bank of albania 2011 foreign direct investment report

7/31/2019 Bank of Albania 2011 Foreign Direct Investment Report

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REPORT ON FOREIGN DIRECT

INVESTMENT IN ALBANIA, 2011May 2012

Albania


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ACKNOWLEDGEMENTS

EXECUTIVE SUMMARY

INTRODUCTION

CHAPTER I.FDI IN ALBANIA: RECENT TRENDS,MAIN FEATURES AND ROLE IN THE ECONOMY

Slight decline in 2011 ollowing years o expansion

Characteristics o FDI inlows

Main eatures o FDI stock in Albania

Eects o FDI: the role o oreign ailiates in the Albanian economy

CHAPTER II.

POLICIES AND MEASURES AFFECTING FDI IN ALBANIA

Assessments o the business environment and the competitive position

Measures to improve the investment environment

FDI policy: the investment regime

Investor satisaction survey

CHAPTER III.THE ROLE AND IMPACT OF FDI IN ALBANIAN AGRICULTURE

Main eatures o agriculture and agricultural policy in Albania

Main trends and issues relating to FDI in agriculture in other transition

economies and Albania

Conclusions and policy recommendations: attracting and beneiting more rom

FDI in agriculture

REFERENCES

TABLE OF CONTENTS

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Te Report on Foreign Direct Invest-ment in Albania 2011 was prepared by theAlbanian National FDI eam (Ministry oEconomy, rade and Energy, Central Banko Albania, INSA, AIDA (Albanian In-vestment Development Agency) and FIAA(Foreign Investors Association in Albania)in collaboration with UNCAD and

UNDP Albania.

It is mainly drated by Gabor Hunya,an UNCAD consultant, with substan-tial inputs rom the Albanian FDI Na-tional eam and a special contribution onagricultural sector by Shkelzen Marku, aUNDP consultant.

Te FDI national team members in-clude Bashkim Sykja and Kujtime Steani(Ministry o Economy, rade and Energy),

Diana Shtylla and Godiva Rembeci (Cen-tral Bank o Albania), Eneida Guria, SilviGruda and Geri Zaimi (Albanian Invest-ment Development Agency), Elsa Dhuli(National Statistical Oce), MarinelaJazoj (Foreign Investor Association in Al-bania), Diana Leka (UNDP, Albania),

Lida Llakmani and Altin Zeqo (Minis-try o Agriculture, Food and ConsumerProtection). Te report was coordinatedin every stage by Diana Leka o UNDPAlbania and Astrit Sulstarova o UNC-AD, under the overall supervision andguidance o Masataka Fujita o UNC-AD, Enno Bozdo o the Government

o Albania and Arben Rama o UNDPAlbania. Signicant comments were re-ceived rom Padma Mallampally, an in-ternational FDI expert, Kalman Kalotayand Kee Hwee Wee o UNCAD. Te re-port urther beneted rom the commentsand suggestions o Adrian Civici, LuljetaMinxhozi, Erjon Luci, and Altin anku.

Statistical support was provided byBesa Menzelxhiu and Dorin Rama. Spe-cial thanks or the translation o this report

in Albanian go to Evis Cerga (Gjikondi).Tis report is an activity within the projectEnhancing Regional rade and Attractingmore investment in Albania .

Te nancial support o UN Cohe-rence Fund is grateully acknowledged

ACKOWLEDGEMENT


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REPORT ON FOREIGN DIRECT INVESTMENT IN ALBANIA, 2011


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Te rapid economic development andEU integration are high on the AlbanianGovernments agenda. Te countrys mainpolicies over the past ew years have result-ed in a liberalized economic rameworkand improved conditions or doing busi-ness and or attracting FDI. Positive rateso economic growth were achieved in each

year through 20082011. Albania had oneo the highest rates o growth in Europe onaverage during this period and weatheredthe nancial crisis relatively well.

Albania is ranked 18th among 141countries according to UNCADs In-ward FDI Perormance Index or 2010, upsharply rom the 68th place it occupiedin 2005. Tis improved position reectsan - investor-riendly business environ-ment and opportunities opened up by the

privatization o state-owned enterprises.

In terms o UNCADs Inward FDIPotential Index, Albania was ranked 81st in2009 (the most recent year or which data areavailable), ar behind other European coun-tries. Tis low ranking was due to, amongother things, poor inrastructure, and mod-est research and development activity. As aresult o new public investments in the pastour years important improvements havebeen made in the road inrastructure and theenergy supply has become stable, but thereare several other areas where improvementsneed to be made. Te country needs urtherimprovements in its FDI potential i it wish-es to attract more FDI, especially greeneldinvestments by oreign transnational corpo-rations (NCs).

FDI inows increased rom one quarterto one third o the value o gross domesticcapital ormation rom 2009 (717 million)

to 2010 (793 million). It ell back again toone quarter in 2011 (742 million) whichcan still be considered as a good result in theabsence o major privatization deals. FDI -

nanced 62 per cent o the current accountdecit in 2011, down rom more 77 per centa year beore. Despite the 2011 decline, FDIis an important actor in Albanias economicgrowth and nancial stability. But a moresignicant decline may reduce economicgrowth and make the country more vulner-able to external nancing shocks.

Albania has applied a policy rameworkavorable to FDI, and has more recently in-troduced policies to support private-sectordevelopment in general. Measures are alsounderway or urther improvements, includ-ing in the legal system and the new agency(AIDA) in charge o investment promotion.

Industrial sector (including manuactur-ing and mining) accounted or almost 50per cent o the inow o FDI in 2010 and

2011, with mining and metal working be-ing the main recipients. Some labour-inten-sive industries such as wearing apparel andoot-wear have attracted a large number oprojects with modest amounts o capital,mainly rom Italy and Greece.

Te degree o oreign-aliate participa-tion in the Albanian economy is similar tothat in the Central European countries. Teturnover o oreign investment enterprises(FIEs, i.e. enterprises with 10 per cent ormore ownership by a oreign investor)represented 29 per cent o the countrys to-tal in 2010, and 51 per cent o the turno-ver in manuacturing. Both these sharesare 12 percentage points higher than theywere two years earlier. Te turnover o FIEsis generated by three main economic activi-ties, trade (24 per cent), manuacturing(21 per cent), and transport and telecom-munications (18 per cent). In manuac-turing, FIEs are most important in the

tobacco industry, petroleum products andthe production o metals in which theyproduce almost the total output o thecountry. As to employment in FIEs, the

EXECUTIVE SUMMARY


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highest number o workplaces has beenestablished in aliates in the productiono wearing apparel and shoes as well as inelectricity generation and telecommuni-cations. High oreign participation is theresult o avorable conditions or FDI in

these industries in the country, but is alsoa sign o weaknesses in the domestically-owned part o the economy, including anunderdeveloped local SME sector.

Te entry o oreign investors on asignicant scale into the nancial andtelecommunication services has increasedthe scope and eciency o those services.Investments in the energy sector have sta-bilized electricity supply.

Just like in the 2010 survey, three quar-ters o the respondents are quite posi-tive about the initiatives undertaken bythe Albanian Government in the areaso start-up and licensing, provisiono working permits and employmentregulation. About 40 per cent o theFIEs are by and large satised with thetax system and the employment regu-lations. Te majority o companies arepositive about the cost o labour, inter-action with authorities, and linguistic

as well as IC related skills available inAlbania.

Most o the companies were growing inrecent years, 56.6 per cent have moreemployees in 2010 than in 2008, 68.1per cent have higher turnover and 66per cent increased their market shares.In 2012, 57 per cent o the companies

would increase employment while 35per cent will keep it constant. About85 per cent o the companies havepositive expectations to increase theiractivities in Albania.

Members o the oreign business com-munity expect or the uture that the

Albanian Government urther im-proves the business climate by sim-pliying administrative procedures,improving licensing and implement-ing the rule o law. Tey wish urtherimprovements in tax administrationand inrastructure. In particular, theyidentiy as a hindrance to their busi-

nesses the relatively high level o theinormality, the uneven enorcemento the tax laws to all businesses anddiculties to get proper invoices es-

pecially rom micro and small enter-prises.

FDI stock in agriculture representedonly 0.3 per cent o the total FDI stockin Albania in 2010, and 2.1 per cent in

ood, beverages and tobacco manuactur-ing. Tereore, when ormulating its poli-cies towards FDI in agribusiness, includ-ing agriculture and related processing andservice activities, the Government needs toocus on the development impact o suchFDI, and not its volume, which is expect-ed to remain limited.

Direct positive impact o NCs in ag-riculture and related activities can be mostexpected in establishing highly productive

and competitive arms and business net-works. NCs may incorporate the (semi-)commercial Albanian armers into busi-ness networks, which in turn would con-tribute to employment opportunities andimproved access to nance and markets orsmallholder armers. Tis involvement canresult in technology transer, training andknowledge sharing along with the enorce-ment o production standards.

Negative impacts may also emerge

rom NC involvement in agribusinessi NCs grab the land o smallholders,crowd out small producers rom the localmarket and increase unemployment. Simi-larly, large supermarket chains may sourcecheaper products rom abroad and makelocal producers and retailers redundant. Inview o this possibility, provisional protec-tion to local producers can be envisaged.Simultaneously, government policy couldsupport the development o market-ori-ented arming, production networks andvalue chains based on the participation olocal producers.

