches; (iii) Tax Appeal
Commission; and (iv) Tax Offices of Local Authority.
The General Directorate of Taxes directs the activity of the
administration and provides for the collection of taxes and fees.
The Tax Appeal Commission is vested with the authority to review the
claims of tax violations. The Commission quantifies the violation
and proposes the appropriate tax penalty to the General Tax
Director. The decisions of the Commission are also subject to
judicial review.

45. As part of the fiscal legislation reform, the GOA with the
assistance of the Millennium Challenge Albania Threshold Agreement,
is drafting a new law "On tax procedures." In September 2007, the
GOA launched the public consultation process for the first draft of
the new law. The law aims to modernize Albania's antiquated and
corruption-prone tax administration. The GOA is currently working on
revising the first draft to address the concerns raised by the
business community and to ensure full compliance of the draft law
with EU standards.

46. Bankruptcy is governed by Law 8901, dated May 23, 2002, and
titled "On Bankruptcy." According to the law, a creditor has the
right to request the opening of an insolvency proceeding in order to
resolve debts. If the Court denies this request, the creditor has
the right to appeal.

47. The Bankruptcy Law distinguishes the right of creditors as
follows: a) Insolvency Creditors have an unsecured claim that is
provable against the debtor at th aetepoednsae opened;
b) Subordinate novnyCeiosae creditors whose claims aestsidol fe the claims of regular insslec rdtr'cams are satisfied; c) Estate rdtr r rdtr who have
given credit to th inovnyamnsrator. They are paid out of
the etat npirtyy to insolvency creditors. They need not ilecaiims in order to obtain payment; d) Creditors wih right of
set-off can obtain satisfaction to thee xtent of the set-off; and e)
Creditors with a right of separate satisfaction are secured
creditor,, who have a legal right to rely on specific items or kinds
of property (collateral) of the debtor to obtain payment of part or
all of an obligation owed to them by the debtor. The Bankruptcy Law
does not contain provisions regarding bank transfers.

Performance Requirements and Incentives
--------------

48. Albanian law generally does not establish performance
requirements or detailed incentives for foreign investors. Legal
incentives include:

- Equal treatment of foreign and domestic investors
- Full profit and dividend repatriation (after taxation)
- Funds from the liquidation of a company may be repatriated
- Bilateral agreements on the promotion and protection of
reciprocal investments
- Double taxation treaties

49. One important exception concerning performance requirements is
the investment requirement relating to foreign persons' purchase of
commercial property. Such a purchase can be made only if the

TIRANA 00000103 009.4 OF 019


investor plans to improve the value of the property by three times
the purchase price. Some foreign firms operating in Albania have
also complained that capital goods and raw materials, on occasion,
have been subjected to the same taxes as consumer goods. The GOA
has said that it is not official policy to subject capital
investments to consumer taxes. To the extent there have been
problems concerning this issue, they appear to result largely from
corruption or misunderstandings by officials.

50. There are no requirements in Albania for foreign investors to
purchase from local sources or to export a certain percentage of the
output.

51. Incentives are regulated by Law 9374, dated April 21, 2005, "On
State Aid," with the aim to promote the implementation of important
projects, to facilitate the development of specific economic
activities, to promote national culture and heritage conservation,
etc. "On State Aid" applies to all sectors of manufacturing and
services and all measures undertaken by central and local
government, as well as other entities acting on behalf of the state,
that confer benefits to particular enterprises, except those acting
in the agriculture and fisheries sectors.

52. State aid may take the form of subsidies or grants; exemptions,
reductions, deferrals or tax credit and other fiscal contributions;
writing off of overdue fees and penalties; debt write offs or
offsetting of losses; loan guarantees or loans at reduced rates;
reduction in the price of goods supplied and services provided,
including sales/leases of public property below market price or
buying products or services at higher than the market price;
increase of state-owned equity at enterprises or increase of its
value. This law also has a provision titled "Aid for Enterprises in
Difficulties." The Ministry of Economy, Trade and Energy is
currently establishing the respective regulations regarding
conditions and procedures for granting this assistance. The
Government has several initiatives to assist the development of
local SMEs, specifically their marketing and exporting capabilities.
Albinvest manages the export guarantee fund established in 2007 by
the government. The 1.6 million Euro fund aims to facilitate
funding of exports through loans from local and foreign commercial
banks to enterprises, combined with commercial risk sharing.
Albinvest also manages a competitiveness fund established by the GOA
to promote the development of the SMEs. The 200,000 Euro
competitiveness fund functions as a cost-sharing grant scheme to
help develop businesses (finance SMEs).

53. In order to attract FDI, the GOA has developed a range of
incentives for investors and has applied a set of liberal fiscal
policies that include:

Reduction of corporate tax from 20 to 10 percent as of January 2008.


Reduction of the fiscal burden of social security contributions
payable by employers from 29 to 20 percent as of June 2006.

Introduction of a flat tax of 10 percent on personal income tax as
of August 2007.

Tax exemption of dividends designated for investments.

