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



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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



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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

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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



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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



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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



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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.





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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,



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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



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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.





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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.



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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