Foreign investors have an importantrole in the Albanian ood processing in-dustry in terms o turnover (22 per cent)and employment (16 per cent). Teyconstitute the more productive segmento rms active in this industry and thisadvantage can be expected also o utureprojects. Albanian FDI policy may targetspecic investors interested in processing

local agricultural products. Te success osuch eforts depends on improvements inthe policy and institutional ramework setor agribusiness.


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INTRODUCTION

Te aim o this report is twoold. Oneis to provide oreign investors, potentialinvestors and interested experts with themost recent inormation on the develop-ment and impact o oreign direct invest-ment (FDI) and related policies in Albania.Te second is to help government authori-ties to understand better the potential and

efective impact o FDI on the Albanianeconomy and use this inormation in theirdecision-making.

In this second report on FDI in Alba-nia (ollowing a pioneering report, UNC-AD and UNDP, 2010) all data have beenupdated and reshly analysed. For thoseeatures which did not change much (e.g.the role o privatization in attracting FDI)the reader may reer to the previous report.Te current report has a new special ocus,

the situation o FDI and its developmentpotential in agribusiness (including agri-culture and the ood, beverages and tobac-co industry). Te conclusions and recom-mendations relating to FDI in this sectorhave taken into account, among others,the liberal approach o the Government oAlbania to oreign land ownership whichmay acilitate FDI.

Te basic patterns o FDI in Albaniaare linked with its geography and eco-nomic structure. Albania is a small coun-try with 2.8 million inhabitants, althoughnot so small in its subregional context, thehighly ragmented South-East Europe.1Its nominal GDP in 2010 at market ex-change rate was almost 9 billion, threetimes more than that o Montenegro and50 per cent more than that o the ormerYugoslav Republic o Macedonia (but onlyone quarter o Croatias). Size matters, justlike the level o development and geo-

1 South-East Europe includes Albania, Kosovo (UNMIK),

Bosnia and Herzegovina, Croatia, Serbia, Montenegro

and the ormer Yugoslav Republic o Macedonia.

graphic position when it comes to attract-ing FDI. Small countries usually all shortin attracting large NCs and industriesproducing or export markets o a massscale. While this limits the extent to whichit can compete with larger, (and similarlylow-cost) host countries in attracting ex-port-oriented FDI rom a range o sourc-

es, Albania, with its cheap and motivatedworkorce, has good potential to become aproduction and services hub or exports toItaly and Greece. Similarly in agriculturenot volume but specialization and Medi-terranean conditions can provide a win-dow o opportunity or exports to coun-tries urther to the North.

Rapid economic development andEU integration are high on the Govern-ments agenda. Te countrys main policies

over the past ew years have resulted in aliberalized economic ramework and im-proved conditions or doing business andor attracting FDI. Tanks to progress ineconomic transormation and a supportiveexternal environment, economic growthwas robust between 2000 and 2009. Al-bania achieved an average annual GDPgrowth o 6 per cent in this period. Teslowdown in 2010 and 2011 was also lessserious than in other countries o the re-gion. Still, per capita GDP at purchasingpower parity is only 25 per cent o theEU-27 average, less than o Bulgaria thelowest-income EU member State.2 Tusthe room or catching up is wide and thepotential role o FDI in transerring capi-tal and technology invaluable.

Albania has weathered the nancialcrisis relatively well. Positive rates o eco-nomic growth were achieved in each yearthrough 20082011. In act the country

had one o the highest rates o growth in

2 "GDP per inhabitant varied by one to six across the

EU27 Member States," Eurostat Newsrelease, 94/2009.


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Europe on average during this period. Tereason or this remarkable result has beenthe lack o enorced rebalancing o eitherthe current account or the scal decits.Both these decits are high in comparisonwith those o other European economies,

but adequate inow o oreign capital, alarge part o which has been FDI, acilitat-ed the nancing o decits. Te impact othe international nancial and economiccrisis on Albania was also mitigated by thelimited importance o the export channelto transmit the crisis to the country, andby Albanias relatively modest reliance oninternational nancial markets. Te mon-etary policy ramework, careul bankingsupervision and the exible exchange ratealso had stabilizing efects.

In the previous FDI Report (UNC-AD and UNDP, 2011) it was expectedthat sluggish economic growth would gohand in hand with a slow-down o FDI in-ows in 2010 and 2011. Fortunately thisexpectation proved to be alse: in 2010,oreign investors in Albania were still in anexpanding phase especially in the sectorsthey recently acquired by privatization orconcessions. Both economic growth andFDI changed to lower gear in 2011, but

despite a decline that went against theglobal as well as regional trend, FDI in-ows to Albania in 2011 were higher thanthey were in 2009.

Under the given challenging circum-stances it is all the more important thatthe Government o Albania embarks on

an economic policy with a strong empha-sis on the training o workers, that is sup-portive o private sector development andinternational investment in the country.

With respect to the latter, the aim is toattract more greeneld FDI in industries

producing or export, those improvingthe economic inrastructure and thosecontributing to an increase in the tech-nology level in the country. A liberal ap-proach to land ownership o legal personsregistered in Albania, be they domestic ororeign, allows investors to establish busi-nesses in this sector. In this way, agricul-ture and ood products may increasinglycontribute to exports or decrease importdependence.

In the chapters that ollow, this re-port rst examines the experience o Al-bania with FDI, ocusing on trends inFDI ows to the country, the importanceo FDI ows or the countrys balance opayments, main eatures and patterns oinward FDI and the relative importance ooreign investment enterprise activities inthe Albanian economy. Chapter II rst re-views the regulatory ramework and busi-ness environment or FDI in the countryand outlines policy options and measures

that could contribute to the eforts o theGovernment to develop a more efectiveand targeted FDI policy, then it presentsthe results o a recent oreign investorssurvey. In chapter III, the role and impacto FDI in agriculture and in agribusiness isanalysed and policy conclusions drawn orthat specic sector.


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13CHAPTER 1

FDI IN ALBANIA

CHAPTER

RECENT TRENDS, MAIN FEATURES

AND ROLE IN THE ECONOMY

A. Slight decline in 2011ollowing years o expansion

While most countries in South-East

Europe sufered rom sharply decliningFDI inows in 2010, Albania received an

increased amount. Ater 717 million in2009 (according to data that were revisedby the Bank o Albania since the publi-cation o the Albania FDI Report 2010and UNCADs WIR11) inows in 2010amounted to 793 million (table I.1).3In 2010 Albania had the second highestamount o FDI inows among South-

East European countries, ater Serbia. In2011 Albania attracted 742 million FDI,

3 Flow data reported by the Bank o Albania (BOA) in

the balance o payments are obtained rom the annu-al FDI survey or the period 2008-2010. Data or 2011

are preliminary, based on monthly bank settlements

and subject to later revision.

TABLE I.1.

FDI inows: world, South-East Europe and Albania, 2005-2011 (Millions o euro)

Host economies 2005 2006 2007 2008 2009 2010 2011

World 782 673 1 164 682 1 534 682 1 208 931 802 041 936 640 1 085 242*

South-East Europe 3 870 7 885 9 384 8 663 5 446 3 109 4 745*

Albania 213 259 481 665 717 793 742

Source: UNCTAD, WIR11 and Global Investment Trends Monitor No.8 and Bank o Albania. *UNCTAD estimate.

FIGURE I.1

Shares o Albania in FDI inows to South-East Europe and the world, 19902010

0

5

10

15

20

25

30

0.00

0.02

0.04

0.06

0.08

0.10

1990-2000 2005 2006 2007 2008 2009 2010 2011

annual

average

3 Flow data reported by the Bank o Albania (BOA) in the balance o payments are obtained rom the annual FDI survey or

the period 2008-2010. Data or 2011 are preliminary, based on monthly bank settlements and subject to later revision.

Source: Based on data rom UNCTAD, FDI/TNC database (www.unctad.org/distatistics) and Bank o Albania.

Percentage share in inflows to South-East Europe (left scale)

Percentage share in world inflows (right scale)


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somewhat less than in the previous year.Tis decline went not only against theglobal recovery but also against the FDIupswing in the two largest South-East Eu-ropean countries, Croatia and Serbia.

Te share o the FDI inows o Alba-nia in the world total remains marginal: itwas below 0.1 per cent (gure I.1), eventhough inows to Albania grew by tentimes since 2000, according to UNCADdata. Te countrys weight as a host toFDI in the South-East European regionhas, however, grown remarkably, especiallybetween 2007 and 2010, when inows to

South-East Europe declined while owsto Albania kept growing (table I.1, gureI.1). Te FDI decline in 2011 reduced Al-banias share both in global and in regionalinows.

Although the value o FDI ows to Al-bania is modest due to the small size o thehost economy, its relative importance orthe Albanian economy is rather high. Teratio o inows to gross xed capital or-mation (GFCF) increased rom less than10 per cent in 2006 to 25 per cent in 2009and to as high as 33 per cent in 2010 (tableI.2)4. Te big leap in 2010 was not only

4 FDI does not necessarily contribute to gross xedcapital ormation and the compilation o the two

data sets (or FDI inows and or GFCF) ollow difer-

ent methodologies.

TABLE I.2

FDI inows as a percentage o gross fxed capital ormation, South-East Europeancountries, 20042010

Region/country 2004 2005 2006 2007 2008 2009 2010

South-East Europe 16 16 24 33 27 22 13

Albania 13 9 9 16 21 25 33

Bosnia and Herzegovina 27 20 25 46 17 6 2

Croatia 12 17 27 33 32 19 4

Montenegro .. .. .. .. 56 208 130

Serbia .. .. .. .. 23 20 15

The FYR o Macedonia 34 10 37 43 28 11 17

Source: UNCTAD, WIR11, annex tables.