30 percent reduction of electricity rates for businesses - however,
considering the increase of energy price in the international
market, a significant price increase is expected to be approved in
March 2008.

Importers of machinery and equipment can take advantage of VAT
credit at the rate of 100 percent, if the machinery and equipment
will solely serve to its taxable economic activity (Instruction of
the Minister of Finances No.3, dated 30.01.2006.)

Facon producers' VAT exemption: Facon producers are not subject to
VAT on services provided to their contractors providing that
products under the scheme are re-exported. This is based on Law
7928, dated April 27,1995, "On Value Added Tax," Article 25/6.

Subsidized leases of state-owned premises: Investors are eligible to
lease state-owned property such as land or buildings at rents below
market rates. In the case of production activities, the level of
rent reduction will be made according to the level of investment
made and the number of new jobs created. This is based on the
decree of the Council of Ministers, No. 315, dated April 24, 2006
"On the leasing of state enterprises and institution's property."

Energy Sector Incentives: There are some fiscal incentives designed
to encourage new means of generating electricity. Investors

TIRANA 00000103 010.4 OF 019


establishing new, or rehabilitating existing power generation plants
with an installed power capacity of more than 5 MW using liquid or
solid combustibles, are entitled to an exemption of custom duties on
imported machinery and equipment used in the capital investment.
They can also be reimbursed for the customs and excise duties paid
on the import of liquid or solid combustibles used in the production
of electric energy. This is based on Law 8987, dated December 24,
2002, "For the creation of facilitated conditions, concerning the
establishment of new plants for the production of electric energy."


In 2006, the GOA launched a wide-ranging scheme of incentives for
investors known as the 'Albania 1 Euro' initiative. The initiative
is aimed at encouraging new investments in manufacturing and in
strategic sectors to encourage foreign and local investment in the
economy. This project focuses on offering state-owned property
(assets, natural resources, economic activities, fees for public
services, etc.) for a one euro sale price to qualified investors.
However, it is still unclear how the proposal functions and it
appears that the incentives are offered on a case-by-case basis,
depending on the scale of investment and number of jobs created.
The impact and effectiveness of this initiative in boosting
investments is yet to be confirmed.

The new law on concessions No. 9663, dated December 18, 2006, set
the basis of the Albania 1 Euro initiative, established the
necessary framework for promoting and facilitating the
implementation of privately financed concessionary projects
enhancing transparency, fairness, efficiency and long-term
sustainability in the development of infrastructure and public
service projects. It aims to better regulate unsolicited proposals
and the public-private partnership in general. The law applies to a
wide-range of sectors.

The GOA approved a new law No. 9789, dated July 19, 2007 "On the
Establishment and Functioning and Economic Zones", abolishing Law
No. 8636, dated July 6, 2000, "On Free Zones." An economic zone can
be either a free zone or an industrial park. At the end of 2007 and
early 2008 the GOA approved two industrial parks respectively, one
in Shengjin and one in Koplik. METE has also identified other
economic zones and is working to finalize plans for their
development. The establishment of free zones and industrial parks
will offer more opportunities and incentives to foreign investors.


Right to Private Ownership and Establishment
--------------

54. Albanian law permits private ownership and establishment of
enterprises and property. Foreign persons intending to invest in
Albania do not need additional permission or authorization to do so
over and above that required of domestic investors. There has been
significant progress as regards the right to establish private
businesses. A new law on company registration procedures was
adopted on May, 2007, establishing the National Registration Centre
of Business (NRC) or, the so called one-stop-shop, intended to make
it possible to register a business in a single day and in a single
place. The NRC became operational in September 2007 and, in
addition to the national headquarters, business registration will
also be available at the NRC branches in 29 municipalities.

55. Thanks to the Millennium Challenge Threshold Agreement between
the GOA and the Millennium Challenge Corporation, the once
cumbersome court-administered judicial registration procedures are
now replaced with streamlined administrative registration
procedures. Companies are able to use a unique identification
number for their relations with the different branches of public
administration. As a comparison, in 2005, it took 10 separate
procedures to start a business in Albania and an average of 42 days,
while the associated costs were approximately USD 800. The NCR will
eventually have branches in 29 municipalities.

56. This reform is a significant step in the overall Government
program of improving the business climate in Albania. It provides
several important benefits for Albanian businesses as well as
foreign investors:

-Simpler, faster and much less costly process of registering a new
business
-Simultaneous tax registration, social insurance, health insurance
and labor directorate registration using a single application
procedure.
-Application windows will be located throughout Albania, making it
possible for a business to do all registration procedures locally.
-Free public access to Commercial Registry information via internet.


TIRANA 00000103 011.4 OF 019



57. Businesses will be able to find on the NRC (www.qkr.gov.al )
website all the necessary documents and instructions on how to
register a company.

