Openness to Foreign Investment

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.

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.

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.

Officially, a legal framework to encourage investment already 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.

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 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.

In 2007, the GOA approved legislation establishing the National Registration Center of Business (NRC). 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.

Conversion and Transfer Policies

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).

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.

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.

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.

Expropriation and Compensation

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.

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.

Dispute Settlement

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 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

-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

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.)

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.

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.

Performance Requirements and Incentives

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

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 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.

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

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.

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 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.”

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

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.

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.

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.

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.

Protection of Property Rights

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.

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.”

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 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.

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.

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.

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.

Transparency of Regulatory System

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

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.

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.

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. 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.

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.

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.

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

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.

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

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 Violence  

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 be of some concern to the business community. Nonetheless, the domestic climate has been steadily improving and the violent crime rate has substantially decreased. Albania is a steady source of stability in the region and relations with neighboring countries are friendly. The U.S. enjoys a particularly amicable bilateral relationship with Albania, which is a staunch American ally in the fight against international terrorism and has contributed several hundred troops to the war efforts in Iraq and Afghanistan. In April, 2008 Albania was officially invited to become a member of the North Atlantic Treaty Organization at the 2008 NATO Summit in Bucharest, Romania.

Corruption

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.

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.

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.

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

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.

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.

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

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.

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

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

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

Labor  

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.

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.

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.

The minimum wage in Albania is lek 16,800 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.

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.

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  

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.

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.)

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.

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

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.

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.

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.

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.