0

100

200

300

400

500

600

700

800

Inflow

Outflow

2004 2005 2006 2007 2008 2009 2010 2011

FIGURE I.2

Albania: FDI inows and outows, 20042011 (Millions o euro)

4 FDI does not necessarily contribute to gross xed capital ormation and the compilation o the two data sets (or FDI inows

and or GFCF) ollow diferent methodologies.

Source: UNCTAD, FDI/TNC database, based on data rom the Bank o Albania.


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15CHAPTER 1

the result o higher FDI but also o a se-vere decline in GFCF. In 2011 when FDIdeclined and GFCF recovered, the ratio othe two went back to 25 per cent. Amongcountries o the region, only Montenegrohas attracted more FDI relative to GFCF

in 2010. FDI in Albania has stimulatedeconomic growth, especially through proj-ects in services and inrastructure. As a re-sult, the overall investment rate o Albaniarelative to GDP (33 per cent) was muchhigher than the regions average (20 percent) in both 2010 and 2011.

Although the analysis in this report o-

cuses only on inward FDI, it may be notedthat Albanian FDI to other countries hasbeen modest over the past ew years andespecially low, amounting to 9 millionin 2010 and 30 million in 2011 (gureI.2). Outows o FDI rom Albania tar-

geted neighbouring economies, especiallyKosovo and the ormer Yugoslav Republico Macedonia.

Te net balance o FDI inows andoutows is positive and high. It nancedabout hal o the countrys current ac-count decit over the period 20062009and as much as 77 per cent in 2010 (tableI.3 and gure I.3). Tis was all the more

TABLE I.3

Albania: external sector indicators, 20062011

(millions o euro and percentage o GDP)

Indicators 2006 2007 2008 2009 2010 2011

Current account balance -471 -824 -1381 -1321 -1019 -1145

In per cent o GDP -6.6 -10.5 -15.6 -15.2 -11.5 -12.5

Export o goods 631 786 917 751 1172 1406

In per cent o GDP 8.8 10.0 10.3 8.6 13.1 15.3

Balance on goods -1659 -2104 -2431 -2304 -2083 -2242

In per cent o GDP -23.1 -26.9 -27.4 -26.4 -23.4 -24.4

Export o services 1157 1421 1688 1771 1702 1747

In per cent o GDP 16.1 18.2 19.0 20.3 19.1 19.0

Balance o services -32 19 69 174 182 135

In per cent o GDP -0.4 0.2 0.8 2.0 2.0 1.5

FDI inows 259 481 665 717 793 742

In % o GDP 3.6 6.1 7.5 8.1 9.0 8.1

FDI outows -8 -17 -55 -28 -5 -30

In % o GDP -0.1 -0.2 -0.6 -0.3 -0.1 -0.3

Balance on FDI 250 464 610 689 784 712in per cent o current account decit -53.1 -56.3 -44.2 -51.8 -77.4 -62.2

Source: Bank o Albania and INSTAT; 2011 GDP estimated at 9192.6 million.

0 500 10001500 1000 500

Current balance million

Balance on FDI, million

Source: Based on data provided by the Bank o Albania.

FIGURE I.3

Albania: Current account balance and FDI balance (net FDI) in 20062011

(Millions o euro)


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important as the current account decitgrew three times between 2006 and 2008.2010 marked a turnaround with a shrink-ing current account gap to 12 per cent oGDP (gure I.3) as a result o exception-ally good export perormance coupled

with modest import growth. Accordingto preliminary results, in 2011 the cur-rent account decit expanded again and62 per cent o the decit could be coveredby FDI.

Albania ranks relatively high in termso UNCADs Inward FDI PerormanceIndex which measures FDI inows rela-tive to the size o the economy. In 2010,Albania was 18th among the 141 coun-tries covered (table 1.4). Tis represents

a rapid improvement rom its position o68 in 2005. In 2005, Albania was rankednext to Poland, now it is next to Chilewhich has one o the most FDI-orient-ed economies in the world (UNCAD,WIR06and WIR10). Te improved posi-tion is partly the result o rapid increaseo FDI ows to the country, much oit in response to an improved businessenvironment and opportunities openedup by privatization o state-owned enter-prises.

Te FDI Perormance Index rank-ing achieved by Albania is better than thecountrys rank by the Inward FDI Poten-tial Index. In the latter Albania ranked81st in 2009 (the most recent year orwhich data are available), ar behind otherEuropean countries.5 Tis low rankingwas due to, among other things, to poorinrastructure, energy shortalls and mod-

5 The Inward FDI Potential Index is based on 12 indica-tors including among others the level o develop-

ment in general and o inrastructure in particular

(UNCTAD, WIR02).

est research and development activity.As pointed out in chapter II, there havebeen rapid improvements lately in Albaniaprecisely in those elds o inrastructure,such as energy supply and roads which hadbeen identied as bottlenecks in interna-

tional comparisons. Foreign companieshave acquired concessions to develop theseservices and are improving their supplyand thereby, conditions or urther invest-ments in the other sectors.

B. Characteristics o FDI inows

1. FDI by orm

FDI can take the orm o equity in-vestment, reinvested earnings and other

capital covering mainly loans rom theparent company. As Albania is at an earlystage o FDI attraction, most o the FDI(almost 80 per cent in 2010 and evenmore in 2011) comes in the orm o equityinto new ventures and as capital increasesin existing oreign investment enterprises(table I.5). Reinvested earnings accountor about 20 per cent o the inows whileFDI in the orm o other capital (mostlyintra-company loans) is usually negligibleand turned negative in 2009 and 2011.Repayment o intra-company loans usu-ally happens when the parent company isin nancial diculties, which could havebeen the case with Greek investors in Al-bania.

Income o the oreign investors in Al-bania amounted to 81 million in 2011,down rom 288 million in 2010. Tisconsiderable contraction may reect some

worsening in the business environment,like contraction o demand. Earnings o

the oreign investors corresponded to morethan 10 per cent o the FDI stock in theprevious years (table I.6) and are likely tohave allen to a raction o that in 2011. In

TABLE I.4

Albanias ranking according the Inward FDI Perormance Index and the Inward FDI

Potential Index, selected years

Indicators 1995 2000 2005 2009 2010

Inward FDI Perormance Index 39 58 68 23 18

Inward FDI Potential Index 115 101 83 81 ..

Source: UNCTAD, WIR11.

Note: The latest year or which data is available or some variables included in the Inward FDI Potential Index is 2009.


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17CHAPTER 1

2008 and 2009, investors in Albania en-joyed a good prot rate, one o the highest

among the South-East European countries(no data or 2011 are available). Amongcountries o South-East Europe and thenew EU member countries o Central andEastern Europe, it was surpassed only bythose in the Czech Republic and Estonia,both o which have mature FDI projectswhich usually have higher income-generat-ing capacities than new projects. O the FDI-related income generated in Albania, 79 percent was reinvested in 2011, up rom 65 percent in 2010. Tis is high in internationalcomparison and is another characteristico projects in an early, build-up stage.

2. FDI inows by mode o entry and

economic activity

Foreign investors enter a country in theorm o greeneld investments or cross-border mergers and acquisitions (M&As).Based on data compiled by UNCAD

(box I.1) during 20032011, the numbero greeneld projects in Albania was 84(table I.7). It must be noted, however,thatseparate shops o a supermarket chain or

local branches o a commercial bank ap-pear as separate investment projects. Te

year with the highest number o new projectswas 2008 and with the lowest 2009-2011.

Tus a decline in new projects can beobserved in the years o the global crisis.Also regarding the value o projects and thenumber o uture jobs the largest commit-ments were made in the years 20062008while very small amounts were attractedin the subsequent two years ollowed by aslight recovery in 2011.

TABLE I.5

Albania: composition o FDI inows by orm, 20062011

(Millions o euro)

Components 2006 2007 2008 2009 2010 2011

FDI Total 259 481 665 717 793 742

Equity 199 487 420 516 600 755Reinvested earnings 0 0 182 229 186 64

Other capital 60 -6 63 -27 7 -77


TABLE I.6.

Albania: income payments on inward FDI and reinvested earning, 20082011

(Millions o euro)

Indicators 2008 2009 2010 2011

Direct Investment Income 197 321 288 81

repatriated income on equity 10 91 94 14

reinvested earning 182 229 186 64

income on debt 6 1 8 4

FDI stock(inward) 2040 2233 2640 .

FDI related income as per cent o FDI inward stock 9.7 14.4 10.9 .

Reinvested earning as per cent o FDI income payments 92.4 71.3 64.6 79.0


Box I.1Denitions and sources o the data on greeneld projects

Data on greeneld FDI projects used in this study are based on the inormation compiledby UNCTAD rom Di markets o the Financial Times Ltd. Di Markets tracks all new invest-ment projects in host economies and expansion o existing investments. While there is nominimum size or a project to be included, as a selection criteria or inclusion in this databasean investment project has to create new direct jobs and new capital investment. Inormationsources to collate and validate those projects include Financial Times newswires, nearly 9,000media sources, project data received rom over 1,000 industry organizations and investmentagencies, and data purchased rom market research and publication companies. The data arecross-reerenced against multiple sources and over 90 per cent o them are validated withcompany sources.

Source: UNCTAD, WIR10.