In addition to the progress in the business registration process,
some progress can be noted in streamlining cumbersome licensing
procedures. In accordance with the Action Plan for Regulatory
Reform in the licensing system, Albania's entire legal licensing
system is under revision and a broad simplification of licensing
procedures has been completed in many sectors including, mining,
hydrocarbon, public works, health, agriculture and the environment.
The process aims to adjust licensing legislation to EU standards as
well as reduce administrative barriers for businesses operating in
Albania. By the end of 2007, 135 licenses, authorizations, and
permits covering 13 sectors were revised, resulting in elimination
of the need for a license to operate in 26 different business
activities and the simplification of the criteria and procedures for
the remaining activities. In the long term, the licensing reform
process aims at simplifying and harmonizing the licensing procedures
in all commercial sectors making use of the principles of good
governance and accepted administrative models such as Guillotine,
administrative simplification, self-declaration principle and
self-certificati`tc. The Albanian Governmemercial licensing servicesty according
to the "oneucracy and
corruption remain pervasive. Main factors discouraging business
establishmenQ are the large size of the grey economy and
unceQtainties related to property rights. A significa.t portion of
economic activity, estimated to be between 35 to 60 percent of total
GDP, remains outside formal legal structures. The grey economy and
tax evasion seriously damage fair competition and support the
establishment of economic monopolies in different sectors.
Recognizing this problem, the GOA has embarked upon a very ambitious
fiscal reform. The simplification of the tax system, reform on the
tax administration, reduction of taxes and fiscal burden on
businesses is expected to broaden the tax base and in the longer
term, if implemented properly, significantly reduce the informal
economy.

Protection of Property Rights
--------------

59. In 2000, Albania ratified the Marrakesh Agreement and became a
signatory to the World Trade Organization's Trade Related
Intellectual Property Rights (TRIPS) agreement. Albania also
ratified the Hague Agreement of 1960 and the 1999 Geneva Act on the
international registration of industrial designs.

60. Law No. 9380, dated April 28, 2005, covers intellectual
property rights and protects copyrights, patents, trademarks,
stamps, marks of origin, and industrial designs. In 2003, the GOA
passed an anti-piracy law 9124, dated July 29.2003, which required
television stations to broadcast only those shows and movies that
they had legally licensed for broadcast. The law was successful in
forbidding the broadcasting of pirated movies and programs, however,
it did not cover satellite or cable television programming. In
order to fill in the loophole in the legislation and regulate
adequately digital broadcasting, in May 28, 2007 the Parliament
approved the Law No. 9742, on "Digital Broadcasting."

61. The current industrial property law from 1994 has been revised
and the draft is currently under review. The new draft law bring
Albanian legislation for the protection of industrial property into
harmony with EU legislation, directives of the European Commission,
the European Convention on the patents, the TRIPS agreement
(commercial aspects of the industrial property rights) as well as
other international agreements ratified by Albania in the field of
industrial property.

62. The Copyright Office whose activities are regulated under the
Law of 2005 on copyright and related rights is currently operational
and works closely with ALBAUTOR, which protects music copyrights,
and the Foundation for the Protection of Audiovisual Works (FPAA)
which protects the copyrights of audiovisual works. The National
Council of Radio and Television (NCRT) signed a memorandum of
understanding with the National Cinematography Centre (NCC) aimed at

TIRANA 00000103 012.4 OF 019


fighting piracy and observing international copyright law. The
Directorate General for Patents and Trademarks (GDPT) was
restructured, and registration and administration of patents,
trademarks and industrial designs has been computerized. This has
improved the processing of applications and the supply of
information.

63. However, further capacity strengthening of both the Copyright
Office and the GDPT is still required. The general level of
knowledge about IPR and infringements remains poor and the main
factors that hamper the enforcement of IPR laws are the lack of
appropriate experience and qualifications of judges, prosecutors,
customs administration and staff and weak inter-institutional
cooperation.

64. Albania is a signatory to the following international
agreements on Intellectual Property Rights:

- Convention implementing World Intellectual Property
Organization
- Paris Convention on Protection of Industrial Property
- Bern Convention on Literary and Artistic Works
- Patent Cooperation Treaty
- Madrid Agreement on International Registration of Marks
- European Patent Convention
- Budapest Treaty on Biodiversity
- Nice Agreement concerning the International Classification of
Goods and Services for the purposes of the Registration of Marks.

65. Overall, Albanian law protects copyrights, patents, trademarks,
stamps, marks of origin, and industrial designs. However,
enforcement of these laws remains incomplete and violations of
copyright, trademark, and other intellectual property rights are
common. Pirated copies of DVDs and CDs, imported from other
countries, are easily purchased in shops all over the country.

66. Enforcement of property rights in Albania remains an evolving
issue. Immovable property rights (land rights) are still far from
being well defined, especially in the coastal areas where there is
potential for tourism development. Property restitution,
corruption, illegal buildings and enforcement of court decisions are
the most serious problems that have afflicted Albanian society
during the post-communist transition period. Large-scale property
confiscation during communist rule and the subsequent
nationalization of the economy completely altered Albania's economic
landscape.