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Te largest number o greeneld proj-ects was initiated in sales and marketingollowed by transport and other businessservices (table I.8). Overall, the largestnumber o investment projects was inthe services sector. Te highest amountso investment commitments were madein energy and the production o con-struction materials. Te distribution oprojects by clusters reveals that the high-est number o them is in energy, construc-tion and retail trade. Four projects arereported in the ood beverages and to-bacco industry but there were none in

agriculture.

Te largest investor, with the high-est amount invested in greeneld proj-

ectsis itan Cement rom Greece whichannounced its second actory in 2011.

Another large investor is MoncadaCostruzioni (Moncada Energy Group)rom Italy. Te Italian ood-store co-operative Conad received a competitorin the retail sector, the French Car-reour. 29 per cent o the greenieldFDI projects come rom Italy, 7 percent rom the United States, 6 per centrom Greece, urkey and Italy each.he largest new project announced in2010 was Hidroelektra Niskogradnjarom Croatia in the construction sector.

Smaller projects in services came romAustria, Bosnia-Herzegovina, Serbia. Inthe oil sector there were two new proj-ects announced, one by the exploration

TABLE I.7.

Greenfeld FDI projects in Albania: number, and commitments with respect to jobs

and total investment, 20032011

YearNumber o

projectsTotal number

o jobsTotal investment

(Millions o U.S. dollars)

2003 9 643 3002004 7 428 141

2005 13 2 399 668

2006 11 2 196 2 346

2007 8 2 738 4 454

2008 16 3 139 3 505

2009 7 914 124

2010 6 320 68

2011 7 1 311 488

Total 84 14 088 12 094

Source: Di markets, Financial Times Ltd (www.dimarkets.com).

TABLE I.8

Albania: Number o greenfeld FDI projects by business activity, 20032011

Activities 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total

Extraction 2 1 3

Manuacturing 3 4 3 1 3 5 1 2 22

Electricity 1 1 3 2 7

Construction 1 1 1 1 4

Sales, marketing, retail 1 1 3 5 7 4 2 3 26

Transport, business

services2 2 6 3 1 1 3 2 2 23

Total 9 7 13 11 8 16 7 6 7 84

Source: UNCTAD, based on Di markets, Financial Times Ltd (www.dimarkets.com).


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19CHAPTER 1

and development company Sonoro romCanada and another by a company romSwitzerland building pipelines.

FDI entry through cross-borderM&As in a transition economy like Al-

bania usually occurs through privatizationo state-owned enterprises. Tere has beena considerable inow o FDI to Albaniathrough the privatization process, involv-ing both privatizations o small and me-dium-sized enterprises (SMEs) in a num-ber o industries, and the privatizationo large enterprises in strategic industries(such as banking, telecommunications andenergy), that have attracted participationby NCs. It is mainly the privatization othe strategic-industry enterprises which

has generated high FDI inows in someyears. In 20042008, 24 per cent o thetotal FDI came as a result o privatizations;

in 2009 this share was as much as 26 percent.6 Tere was no new privatization dealcompleted in 2010 and 2011. (See chapterII on the Governments privatization andconcession policy and the main achieve-ments.) Te sectoral composition o FDIinows to Albania underwent some im-portant changes over the 20062011 peri-od or which data are available. Tere wasa rapid increase o investments in industry(including mining and manuacturing)initially (table I.9).

6 Based on data provided by the Bank o Albania or FDI

inows and Ministry o Economy, Trade and Energy and

Ministry o Finance or FDI inows rom privatization.

In 2011 FDI inows increased onlyin the electricity and gas sector as well asin distribution and other services whileit declined in all other activities, com-pared with the previous year. Some uc-

tuations over the six year period reectimportant privatization deals like thosein telecommunications. he priva-tization o the oil reinery complexARMO or about 125 mil lion wasthe main actor that led to a large in-crease o FDI in manuacturing in 2008.In later years FDI in mining o oil, gasand metal ores increased in the wake oconcession granted to NCs (see chap-ter II). Te highest amount o FDI wentinto the services sector, most notably

into nancial intermediation. High FDIin nancial services in 2008 was the resulto the purchase o shares o Banka Popul-

lore and Union Bank by oreign investors.Since then, FDI in nances has subsidedmost probably linked to the impact o thenancial crisis in Europe.

Te type o FDI Albania has receivedso ar has beenconcentrated primarily inthe production o services or the domesticmarket. But recent inows went also intomanuacturing, mining and energy, someo which also generated exports. From abalance-o-payments perspective, it would

be advantageous or Albania to attracteven more FDI which generates exports ogoods and services in addition to that serv-ing the domestic market.

TABLE I.9.

Albania: FDI inows by main economic activity

(millions o euro)

Activities 2006 2007 2008 2009 2010 2011

Agriculture, hunting, shing 2 2 -54 -9 0 -

Construction 8 51 147 19 44 -Industrya 69 56 369 300 394 351

Electricity and gas 0 4 2 143 88 103

Telecommunications 62 196 -61 84 97 67

Financial intermediation 30 136 167 120 138 110

Distribution, other services 88 25 95 59 33 111

TOTAL 259 480 665 717 793 742


a Dened as manuacturing, mining and quarrying.


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C. Main eatures o FDIstock in Albania

1. Size and composition o FDI stock

Inward FDI stock in Albania reached2,640 million in 2010, according to theresults o the Bank o Albanias (BOAs)most recent survey o oreign investmententerprises (FIEs) (box I.2). Tis level is 18per cent above the level o the previous yearand 45 per cent higher than in 2007. (Teoutward FDI stock o Albania amountedto 115 million in 2010 meaning practi-cally no change against the previous year).

Among the more than one thousandFIEs in the BOA survey 77 per cent weremajority oreign-owned in 2010. As to thesize o the companies, 31 per cent weresmall and 19 per cent were o mediumsize. In a regional perspective, 73 per cent

o the companies were registered in cen-tral Albania and the rest were distributedin the other preectures o the country inalmost equal percentages.

FDI stocks change due to new inows,the termination o past investments andalso as a result o exchange rate movementsas national currency data are converted atthe exchange rate on the last day o the

year; in addition, urther adjustments aremade to represent changes in the value othe capital stock. In Albania inows re-sulted in an increase in the stock value by793 million in 2010, but the other ad-

justments item and exchange rate changesdecreased the stock by 329 and 58 mil-lion respectively (table I.10).

Albania has the lowest FDI stockrelative to GDP among the countries oSouth-East Europe (table 1.11) which isquite diferent rom the relative size o

Albanias inows in the years since 2008.Tis is due to the act that FDI in Albaniais a very recent phenomenon and much othe stock has been accumulated over thepast ew years only, while the other coun-ties have received FDI or a longer periodo time. Albania has also had more rapideconomic growth in recent years than its

regional peers, which has lowered themagnitude o its FDI per GDP indica-tors.

Box I.2

Collection o data on FDI and activities o TNCs in Albania

FDI ow and stock data or the period 2008-2010 are derived rom the Bank o Albaniasannual survey o companies with at least 10 per cent oreign ownership. Flow data by activitiesor the survey run in 2011(with data obtained or 2010) are estimated and are subject o revi-sions in the next FDI survey. O the 2300 active FIEs in the business statistical register Bank oAlbania managed to collect data or about 1060 FDI enterprises including the most importantones. The results allowed Bank o Albania to update the FDI ow statistics and to provide FDIstock data by various characteristics. Parallel to the Bank o Albania survey, INSTAT carries out astructural business survey (SBS) covering all active companies in the country. From the resultso this survey it derives the data or the oreign investment enterprises to provide the statisticson the characteristics o oreign afliates examined urther below (section D).

Source: Bank of Albania.

TABLE I.10.

Albania: composition o change in FDI stock, 2010 (Millions o euro)

Indicators

Position

at end o

2009

TransactionsPrice

changes

Exchange

rate

changes

Otheradjustments

Position at endo 2010

Direct investment

in Albania2,233 793 0 -58 -329 2,640

Equity capital and

reinvested earnings2,148 786 0 -57 -328 2,550

Other capital 86 7 0 -1 -2 90



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21CHAPTER 1

2. FDI stock by main economic activities

Te composition o FDI stock under-

went signicant changes in the years 2008-2010. In 2008 the services sector domi-nated with 66 per cent o the total FDIstock; the share ell to 58 per cent in 2010.During the three years the FDI stock inservices remained almost unchanged whileit expanded in some other economic ac-tivities. Te main beneciary was mining.Te share o mining sector FDI increasedalmost tenold in three years rom neg-ligible to almost 13 per cent o the FDIstock. (Tis is the result o the concession

policy o the Government, outlined below

in chapter II.) A similar development tookplace in the energy sector which increasedits share rom less than 1 per cent in 2008

to almost 5 per cent in 2010.

elecommunications had been amongthe most dynamic service activities in Al-bania. Tey developed mainly via priva-tization and subsequent investmentso oreign investors and to some extentthrough domestic investments. But FDIin this sector has subsided in more re-cent years and its share in FDI stock ellto 15 per cent in 2010. Te rst mobileoperator in Albania was launched in May

1996 by Albanian Mobile Communica-

TABLE I.11.

Inward FDI stock as a percentage o GDP in Albania and other countries

o South-East Europe, 20042010

Countries 2004 2005 2006 2007 2008 2009 2010

Albania 11 12 15 23 22 29 37

Bosnia and Herzegovina 28 28 33 44 39 45 43

Croatia 31 33 56 77 45 57 57

Former Yugoslav Republic

o Macedonia41 36 42 46 42 48 48

Montenegro .. .. .. .. 74 124 138

Serbia .. .. .. .. 35 44 47

Source: UNCTAD, WIR11, annex tables.