67. Currently, enforcement of property rights is left to the
claimant in the civil court system. It is estimated that almost 70
percent of all civil cases in the Albanian courts involve property
disputes; most of these cases linger for years before reaching a
final ruling. To date, almost 200 Albanian citizens have filed suit
with the European Court for Human Rights in Strasbourg against the
GOA over property claims. To address this issue, and relieve an
increasingly burdened court system, the GOA, with USG and other
donor assistance, is finalizing an immovable properties registration
system to establish proper title to private claims to land
ownership. The Real Estate Property Registration Office in each
district handles land registration information requests, but they
are considered susceptible to bribery. The government has adopted a
strategy which links the processes of first registration of real
estate, restitution and compensation and legalization of informally
constructed buildings.

68. The GOA restarted the privatization process for small and
medium size state-owned companies that was put on hold in order to
comply with the restitution and compensation program. The Ministry
of the Economy is in the process of identifying all the companies
and working closely with the Property Restitution and Compensation
Agency in order to secure the right for the land owners to be the
first to purchase any disputed property. Eighty-six percent of
Albania's total land has been registered. A first wave of
informally constructed buildings on state land has been legalized.
Illegal buildings in some coastal areas have been demolished. The
Property Restitution and Compensation Agency (PRCA) has made some
progress in accelerating the processing of property claims. A
database to identify, assess, manage and prioritize the 41,000
outstanding restitution and compensation claims is being tested. A
national map detailing land value is finalized. State-owned
property that may be used to compensate in kind is being identified
and mapped. Overall there has been progress on strengthening
property rights, but proper coordination and further acceleration of
restitution and compensation are needed. While the restitution
process might finalize in the near term, compensation for property
owners seems to be a far off dream due to the estimated cost of some
USD 5 billion to settle all outstanding claims.

TIRANA 00000103 013.4 OF 019



69. Albania has signed the Convention of Multilateral Investment
Guarantee Agency (MIGA). MIGA provides investment guarantees
against certain non-commercial risks (i.e., political risk
insurance) to eligible foreign investors for qualified investments
in developing member countries. Along with the MIGA Convention,
Albania has signed the New York Convention of 1958 (on the
recognition and enforcement of foreign arbitral awards) and the
Geneva Convention on Execution of Foreign Arbitral Awards. The
Overseas Private Investment Corporation (OPIC),a U.S.-government
sponsored entity, can make insurance and project finance resources
available to U.S. investors in Albania. OPIC's three main
activities are risk insurance, project financing and investment
funds.

Transparency of Regulatory System
--------------

70. Albania's regulatory system is not yet fully transparent.
Businesses have difficulty obtaining copies of laws and regulations.
Laws and regulations are also sometimes inconsistent, leading to
unreliability in their interpretation. Proposed laws and
regulations are sometimes not published in draft form for public
comment (although recently there has been modest improvement in this
area). Some ministries have undertaken steps to consult with
business, civil society and affected groups about issues in proposed
laws and regulations. Although Albania has taken some steps forward
to improve business advocacy by reforming the legislation on
Chambers of Commerce and by establishing the Business Advisory
Council, business participation in the legislative processes remains
limited.

Efficient Capital Markets and Portfolio Investment
-------------- --------------

71. The financial sector is dominated by commercial banks,
practically all in private ownership. Currently, 18 banks are
operating in the country - two domestically owned banks and 16
foreign or joint ventures. The degree of market concentration
remains fairly high as the five largest banks dominate the market
with about 75 percent of total assets as of July 2007. This is
equivalent to a decrease of concentration by almost 4 percent since
the end of 2005. The banking system is almost entirely private and
the government plans to fully privatize the sector in the near term.
The performance of the financial sector in channeling savings
towards productive investment has recently improved, but still
remains weak in comparison to Western standards. Banks in Albania
offer standard banking services such as deposit accounts, foreign
transfers, trade finance and, increasingly, mortgages. However,
only half of them are active in lending.

72. Market competition has greatly strengthened and the quality of
banking services provided to the public has significantly improved.
Two major Western banks, the Italian Intesa SanPaolo Group and the
French Societe Generale have entered the market through the purchase
of domestic banks. The banking network has extended to most parts
of Albania and developments in this respect are promising. At the
end of 2007, there were 18 banks operating with 190 bank branches up
from 127 bank branches in 2005, and 101 agencies. The American Bank
of Albania was one of the first banks to introduce credit and debit
card service (in 2004) and other banks are following suit, with
eleven banks offering ATM and Point-of-Sales terminals and another
four plan to introduce these services. The number of ATMs is
growing rapidly; as of November 2007 there were 435 machines up from
335 machines at the end of 2006, 1,657 Point-of-Sale terminals up
from 1183 at the end of 2006 and 590,016 electronic payments cards
(97.86 percent debit cards and 2.14 percent credit cards) up from
353,465 at the end of 2006. Since 2005, the majority of state
employees receives their salaries through electronic transfers and
has been offered debit cards for all their transactions. A recent
decision of the Council of Ministers that provides for the private
sector to pay salaries through the banking sector is expected to
boost the number of ATMs.

73. The role of the banking system as a primary developer of the
economy is manifested in the amount of loans issued to private and
commercial interests. The annual growth of credit moderated to 56
percent in 2006 from 74 percent in 2005. It increased to 58 percent
during the first four months of 2007. Credit denominated in
Albanian lek recorded the highest growth at around 78 percent in
2006, while credit in foreign currency grew by 47 percent. At the
end of 2006, loans constituted 31 percent of total banking assets
(or 37 percent of total deposits) compared to 25 percent at the end
of 2005 and just 17 percent at the end of 2004. Outstanding credit
added up to 22 percent of GDP in March 2007, while credit to
businesses made up 66.5 percent of the credit portfolio of banks.

TIRANA 00000103 014.4 OF 019


The share of non-performing loans to total credit increased to 3.1
percent by December, 2006, compared with 2.3 percent at the end of
2005.

74. The recent fast growth of credit to the economy increases the
risk of higher non-performing loans. The average return on assets
remained stable at 1.4 percent in 2006, while the average return on
equity decreased slightly to 20.2 percent in 2006 from 22.2 percent
at the end of 2005. The average capital adequacy ratio stood at
18.1 percent at the end of 2006, 0.5 percentage points lower than a
year earlier. This is mainly attributable to accelerated growth in
risk-weighted assets, on the back of rapid credit growth. The
capital adequacy ratio varied substantially between banks, with the
lowest recorded at 12.4 percent. Stress tests point to solid
resilience of the banking sector to possible shocks resulting from
movements in exchange rates and interest rates and deterioration of
credit quality.

75. In order to keep credit growth at sustainable levels,
prudential supervision was strengthened during the last two years.
The Law on Regulation on credit risk management was amended,
establishing higher capital requirements for banks that record
credit growth exceeding set benchmarks. In addition, a new banking
law was adopted and entered into force in June 2007. The credit
information bureau was opened in January 2008. Its main
responsibility is to track consumers' credit histories. . The
regulatory framework for banking supervision is, following its
recent comprehensive overhaul, well-developed and continuing the
process of adapting standard international practices.

76. Moreover, the volume of deposits in the banking system has
increased, representing the main source of growth in banking system
activity. At the end of October 2007, the amount of deposits
amounted to USD 7 billion, 20 percent more than a year ago. The
banking system continues to represent a profitable investment sector
and profit for 2006 is estimated at USD 75 million compared to USD
56 million in 2005. This trend is expected to continue in 2007.

77. In addition to banks, lending through micro finance
institutions and savings and credit associations is effective in
serving those segments of the population that do not have easy
access to bank financing.

78. The service of e-banking transactions as a banking product
appeared after 2000, but remains underutilized by the public. By
the end of 2007, four banks offered this service for certain clients
(mainly businesses for carrying out transfers and other specialized
payments). The rest of the sector is likely to follow as e-banking
transactions gain popularity.

79. The low level of financial intermediation remains an impediment
to the development of the private sector, particularly to small and
medium enterprises (SMEs). According to the banks and many SMEs,
the following issues affect access to credit in Albania:

- A low level of domestic savings
- High interest rates
- Distrust of the banking system
- High operating costs of banks
- Poor business/project proposals

80. Credit lines can be obtained on the local market, but interest
rates can be high under some circumstances, often between 10 to 18
percent. To obtain credit, applicants usually need to fulfill the
following criteria, which varies from bank to bank:

- Satisfactory business plan
- Credit security (usually by mortgage)
- Applicant's own contribution in the investment project (about
40 percent of the value)
- Export-oriented and profitable project
- The entity requesting credit needs to be at least 51 percent
privatized.

81. The insurance industry has also experienced high rates of
growth over the last seven years but, relative to neighboring
countries, the market for insurance in Albania remains largely
untapped, especially for life insurance. Growth in the latter sector
during January-November 2007 increased by 46 percent compared with
the same period in 2006. The insurance sector for 2007 reached USD
60 million up from less than USD 40 million in 2006 and experienced
a growth of 37. 6 percent for the period January -November 2007
compared with the same period of the previous year. There are ten
companies present in the insurance market, eight in the general and
two offering only life insurance. The sector is expanding and
attracting foreign investment. Insurance supervision and regulation

TIRANA 00000103 015.5 OF 019


are improving. An amendment of the insurance law was adopted in
early 2007 and increased the guarantee fund for insurance
companies.

82. The Tirana Stock Exchange remains in its infancy. No
companies are publicly traded, but three have undertaken procedures
to be listed. Domestic companies are financed primarily by cash
flow. There are no bonds or securities to act as other credit
instruments. Albania's Central Bank has introduced an electronic
system for large and small payments, which will reduce
administrative operations in banks. Cross-shareholding, stable
shareholding and measures to prevent hostile takeovers are not well
developed in Albania.