0

20%

40%

60%

80%

100%

Agriculture, fishing

Mining and quarryingManufacturing

Electricity, gas

Construction

TradeHotels, restaurants

Transport, communication

Financial intermediation

Real estate, businessactivities

Other activities

2008 2009 2010


FIGURE I.4.

Albania: Inward FDI stock by main economic activity, 2008-1010 (percentage share)


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tion (AMC), a state-owned company atthat time. In 2009, 85 per cent o AMCsshares were sold to the Cosmote (Greece)-elenor (Norway) Consortium. VodaoneAlbania, an aliate o Vodaone (UnitedKingdom) was the second cellular op-

erator to be licensed in Albania in June,2001. Eagle Mobile entered the market inOctober 2008 and the ourth mobile op-erator, a joint venture between Albaniancompanies and Kosovo Post & elecom-munication received its license in 2009.Te xed telephone operator Albtelekomsh.a. was privatized through sale o sharesto Calik Enerji elekomnikasyon (ur-key) and its partner urk elekom. Due topost-privatization investments and invest-ment by thenew entrant, the number o

xed-line telephone connections in Alba-nia rose by 30 per cent to 360,000 sub-scribers and those o mobile phones morethan tripled to over 4.16 million subscrib-ers between 2005 and 2009. Tis level omobile phone penetration is similar tothat in developed countries such as Ger-many. With the spread o mobile internetthe lack o xed-line connections loses itsimportance.

Te nancial services industry has

also undergone sweeping changes dueto FDI. Te entry o oreign banks inthe 2000s and the takeover o domesticbanks consolidated the banking system.By the end o December 2008, oreigncapital in Albanian banking is estimatedto have increased to ALL 50.3 billion or91.8 per cent o the total (rom 88.8 percent in end-2007), while domestic capi-tal is estimated to have allen to ALL 4.5billion or 8 per cent o the total (Banko Albania, 2009). Te largest oreigninvestors in banking in Albania are romAustria (Raifeisen International Bank),Greece (National Bank o Greece, Al-pha Bank Greece, Emporiki Bank oGreece), urkey (Calik Sekei) and Italy(Banca Veneto, Intese San Paolo). In2009, Greek banks controlled roughly30 per cent o the market in Albania.United Bank o Albania is 4 per centowned by the Government o Albania;Arab nancial investors account or the

bulk o the rest.

Overall, oreign banks appear to havehad a positive inuence on the eciency

and stability o the banking system in theeconomy. Tey have strengthened riskmanagement and corporate governancethrough a more ecient allocation ocapital and increased competition, andhave introduced more sophisticated -

nancial services. As a result the bankingindustry has expanded rapidly, support-ing economic growth, and non-perorm-ing loans declined until 2008. New andmore up-to-date banking services havebeen introduced. However, the overallpositive eatures by international bank-ing standards do not satisy all the needso the Albanian economy yet. SMEs stillhave limited access to bank nancingand there is need or improved creditguarantee schemes.

More recently, the transmission othe efects o the international nancialcrisis through banking relationships hasraised concerns in Albania and othercountries o South-East Europe. In Al-bania, however, the banking industry isin good shape not only due to its priva-tization and the involvement o oreignbanks but also to monetary policy whichprovided timely support via two cutsin the central banks interest rate and

liquidity injection. Prudent supervi-sion and regulation helped ensure thatbanks entered the crisis in good shapeand could rely on substantial solvencyand liquidity bufers. Tese were urtherboosted by oreign parent-bank support(IMF, 2010). But in 2010 and 2011 theshare o non-perorming loans grew andthe amount o new loans to the businesssector declined. Credit conditions havebecome tighter and the private sector hashad diculty meeting its obligations.Overall business sentiment deterioratedand the construction sector was orcedto contract. New FDI in the bankingsector is still substantial but signicantlylower than beore 2008.

Wholesale and retail trade becamemore important receivers o FDI in2007 but their share in total FDI hasdeclined in subsequent years. Te Eu-ropean supermarket chains that domi-

nate the retail sector in the new memberstates o the EU are just at an early stageo expansion in Albania. Besides theMERO Group (Germany), which has


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23CHAPTER 1

invested in a wholesale store in Albania,the Italian cooperative ood store Conadis the most important oreign rm op-erating in wholesale and retail trade ser-vices.

Real estate activities by oreign a-liates are also marginal, accounting oronly 2 per cent o the FDI. Slightly morenoteworthy is the development o otherbusiness activities including consulting,I and call centre services, with almost4 per cent o the FDI stock in 2010.Business process and inormation tech-nology services have undergone somegrowth since 2007 and may have goodprospects, also in comparison with othercountries in the region. Proximity to It-

aly and good Italian language skills in agrowing section o the Albanian popula-tion enable the country to attract Italianrms to set up business support and callservice centres. Pioneers in this respectinclude Italys Answer Group and eleperormance. More training o the la-bour orce as well as better xed-line tele-phone services have been identied as ac-tors o key importance or urther growtho business services. Te hotels and restau-rants industry accounts or only 1 per cent

o the FDI stock, although the country has

good natural potential or attracting tour-ism. Tere is also very little investment inlegal and consulting services, the presenceo which would be necessary or investors.FDI in these services may expand as de-mand or them grows.

A detailed breakdown o the FDI stockin manuacturing reveals the dominanceo capital intensive industries. Te brancho manuacturing with the largest FDIstock is the production o non-metallicmineral products (construction mate-rials) (gure I.5). It is ollowed by thepetroleum productsbased on local natu-ral resources. Another important invest-ment target, the production o basic andabricated metals, also uses local ores. A

urther industry with relatively high FDIis the production o ood and beverages.Tis is based both on imported as well ason local raw materials. 16 per cent o themanuacturing FDI stock was investedin the production o textile and leather,labour intensive activities with good ex-port potential. Te higher-technology in-dustries, like the production o electricalmachinery and vehicles are almost entirelymissing not only among the investmenttargets but also in the Albanian economy

as a whole.

Food, beverages and tobaccoTextiles

Leather

Wood

PaperChemicals

Rubber and plasticNon-metallic mineralsMetals

Machinery

Electrical equipment

Petroleum productsManufacturing n.e.c.

0

20%

40%

60%

80%

100%

2008 2009 2010

FIGURE I.5.

Albania: Inward FDI stock in manuacturing by industry, 2008-1010 (percentage share)



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3. FDI stock by country o investor

As is usual with small countries, Alba-nia receives an exceptionally large part oits FDI rom a neighbouring country inits case, Greece (table I.12 and gure I.6).

FDI rom Greece accounted or 27 percent o the FDI stock in 2010, teen per-centage point less than three years beore.A deep debt crisis in Greece which chal-lenged the nancial stability o the larg-est companies and banks is likely to haveplayed a role here. It is also important tonote that FDI in Albania has diversiedto activities where Greek investors do nothave rm-specic advantages. Greek FDIocuses on telecommunications and nan-cial intermediation where the capital stock

even declined since the oreign takeover. Itis due to the all in Greeces FDI that theshare o EU members has declined in theAlbanian FDI stock rom almost 80 percent in 2006 to 67 per cent in 2010; FDI

TABLE I.12.

FDI stock in Albania by region/home country, 20052010 (Percentage o total)

Region/country 2005 2006 2007 2008 2009 2010

Developed countries 85 88 82 81 82 82

European Union 78 79 70 69 70 67

o which:

Austria 5 9 8 9 10 14

Germany 3 3 3 3 3 3

Greece 55 53 42 34 30 27

Italy 12 11 12 16 16 15

North America 6 7 4 5 7 12

o which:

United States 4 4 4 4 2 1

Developing countries/regions 12 10 16 16 16 15

Arica 0 0 0 0 0 0

South America - - - - - -

Asia and Oceania 12 10 16 16 16 15

Lebanon 3 2 2 2 2 1

Turkey 6 6 8 9 10 11

South-East Europe 3 2 2 2 2 1

International Organizations 0 0 1 1 1 1

Source: Based on data provided by the Bank o Albania

rom urkey has replaced it.Te second largest source-country or

FDI in Albania is Italy, with 15 per cent

o the stock in 2010, gaining three per-centage points in three years. Investmentsoriginating rom Italy ocus mainly onmanuacturing and construction. While

they are also present in the services sector,mainly in nancial intermediation, nanceis still under-represented in Italian FDI in

Albania, compared with FDI rom othermajor investor countries. Another peculiareature o Italian investment is that there

are many small- and medium-size rmsamong the investors.Austria is the third most important

source country with 14 per cent in 2010ollowing an increase o six percentagepoints since 2007. Almost all o the Aus-trian investment is in the banking sec-tor, mainly as a result o the purchaseo the Savings Bank o Albania by Rai-eisen International, the largest bank in

Albania with 30 per cent o the bank-ing assets in the country (2009). Cana-

da is ourth in the ranking o investingcountries in 2010, partly due the Bank-ers Petroleum Ltd., a Canadian-basedoil and gas exploration and productioncompany developing large oil and gas

reserves in the country. Te importanceo urkish investors has also increased,to 11 per cent in 2011 rom 8 per cent

in 2007. Investors rom urkey are pres-ent in a number o activities. German,Dutch and Swiss investors that normallyrank among the rst ve in importance


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25CHAPTER 1

in other countries o Central and East-ern European countries play a marginalrole in Albania. Teir limited presence

could be due to the relative lack o in-vestment opportunities in medium- andhigher-technology manuacturing.