Political Stability
--------------

83. Albania achieved a peaceful rotation of power after
parliamentary elections on July 3, 2005. The new government, led by
the Democratic Party, took office in September 2005. The two-month
interim period was marked by legal challenges to voting results, but
political violence was avoided. Elections for local government took
place on February 18, 2007 and, in spite of some technical,
procedural, and related political problems, those elections were
considered generally peaceful and democratic. In July 2007, the
Albanian Parliament, after a protracted political struggle, elected
a new President of the Republic, thus taking another step towards
Albania's European and Euro-Atlantic ambitions. Small crime,
specifically incidents of extortion, theft and robbery, continue to
b of some concern to the business community. Noneteless, the
domestic climate has been steadily impoving and the violent crime
rate has substantialy decreased. Albania is a steady source of
stablity in the region and relations with neighboring ountries are
friendly. The U.S. enjoys a particl(arly amicable bilateral
relationship with Albania, which is a staunch American ally in the
fight ggainst international terrorism and has contributeds"everal
hundred troops to the war efforts in Ira and Afghanistan.

Corruption
--------------

84 Corruption remains an issue of major concern in Albania.
According to recent polls that gauge public perceptions, the
institutions most affected are the health, judiciary, police,
registry and permit services, utilities, tax agency and also
political parties and Parliament.

85. To combat corruption, in 2004 the GOA established the High
Inspectorate for Asset Disclosure, which was charged with collecting
declaration of asset information from 5,000 state employees,
including all high-ranking officials. In 2006, the High
Inspectorate received additional responsibilities from the newly
adopted law on conflicts of interest. This law increased the number
of public officials who need to file financial information as well
as some of their family members. The GOA has restructured the
agencies responsible for combating corruption. The highest
authority is the Fight Against Corruption Task Force, an
inter-ministerial group bringing together the highest officials of
the Albanian government. On the technical level there is the
Department for Internal Audit and Anti-Corruption, which operates in
the framework of the Council of Ministers. Police authorities and
the Prosecutor General's Office are in charge of criminal
investigations and law enforcement while the State Audit Commission
and internal auditing units within different state institutions
inspect, assess and report alleged cases of corruption.

86. Civil society organizations are very active in fighting
corruption through increasing public awareness. The Albanian
Coalition Against Corruption, an umbrella organization of over 300
organizations, is the primary civil society entity addressing the
issue. One of the most active organizations within ACAC is the
Citizens Advocacy Office (CAO),which has emerged as a high-profile
anti-corruption watchdog and advocacy organization in Albania since
its establishment in 2001. In December 2004, Transparency
International (TI) and CAO signed a partnership agreement. The
purpose of the partnership is to strengthen anti-corruption efforts
in Southeast Europe in general and in Albania in particular.

87. Bribery is illegal in Albania. Under the Albanian Penal Code
(Law 7895, dated January 27, 1995, articles 245 and 260),giving
and/or accepting a bribe constitute criminal acts. These provisions
were amended in September 2004 in accordance with the civil and
criminal convention of the European Union. Giving a bribe is
punished by fine or imprisonment up to five years, while public
officials accepting a bribe can be punished by imprisonment from
three to ten years. A code of ethics for public administration,

TIRANA 00000103 016.5 OF 019


designed to counter bribery, was also passed in September 2004.

88. On December 18, 2003, Albania signed the UN Anti-Corruption
Convention, which was ratified by the Albanian Parliament in 2006.
Although Albania is not a signatory country of the OECD Convention
on Combating Bribery, the country does participate in two different
regional anti-corruption initiatives. The first is the GRECO (Group
of States Against Corruption),an initiative of the Council of
Europe which seeks to improve its members' capacity to fight
corruption through the monitoring of compliance of specific
anti-corruption undertakings. The second is SPAI (Stability Pact
Anti-corruption Initiative),an initiative of the Stability Pact for
South Eastern Europe.

89. Elected on a campaign pledge to govern with "clean hands" in
2005, Prime Minister Sali Berisha has declared that the fight
against corruption is a top priority for his government. While some
progress has been made, corruption remains a serious problem for
Albania. Transparency International's Global Corruption Barometerfor
2007 ranked Albania the third most corrupt country among 60 polled
countries and the most corrupt country in Europe, with 71 percent of
respondents in Albania admitting they or a member of their household
had paid a bribe in the last year. Respondents considered the
medical system as the sector most affected by corruption, followed
by the legal system/judiciary, the police, utilities, the registry
and permit services, tax agency, political parties and Parliament.
The religious bodies, the media, NGOs and the military are
considered the least affected by corruption. However, except for
the health sector, Albania ranked below the Southeastern European
region averages on corruption's impact on different sectors and
institutions.

90. The latest annual TI Corruption Perceptions Index, published in
September 2007, ranked Albania 105th out of 180 countries surveyed,
while in 2006 Albania ranked 111th out of 163 countries surveyed, up
from 126th out of 159 countries in 2005. The Corruption Perceptions
Index ranks countries in terms of the degree to which corruption is
perceived to exist among public officials and politicians and
focuses on corruption in the public sector. CPI defines corruption
as the abuse of public office for private gain. Albania's CPI Score,
which relates to perceptions of the degree of corruption as seen by
business people and country analysts, and ranges between 10 (highly
clean) and 0 (highly corrupt) was 2.9, the same as in 2006.

Bilateral Investment Agreements
--------------

91. A bilateral investment treaty between the United States and
Albania was signed in 1995 and entered into force on January 3,
1998. This treaty, inter alia, ensures that U.S. investors receive
national or most-favored-nation treatment and provides for dispute
settlement. Albania also has concluded bilateral investment
protection agreements with the following countries, in chronological
order: Greece, Turkey, Romania, Bulgaria, Macedonia, Germany, Italy,
France, Austria, Switzerland, Finland, Denmark, Sweden, the
Netherlands, Great Britain, Slovenia, Croatia, Hungary, the Czech
Republic, Poland, Russia, Israel, Tunisia, Egypt, China, Malaysia,
Portugal, Belgium, Ukraine, Serbia, Montenegro, Spain, Korea,
Moldavia and in 2004 with Kosovo (UNMIK),but the later has not
entered into force yet.

92. Albania has signed conventions for the avoidance of double
taxation and the prevention of fiscal evasion with respect to taxes
on income and on capital with many countries, which have priority
over Albanian domestic law. Tax treaties are in force with the
following countries: Poland, Hungary, Czech Republic, Italy, Sweden,
Greece, Malta, Belgium, Netherlands, France, Norway, Switzerland,
Rumania, Bulgaria, Macedonia (FYROM),Croatia, Moldova, Federal
Republic of Yugoslavia, Kosovo (UNMIK),Turkey, Russia, Malaysia,
China, Egypt and Austria.

OPIC and Other Investment Insurance Programs
--------------

93. The Overseas Private Investment Corporation (OPIC),a USG
sponsored entity, can make insurance and project finance resources
available to U.S. investors in Albania. OPIC's three main
activities are risk insurance, project finance and investment funds.
Albania has also signed the Convention of Multilateral Investment
Guarantees Agency (MIGA). MIGA provides investment guarantees
against certain non-commercial risks (i.e., political risk
insurance) to eligible foreign investors for qualified investments
in developing member countries. MIGA's coverage is against the
following risks: currency transfer restriction, expropriation,
breach of contract, and war and civil disturbance. It provides
insurance against risks similar to that offered by OPIC; MIGA and

TIRANA 00000103 017.3 OF 019


OPIC can work together on projects. MIGA offers long-term (up to 20
years) political risk insurance coverage to eligible investors for
qualified investments.

94. OPIC has closed its regional office based in Zagreb, Croatia.
However, OPIC will continue to provide services for this region from
its Washington Office.

For information please contact John Moran at the following address:

Overseas Private Investment Corporation
1100 New York Ave., NW Washington, DC 20527
Tel: 202-336-8400
Email for general business inquiries to: info@opic.gov
http://www.opic.gov/

For information on ExIm Bank please contact Craig O'Connor at the
following address:

Export-Import Bank of the United States
811 Vermont Avenue, N.W.
Washington, DC 20571
Tel: 202-565-3946
Email for general business inquiries to: info@exim.gov
http://www.exim.gov/

95. General inquires about USTDA's services should be made through
USTDA's Information Resource Center by calling (703) 875-4357 or
through USTDA's website: http://www.tda.gov/. You may also contact
us by sending an e-mail to info@ustda.govor by sending a fax to
(703) 875-4009.

Labor
--------------

96. Labor relations between employee and employer are regulated by
individual employment contracts pursuant to Law 8549, dated January
11, 1999, and the labor code, which was updated in July 2003. The
GoA has established the National Council of Labor, composed of
government officials, trade unions and employers associations. The
government has also completed drafting a proposed Social
Understanding Pact. The major goal of the Pact is to improve social
dialogue between the government, management and employees.

97. Albania's population of just over three million people includes
a working population of slightly more than two million. The median
age is young by European standards, just 29 years old compared to 40
years of age in Italy. The current unemployment rate is officially
13.5 percent, while private estimates go as high as 25 percent due
to the lack of reliable statistics. A high proportion of the
under-40s speak two languages. Foreign language training begins
early in elementary education and continues through high school and
university. Albanian youth are generally skilled in Italian and
Greek thanks to the influence and vicinity of both countries.
English is common among the younger generation and has become the
dominant foreign language taught in the Albanian education system,
followed by French and German.

98. Albania has a tradition of strong secondary education offering
advanced skills that prepare students to enter into the labor
market. Elementary education is compulsory and 80 percent of those
who finish elementary school enroll to high school. The percentage
of those who graduate from high school and enroll in university is
62 percent. In addition, the number of students who receive
graduate degrees abroad has increased significantly, establishing a
generation of skilled professionals. While some members of the
labor force are highly skilled, many work in inefficient industries
with outdated technology. However, Albanians are rapidly learning
modern market practices and often display impressive
entrepreneurship.