Due to nancial instability in the

main source economies o FDI in Al-bania, eforts are necessary to diversiyto new sources o FDI. But the country

may also benet rom an eventual capitalight rom Greece i companies leave thatcountry due to diminishing demand andincreasing tax burden.

Greece 42%

Italy 12%

Austria 8%

Canada 0%

Turkey 8%

Netherland 1%

Switzerland 1%

Germany 3%

Kuwait 5%

France 1%

Other countries 19%

2007

2010

Greece 27%

Italy 11%

Austria 15%

Canada 14%

Turkey 11%

Netherland 3%

Switzerland 2%

Germany 3%

Kuwait 3%

France 2%

Other countries 9%

FIGURE I.6.

Albania: geographical breakdown o inward FDI stock by source country, 2007 and 2010

Source: Data provided by the Bank o Albania.


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D. Eects o FDI: the role ooreign afliates in theAlbanian economy

Tis section looks at some importanteatures o oreign aliates with at least

ten per cent oreign ownership, called or-eign investment enterprises (FIEs) (boxI.3), with a view to understanding theircontribution to the Albanian economy.

Tere was an important increase inthe share o FIEs in the Albanian econo-my between 2007 and 2010 (gure I.7).Tis change was most pronounced or in-vestment and turnover while in terms oemployment the increase was small. Tisis especially the case in manuacturingemployment where the share o FIEs stag-

nated, while it increased in turnover.

Te number of FIEs is marginal rela-tive to the total number o enterprises:only 2.1 per cent o the total number oactive enterprises in 2010 had oreign in-vestment (gure I.7). Tis is neverthelessmore than two times higher than in 2007.Te share is larger in manuacturing (5.3per cent in 2010). In some activities thenumber o enterprises is small in abso-lute terms but a larger than average pro-portion o them is FIE. FIEs accountor a high proportion o companies inthe extraction o petroleum (more thanhal), in the production o other trans-port equipment, electrical machineryand petroleum products, as well as in the

electricity and gas sector (more than onethird, gure I.8). Tese are the activitieswith very high capital intensity whereSMEs, usually domestically owned, are

rare. In other activities like retail tradeor hotels and restaurants local SMEs arenumerous and dominate.

Te share o FIEs in the Albanianeconomy is much higher in terms oallother indicators than in the number o

enterprises (gure I.7). Tis reects theact that the oreign aliates are muchlarger in size; they have many moreemployees and higher turnover per en-terprise than the domestically-ownedcompanies. Larger size and more eco-nomic power may add positively to thedomestic economic structure but mayalso result in unequal competition withdomestic rms, especially SMEs. Tesectoral composition o oreign aliatesdifers rom that o Albanian enterprises.

Te main distinguishing eature is thehigh percentage o oreign aliates inthe manuacturing sector despite a rela-tively small share o manuacturing intotal FDI stock.

As to employment, the share oFIEs is 18 per cent or the economy as a

whole, but much more (39 per cent) inmanuacturing (gure 1.7). Teir sharein employment is relatively small com-pared with the share in turnover whichis a sign o the higher labour productiv-

ity o the oreign sector. More FDI canresult in higher turnover and labour pro-ductivity but not necessarily in higheremployment. Te lead o the oreignsector in terms o labour productivityis more pronounced in capital-intensiveindustrial activities like non-metallicminerals, basic metals and general ma-chinery. All these positive eatures o theoreign sector support an FDI-orientedgovernment policy in manuacturing. FDIin this sector can be particularly develop-ment-augmenting. Crowding out is not adanger as domestic companies are absentrom or play a limited role in several in-dustries. But uniorm regulation must bein place to ensure air competition and therecognition o competition rules.

Te turnover o oreign aliates rep-resents 29 per cent o the total, but inmanuacturing, it is much higher, at 51 percent (gure 1.7). Both shares are higher by12 percentage points than they were two

years earlier. Te overwhelming part othe turnover o FIEs is generated by ourmain economic activities, manuacturing,transport and telecommunications, con-

Box I.3

Data on oreign investment enterprises

Data on oreign investment enterprises have been gathered by Albanias INSTAT in theramework o its Structural Business Survey (SBS), which closely resembles that o the Bank oAlbania (BOA) survey or FDI statistics (see box I.2.). Both cover enterprises with 10 per centor more ownership by a oreign investor (FIEs). Data are grouped by economic activities ac-cording to NACE (Nomenclature Gnrale des Activits conomiques dans les CommunautsEuropennes) classication at the two-digit level. However, the coverage by economic activity

is only partial, and excludes enterprises active in agriculture, nancial intermediation, educa-tion, health, and cultural activities. Data were weighted in the same way as other SBS data;thus comparability is achieved which allows calculating the share o the oreign investmententerprises (FIEs) in the Albanian economy by var ious indicators covered by the SBS.

Source: INSTAT


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27CHAPTER 1

Source: Based on data rom INSTAT.

Source: INSTAT, structural business survey (SBS).

0

10

20

30

40

50

60

2007 2008 2009 2010

FIGURE I.7.

Share o oreign investment enterprises in the Albanian economy, total and in

manuacturing in terms o number o enterprises, employment, turnover and

investment expenditure, 20072010 (Per cent)

Enterprises Employment Turnover

0

20

40

60

80

100

FIGURE I.8.

Share o oreign investment enterprises in manuacturing in Albania by NACE 2

digit industry, in terms o number o enterprises, employment and turnover, 2010(Per cent)


28/67


struction and trade. As to manuactur-ing the FIEs are most important in thetobacco industry, petroleum products,basic metals and other transport equip-ment where they produce almost thetotal output o the country (gure I.8).

o a large extent this is the result o theprivatization and concession policy o theGovernment.

Te investment activity o oreignaliates amounts to hal o the value ototal investments in in Albania (gureI.7). Investment expenditures per unit oturnover are higher in the FIE sector thanthe average or the Albanian economy asa whole. Increased investment due to thegreater propensity o oreign rms to in-

vest is a clear advantage derived rom FDI.Investment is especially high in telecom-munications ollowing oreign takeovers.Te share o FIEs in manuacturing in-vestments is smaller than their share ininvestments in the economy as a wholein 2010. Also, the investment propen-sity o FIEs in manuacturing tends tobe lower than that o the oreign sectortaken as a whole. Te latter can be a dan-ger or the uture when production costsrise and technological development are

needed. FDI policy and promotion maytarget oreign manuacturing companieswell established in the Albanian economyto carry out modernization, ollow-up in-vestment and upgrade the competencies olocal aliates.

In conclusion, Foreign investment enterprises have

high signicance in the Albanian econ-omy in terms o production, employ-

ment and investment activity.

FDI improves labour productivity andthe propensity to invest which may in-crease international competitiveness.However, high oreign participation in

certain sectors and industries is also asign o weaknesses in the domestically-owned part o the economy, includingan underdeveloped local SME sector.

Foreign investment enterprises in Al-bania have an uneven distributionacross the economy. Although theydrive some reindustrialization in thecountry, their involvement in activities

with higher technologies is still weak.

Te labour productivity gap betweenoreign aliates and domestic companiesis relatively small in the manuacturingindustries pointing to a relatively similarlevel o technology used by oreign ali-ates as compared with domestic rms.

Te policy conclusion is that condi-tions or higher value-added FDI haveto be put in place. Tis requires higherstandards o training and the improve-ment o competencies o human re-

sources. Inrastructure development isanother precondition or urther FDI inmanuacturing and recent improvementsin roads and energy supply are a wel-come step in that connection. But localinrastructure may still be decient andthereore industrial parks should becomeoperational to provide high-standard ser-vices or incoming investors.


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29CHAPTER 2

With the start o the reorm processestowards a market economy in the 1990s,Albania embarked upon a transormationo the political, economic, legal and insti-tutional ramework o the economy. TeGovernment has implemented a series ostructural reorms including among oth-ers, land reorm, reorm o the nancial

system, price liberalization, and privatiza-tion etc. Almost all state-owned companieswere privatized, including telecommuni-cations and banking. Te country is nowcharacterized by an open economy, with aliberal trade and investment regime. Attract-ing higher levels o FDI is still a challenge orthe country. Te reorm process continuesand aims at improving urther the businessand investment environment through thereduction o various legal and administra-tive barriers to doing business and improv-

ing the physical inrastructure. Tis chapterrst gives an overview o recent assessmentso Albanias business environment andinternational competitive position, thenoutlines the main eatures o the Gov-ernments policy to improve the businessenvironment and nally, it provides anoverview o the FDI regime in Albania.

A. Assessments o thebusiness environment and the

competitive position

European Commission - Albania 2011 Progress

Report7

Albania ell short o receiving thestatus o a EU accession country mostlybased on political reasons. Te Reportstates that overall progress was made inestablishing a unctioning market econ-omy. But it adds that Albania needs tocommit itsel to urther structural re-

7 European Commission, Albania 2011 Progress Report,

Communication rom the Commission to the European

Parliament and the Council, p. 27.

orms, among other things by bolsteringeconomic policy governance, enhancinglabour market perormance and protect-ing property rights. Shortcomings wereidentied because the planned privatiza-tion programme was delayed, the paceo reorms to acilitate market entry andexit slowed, and weaknesses in the rule o

law particularly in contract enorcementand property rights persist. Widespreadcorruption was ound to have a negativeefect on the business environment. Atthe same time, the Report recognizesthat good progress has been in acilitat-ing business registration and businesslicensing procedures as the NationalLicensing Centre extended its servicesnetwork to cities beyond irana. Prog-ress was also noted to have been achievedin the areas o regulatory reorm and the

regulatory impact assessment system.

EBRD Country Assessments 2011: Albania8

Te main ndings include:

Progress in European Union approxi-mation has slowed down. Internalpolitical inghting has prevented thepassage o important laws and reormsand has not allowed the country togain candidate status.

Road sector reorms have advanced. In-ternational nancial institutions have pro-vided important support to the building onew roads and upgrading inrastructure.

Sales o state-owned assets shouldbe concluded. Te completion oplanned privatizations would notonly bring much-needed revenue tothe Government, but would also signalits commitment to market-orientedreorms. Tis could trigger substantialoreign direct investment (FDI) in-ows in the coming years.

8 Available at: http://www.ebrd.com/downloads/re-

search/transition/assessments/albania.pd

POLICIES AND MEASURES

AFFECTING FDI IN ALBANIA

CHAPTER


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World Bank, Doing Business 20129

In the 2012 global ranking o countriesby the ease o doing business, Albania isin the 82nd position,with a perormanceslightly below that o the previous year. Al-bania ranks in the middle o the group o

the Western Balkan countries and ahead oItaly and Greece (gure II.1). In terms othe ten main areas comprising the doing

9 World Bank and IFC, Doing Business 2012, Economy

Prole Albania (Washington D.C.: World Bank, 2012).

business indicator there is a large difer-ence. Te country has higher ranking inProtecting Investors (16), Getting Credits(24), and Starting a Business (61) (gureII.2). It has a worse position in RegisteringProperty (154), Getting Electricity (152),

Paying axes (152) and is the lowest in theglobal ranking in Dealing with Construc-tion Permits (183/183).

0 30 60 90 120

Macedonia

Montenegro

Croatia

Albania

Italy

Serbia

Greece

Bosnia

FIGURE II.1.

Ease o doing business ranking o Albania and its peer economies

50

100

150

200

Startinga Business

ConstructionPermits

GettingElectricity

RegisteringProperty

GettingCredit

ProtectingInvestors

PayingTaxes

TradingAcross

Borders

EnforcingContracts

ResolvingInsolvency

Source: World Bank and IFC, Doing Business 2012, available at: http://www.doingbusiness.org/rankings

FIGURE II.2

Albanias ranking by the main indicators o Doing Business, 2012

Source: World Bank and IFC, Doing

Business 2012, available at: http://www.

doingbusiness.org/rankings.


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31CHAPTER 2

0 30 60 90 120

Innovation

Business sophistication

Market size

Technological readiness

Financial marketdevelopment

Labor market efficiency

Goods market efficiency

Higher educationand training

Health and primaryeducation

Macroeconomicenvironment

Infrastructure

Institutions

GCI - Total

Source: World Economic Forum, Global Competitiveness Report 20112012.

World Economic Forum - Global Com-

petitiveness Report 2011 2012

Albania is included in the group ocountries which are, according to theWorld Economic Forums Global Competi-tiveness Report 2011-2012, in the second

phase o development o competitiveness,called the phase o economic-eciencydriven growth. Albanias competitive-ness has been steadily improving in recentyears: its ranking by competitiveness roserom the 96th position in 2009 to 88th in2010, and in 2011 Albania moved up tenplaces to reach the 78th position among142 countries o the world. Te coun-try improved its perormance across theboard, reecting a modest strengtheningin basic requirements, eciency enhance-ment and innovation actors, as shown inits ranking in major areas o competitive-ness (gure II.3). Te components withthe highest ranking are goods market e-ciency (43) labour market eciency (49),and institutions (57). Te countrys overallcompetitive perormance, however, con-tinues to be dragged down by poor innova-tion (123), nancial market development(107), macroeconomic environment (86),higher education and training (82). Com-

panies surveyed or this report identiedas the most problematic actors hinderingcompetitiveness the access to nancing,tax rates, corruption and tax regulation.

B. Measures to improvethe investment environment

Being aware o the countrys prob-lems in terms o the business environ-ment and to improve the competivenesso the country and to make it an at-

tractive place or oreign investors, theGovernment o Albania has undertakena comprehensive reorm programme. Asa oundation or its economic policy, ithas introduced policies to support privatesector development. It has undertaken acomprehensive regulatory reorm. Te coreo the measures consists in the reductiono administrative burden and cost o do-ing business. Te steps taken during theyears 20062011 are outlined based oninormation provided by the Ministry oEconomy, rade and Energy.

Business registration: Since 2007 theregistration o a business is made in oneday at the National Registration Centre(NRC) or less than 1 and the number osteps or starting a new business was reducedrom ten to ve. Within one day, in a singleapplication, the new business can registeronline to satisy the requirements relatingto taxes, health insurance, and labour.

Licensing procedures: Te licensingprocedures in diferent sectors o economyhave been simplied through the launch-

FIGURE II.3.

Albanias competitiveness ranking by major areas


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ing o the Business Licensing Center inJuly 2009. As a result, many requirementsor licences were abolished and a broadsimplication o the licensing procedureshas been completed in many sectors in-cluding mining, hydrocarbons, public

works, health, agriculture and the envi-ronment.

Public Procurement: Te public pro-curement has signicantly been improvedin the last ew years. Aiming at improvinggovernment efectiveness, transparencyand strengthening the rule o law, Albaniahas established an e-procurement systemthat won a UN Public Service Award in2010. Tis system handles now all procure-ments over $4000 in value and has cut pro-

curement costs and increased competition.

Taxation: ax reorm has streamlinedand modernized the taxation regime, im-proved collection, and reduced the scopeor discretion and tax evasion. ax policy isbased on the philosophy o lower taxes andextended range o tax-payers. Te countryintroduced a 10 per cent at corporateand personal income tax as o 2007. Also,social security contributions were stream-lined; currently they represent 28 per cent

o the gross wage (16.7 per cent paid bythe employer, and 11.2 per cent paid bythe employee). Law No. 9975 o 28 July2008 urther simplied taxation reduc-ing the number o national indirect taxes(other than the VA) rom 23 to 7 byeliminating and consolidating a numbero taxes while transorming others to ees.Te remaining national taxes are: roadtax, environmental tax, port tax, mineralrent tax, stamp tax, tax or registration ocasinos and gambling, and tax on shingactivities. As a result o the tax reorms, s-cal revenues have increased at a higher ratethan GDP and the number o taxpayersbecame broader.

Trade policy: An appropriate tradepolicy acilitates the integration o the Al-banian economy into the regional marketo South-East Europe which can compen-sate or the countrys small size by open-ing up the prospect o serving a market

o about 50 million people. Integration isostered by trade liberalization, supportingexports and encouraging FDI. Te Gov-ernment has taken action to harmonize

the Albanian legislation with internationaltrade rules and with the European Com-mon Commercial Policy. Since becominga WO member in September 2000 Al-bania has implemented the ull liberaliza-tion o its import-export regime or goods.

Further trade policy steps will be achievedwith the elimination o all non-tarif bar-riers to trade.

Te Stabilisation and Association Agree-ment(SAA) with EU signed on 1 Decem-ber 2006 contains an interim ree tradeagreement with the EU which came intoorce on 1st April 2009. Tis agreement,an important step on the way to EU mem-bership, is expected to open new opportu-nities or the development o the country.

Since January 2004 Albania has com-pleted and started to implement a ullnetwork ofree trade agreements in theSouth-East European region with theormer Yugoslav Republic o Macedonia,Kosovo, Serbia and Montenegro, Bulgaria,Romania, Bosnia and Herzegovina, Croa-tia and the Republic o Moldova. Tat wasollowed by the liberalization process andthe adoption o a joint agreement on reetrade. Te Central European Free rade

Agreement (CEFA) 2006 was signed byall parties listed above and has been ullyoperational since November 2007. Tisagreement is not a ormal transormationo the network o the individual ree tradeagreements into one, but reects a higherlevel o trade opening and regional coop-eration among the countries in the region.Te liberalization policy has continued

with the ree trade agreement between Al-bania and urkey, and with the ree tradeagreement o Albania with European Freerade Association (EFA) states.

Industrial parks and free zones. Amongthe tools o investment acilitation in thecountry are industrial parks and ree zonesthe settingup o which has been initiatedby the Government. Te legal basis orthe development o these economic zonesis the Law no. 9789, dated 19.07.2007On the establishment and operation oeconomic zones, which regulates the es-

tablishment o economic zones and relatedmatters. Te selection o the developero the economic zones is based on the cri-teria dened in the law 9663, dated De-


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33CHAPTER 2

cember 18, 2006 On Concessions. Con-cession to the developer is mainly in theBO orm (build-operate-transer) or aperiod up to 35 years and under a nominalee regime o 1 .