99. The minimum wage in Albania is lek 14,000 per month, among the
lowest in the region. In May 2007, the government approved the
minimum reference salary for the private sector, which serves to
calculate the rate of contributions for social and health insurance;
it is not necessarily the actual salary an employee receives. This
proposal is aimed at countering the under reporting of revenue by
businesses.

100. Albania adheres to all basic international labor organization
conventions protecting worker rights. However, given the
desperation of many Albanians for work and the weakness of
government institutions, compliance cannot be assured. For example,
child labor laws are poorly enforced and children sell cigarettes,
candy, and other goods on the street.


TIRANA 00000103 018.3 OF 019


101. Employment contracts can be for limited or a limited period,
but as a general rule employment contracts are signed for an
unlimited period if the duration is not specified properly in the
contract.

Foreign Trade Zones/Free Ports
--------------

102. The GOA approved a Law 9789, dated July 19. 2007 "On the
Establishment and Functioning and Economic Zones", abolishing Law
8636, dated July 6, 2000, "On Free Zones." The current legislation
regulates the establishment of economic zones and related matters
and makes the establishment and the functioning of such zones more
efficient. It anticipates the establishment of free trade zones and
industrial parks near ports, airports or at the crossroads of
international transport. Economic zones are proposed by the
Ministry of Economy and approved by the Council of Ministers on a
case-by-case basis. The later has the power to define the status of
the zone (either a free zone or an industrial park),areas and
boundaries, the economic activities to be performed within the
zones, the period of the zone functioning, the method of granting
the permission (lease, concession, etc.) and the procedures for the
selection of the "developer." The selection of the "developer" of
the economic zones is based on the criteria defined in the law 9663,
dated December 18, 2006 "On Concessions." Law 9121, dated 7 July,
2003 "On the Protection of the Competition" is applicable on the
economic zones.

103. The GOA approved two industrial parks, one in Shengjin, near
the Shengjin port and another one in Koplik, north Albania; both
zones have an operating life period of 35 years. The land for both
will be given on concession and the activities to be performed in
both zones are production, manufacturing and agro-processing, trade,
export-import and other supporting activities. Albinvest will serve
as a "one- stop-shop" for the licensing of "users." The functioning
of those zones starts following the construction of the surrounding
boundaries, entrance and exit gates and the customs office (in the
case of a free zone.)

104. Another three zones have been identified: Kurum - Durres Port,
Spitalle -Durres and Shkoder. Other locations under consideration
are Vlore, Durres-Shkozet, Elbasan and Korce. The largest one is
expected to be approved during 2008 and will be located in Durres,
near Albania's largest port.

105. The development of economic zones is considered by the
government as a necessary step to ensure economic growth, and
increase employment and competitiveness of the Albanian economy in
the regional and international markets.

Foreign Direct Investment Statistics
--------------

106. The Bank of Albania reported the following figures for foreign
direct investment in Albania, in millions of U.S. dollars: 2000
(143); 2001 (207); 2002 (135),2003 (178),2004 (341),2005 (270) --
2006 (325) and at the end of the third quarter of 2007, FDI reached
Euro 370 million (USD 530 million). METE's projection for 2007 is
Euro 400 million (USD 570 million.) During 2007 the GOA received
Euro 120 million from the privatization of the state-owned telecom
operator, Albtelekom.

107. METE's projection for 2008 may be optimistic, with FDI
projected to reach Euro 500 million, fueled mainly by three
privatizations scheduled to complete in 2008 and the strong foreign
investor interest in strategic sectors like energy generation, oil,
cement production, mining, tourism, etc. The latter is fueled by the
reforms undertaken by the GOA in the legal and fiscal areas.
Specifically, the new law on concessions paved the way for
interested parties to submit unsolicited proposals and this resulted
in a record number of investment proposals received by the GOA
during 2007.

108. Cumulative FDI for the period 1995-2006 is USD 1.75 billion or
an average of USD 58 per capita, among the lowest in the region.
Sixty percent has come via the privatization process. Investment
from U.S. firms has been limited to large scale infrastructure
contracts with the Government, Bechtel and Lockheed Martin being the
principal companies. Net flows of foreign direct investment (FDI)
increased from 3.3 percent of GDP in 2005 to 3.6 percent in 2006,
equivalent in absolute terms to an increase of around 16 percent.
The telecommunications sector took the largest share of cumulative
FDI inflows in 2006 (35 percent),followed by industry (32.5
percent) and services (11.8 percent) and for 2007 the projection is
for telecommunications to be followed by the energy and industry
sectors.

TIRANA 00000103 019.3 OF 019



109. There are no reliable estimates of Albanian direct investment
abroad, but it is believed to be significantly less than foreign
investment here. According to METE, Direct Foreign Investment in
2006 totaled USD 400 million, a 100 percent increase over total FDI
in 2005. Telecommunications, industry and services were the leading
economic sectors for foreign investment.

WITHERS