Te ree trade zones and industrialparks are being established near ports, air-ports or at the crossroads o internationaltransport. Economic zones are proposed bythe Ministry o Economy and approved bythe Council o Ministers on a case-by-casebasis. Investments expected in the economiczones are estimated to be over 100 million .Investment will be mainly greeneld exceptin the industrial park o Elbasan which willbe o the browneld type in the premiseso a closed-down enterprise. As o 2010,

the Council o Ministers had approvednine economic zones, one o which, inVlora, has the status o a ree zone. Te resthave the status o Industrial Park and arelocated in Koplik (Shkodr), Shngjin(Lezh), Vlor, Elbasan, Spitalle (Durrs),Shkoder, Laknas (iran) and Lezha. Tepark in Vlora will start unctioning soonand or the one in Shengjin the develop-ment contract is signed and operations areexpected to start also. Te industrial parksmay be used or manuacturing, agro-

processing, trade and supporting activities.Te development agency AIDA will serveas a one-stop-shop or the licensing otenants in the economic zones.

Aside rom policy reorm and meas-ures to acilitate business, a critical issueor rms is the extent to which existinglaws and regulations are implemented andenorced. Albania has made considerableeforts to improve the investment climateby enacting large numbers o new laws andregulations (in accordance with require-ments or EU accession). However, wherelaws are incomplete (lack implementationregulations) or inconsistent with each oth-er, a gap can emerge between the ormallegal structures and actual implementationpractices which tend to undermine therule o law and increase uncertainty orbusinesses (World Bank 2010a). Clarity isalso needed on the processes or enactingnew laws and regulations and or review-

ing the ecacy o existing ones.

Regulatory reform to improve trans-parency and predictability o Albanias

laws and regulations includes the estab-lishment o the Regulatory Impact As-sessment (RIA) system, the InspectionSystem Reorm and the establishment othe Electronic Registry o Business Legis-lation. Te Regulatory Impact Assessment

system is the basic institution to improvethe quality o regulations and their impacton businesses. Te Inspection System Re-

form is among the most complex reormsundertaken so ar. Te Horizontal Law onInspection Nr.: 10433 Dt.: 16.06.2011contains the general principles o inspec-tion, the establishment o the central in-spectorate or inspection and sharing oroles among institutions. Te ElectronicRegistry of Business Legislation was estab-lished in the end o 2010. Its aim is to

initiate consultation over drat acts, andalso on acts that are in orce in order toimprove their quality.

In order to forestall corruption, controlsystems have been put in place in the cus-toms administration and in the oces con-trolling state expenditure. Also, the tax ad-ministration and audit processes have beenrevised to reect international standards.Tey are organized along clear administra-tive lines working as deterrents or tax o-

cials to engage in corruption.Nevertheless,the inormal sector in the economy is stillsignicant, and that acilitates tax evasion.

Privatization has been an importantpart o Albanias reorm process and animportant tool to attract oreign investors(see also chapter I). Te privatization strat-egy approved by Law No. 8306 dated 14March 1998 aimed among others at theattraction o strategic investors, stimula-tion o the economy through the ecientuse o human and natural resources andguaranteeing the stability o ownership.No limitations on the participation ooreign investors have been applied in theprocess o privatization. Foreign investorsare allowed 100 per cent ownership oprivatized enterprises. Although it is acili-tated by the law, the State has not main-tained control on companies using the so-called golden share. Te most importantprivatization deals, ater 2000 (according

to MEE) include:

in 2001, the privatization o the Com-mercial Bank by its sale to the Calik


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Group o urkey or US$10 million; in the same year, the privatization o

85 per cent o the shares o the mo-bile telephone company AMC by theirsale or US$85.6 million to Cosmote(Greek OE Group),

and the licensing o the second mo-bile telephony operator, Vodaone orUS$30.1 million;

in 2004, the privatization o the Sav-ings Bank by its sale to the RaifesenBank o Austria or US$124 million;

in 2007, the privatization o 84 percent o the shares in Albtelekom bytheir sale to Calik Enerji elekomni-kasyon or 120 million;

in 2008, the oil rening companyARMO was privatized by its sale to the

consortium Te Renery Associates oexas, Anika Enterprises SA, MercuriaEnergy Group Limited or 126 mil-lion;

in 2009, 76 per cent o the electricitydistribution operator DSO was priva-tized by its sale or 102 million toCEZ o the Czech Republic;

in March 2009, the package o sharesowned by the State in the AMC com-pany, 12.6 per cent o the capital, wassold or 48.2 million;

In 2012 the privatization o Albpetrolstarted.

Te privatization process has almostcome to an end with only a ew large anda number o small cases remaining. Telarge companies or sale include Albpetrol,the countrys sole oil extraction company,or which Parliament approved the LawNr. 10490 On the denition o the ormand structure o privatisation ormula othe company ALBPEROL Sh.a in De-cember 2011. Currently most o the ex-isting oilelds administered by AlbpetrolJSC are given or exploration and produc-tion through petroleum agreements. Temain holder o the agreements is BankersPetroleum Ltd., a Canadian-based oil andgas exploration and production companyocused on developing large oil and gas re-serves. Bankers operates and has the ullright to develop the Patos-Marinza heavyoileld, has a 100 per cent interest in the

Kuova oileld, and a 100 per cent inter-est in Exploration Block F. For other assetsowned by Albpetrol and not included inthe petroleum agreements nding the ap-

propriate privatization path is in progress.Te Government has hired the Washing-ton-based law rm Patton Boggs to advisethe sale o Albpetrom.

In addition, the Government is trying

once again to sell its stake in the insurancecompany INSIG, or which two previoustenders had ailed. In preparation or anew privatization attempt, the authoritiesremoved the minimum bid requirementsat the end o June 2011, and are expectedto call a new tender in the coming months.(wo years ago, American Reserve Lie In-surance Company agreed to buy a 61 percent stake in INSIG or 41 million s, but

withdrew later due to the nancial crises.)

Te privatization o the Albanian Gov-ernments minority stake (16 percent) inthe xed telephone operator Albtelecom

went through an auction on 15 March2012. Also, in 2012 procedures will startor the privatization o the remainingshares o DSO and ARMO.

Further, the Government plans toprivatize some o its remaining assets inthe hydropower sector. Four hydropowerplants (Ulez, Shkopet, Bistrica 1 and Bis-

trica 2) have been put up or sale and theirauction is announced or June 2012. Inaddition, the Government announced itsintention to privatize nearly 1,300 o itsremaining (mostly small) state-owned en-terprises, some o which are ormer mili-tary establishments .

Public-private partnership (PPP) hasbeen regulated by the legislative packageunder Law No. 9663, dated 18 December2006 On Concessions. Amendments tothis law should enable increased transpar-ency, efectiveness and airness when signingconcessionary agreements. Concessions, in-cluding to oreign rms, have been imple-mented by the Government in diferentsectors like energy, mining, airport inra-structure and the management o water-supply and communal sewage systems.

Concessionary projects in the energysector aim at increasing the production

o electricity to almost twice the currentlevel and at the diversication o energyresources to renewable energy. Te strat-egy o the Government or increased elec-


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tricity supply securityis the exploitation othe power potential in the country whichhas not been utilized yet. Tis is oreseento be realized mainly through private in-vestments and concessionary contracts orPPPs, including with NCs. Te Ministry

o Economy, rade and Energy has signed114 concessionary contracts or the con-struction o 327 hydro power plants witha total capacity o 1400 MW with an in-vestment value o 1.7 billion s. 43 othem are in the production phase, 40 arein the construction phase and the processo signing and negotiation o urther con-cessionary contracts continues in.

As part o the energy stability pro-gramme, the Government o Albania com-

pleted the construction o a new 97 MWoil uelled power plant in Vlora with a val-ue o about 80 million that has becomeoperational and started power generationin 2012. In addition, licences have beengiven to a number o private investors toconstruct wind arms with a total installedcapacity o around 1500 MW oreseeingan investment o around 1.5 billion .Meanwhile Albania is moving towards aregional energy market and participationin regional power exchanges. Inter-state

interconnection lines have become op-erational connecting Elbasan-irana andirana-Podgorica. Additional investmentson two submarine cable lines with Italyand interconnections between irana-Prishtina, irana-Skopje lines will even-tually close the bypass regional electricitytransmission involving Albania.

In the mining sector, existing projectsinclude Albanian Chrome Sh.p.k. (ACR)that operates in Bulqiza the largest chro-mium mine and the errochromium plantin Elbasan. In a new project, Kurum Ener-gy, Resources and Metallurgy Sh.a. (a sub-sidiary o Kurum Holding A.S. o urkey)and Sichuan Jiannanchun InternationalGroup Ltd (a major Chinese group) havesigned with the Albanian Government aconcession agreement on the explorationand exploitation o Kalimash and Vlahnezone chromite deposits and the establish-ment o copper enrichment acilities in

northern Albania in April 2010. Te con-cession rights enable the locally establishedcompany o the above investors, IllyriaMinerals Industry Sh.a (IMI), the acquisi-

tion or a term o 35 years a 6 million- tonchromite and copper ore deposit which islocated in the area o Albania borderingKosovo. Te new company is expected toproduce about 210,000 tons per year ochrome.

In the petroleum industry, the Gov-ernment has agreements on explorationand production o oil and gas with com-panies like Islandrockall JV. and AustralianBeach Petroleum Ltd, Capricorn AlbaniaLtd, an aliate o Cairn Energy company,Petromanas Albania Gmbh, Banker Petro-leum Albania, and Sky Petroleum. Furtheragreements exist or the production anddevelopment o existing oil and gas eldswith Bankers, Stream Oil & Gas, Sher-

wood International Petroleum and IECVisoka.

Developing the countrys transport in-frastructureis another priority goal o theAlbanian Government. Aided by donorunding and working in partnershi

bank of albania 2011 foreign direct investment report

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