Addendum 4a

Seminar on the Promotion of
Foreign Direct Investment toSoutheastern Europe

Albania

8 November 2002, Tokyo, JIIA
Ministry of Foreign Affairs of JapanThe Japan Institute of International Affairs

QUESTIONNAIREPRESENTED IN THE SEMINAR ON FOREIGN DIRECT INVESTMENT
INTO SOUTHESTERN EUROPE
Tokyo 8 november 2002

Transition to market ekonomy
Public Sector Investment in the 1990s
Albania entered the post-communist period with an infrastructure thatwas totally inadequate to support the transition to a modern market-based
economy. Consequently, increased levels of public investment have been a
key component of the programme of economic reforms adopted by theGovernment since 1991. Between 1994 and 1996 investment levels
increased rapidly from US$ 119 million to US$ 237 million. Over this period
external aid became the major source of financing for public investment andin 1996 accounted for around 65% of total disbursements for public
investment projects.
Increased investment levels have been accompanied by changes inthe scope and definition of public investment. These have reflected thewithdrawal of the state from direct involvement in the industrial and trade
sectors and the changing role of government as an investor. Thus the major
focus of public investment in recent years has been on: (i) the rehabilitationand development of public infrastructure; (ii) improvements in public sector
service provision involving re-equipping, retraining and the introduction of
improved management practices; and (iii) supporting institutional reform anddevelopment in areas such as legislative reform, public administration, thejudiciary and law and order.
In general, Albania has made considerable progress in its transformation process
towards a market economy. After the successive shocks of the demise of thecommunist regime and the consecutive period of chaos (1990-1992), fundamentalsocial and systemic reforms have been initiated. Quick progress was achieved inliberalisation and private sector development, especially in agricultural production
and small and medium enterprises. An entirely new legal and institutionalframework was being elaborated. However, implementation and enforcement
lagged behind legislative work and the overall administrative capacity remained
weak. The financial sector remained as well largely unreformed. The result was
the collapse of the schemes in late 1996 and early 1997 and the subsequent
breakdown of law and order. Parliamentary elections were held under international
supervision in June 1997 and a new government was elected. The main elementsof the new Government’s strategy for political, social and economic reform andrecovery are:(i) political normalisation and democratisation;(ii) restoration of law and order;(iii) institutional reform;(iv) addressing poverty caused by the 1997 crisis;1

(v) macro-economic stabilisation;(vi) financial sector reform and resolution of the pyramid schemes; and(vii) privatisation of strategic sectors.

Developments in the Banking System
The Bank of Albania is implementing the law no.8873, dated 29.03.2002“On the creation of the Deposits Insurance Agency” and other legal
obligations. With support of USAID and FSVC it continues the work forcreating a Deposits Insurance Agency.
Based on the cooperation between the Bank of Albania and the FDIC
(Federal Deposit Insurance Corp.), some experts for training the future staffof the Agency, are going to be present in Albania very soon.
-

On the functioning of the Supervision Department

The review of the regulations “On the functioning of the Supervision
Department” were made necessary in order to reflect the changes of thestructure of the supervising Department and to improve the way of reporting.
They add important elements of reporting to the Supervisory Council of the
Bank of Albania. Particular attention was paid to the approximation of thelicensing regulatory framework and banking regulations with the most recent
international practices, methods and principles of supervision andimprovement of legal documentation as well as in the licensing process.
- Free movement of capital
Albanian legislation does not apply any restrictions on foreign exchange
related to any type of investment, the quantity of the investment, the amountof foreign currency that can be exchanged or the possibility for foreign
investors to repatriate their profits in foreign currencies or in Lek which areearned through their investment (every type of investment including
deposits) and/or the initial capital invested in Albania. The law No. 7764
dated 02.11.1993 “On Foreign Investments” sets forth and ensures the freemovement of capital related to direct investments carried out in Albania byforeign companies.
In the report of the Working Party on Accession of Albania to the World
Trade Organization and in the schedule of Specific Commitments on
Services, Albania is committed to allow legal and natural persons (notincluding Banks), residents and non-residents to carry out freely thefollowing outflows of capital transactions:-

Outflow of capital transfers equaling the amount of the previous inflow
of capital plus the profits derived from returns (return means anamount derived from or associated with an investment including profit,
dividend, interest, capital gain, royalty payment, management fee,technical assistance fee or ‘other fee’);Compensation; payments arising out of an investment dispute; loan
repayments according to a loan amortization schedule; proceeds fromthe sale or liquidation of any or all parts of an investment, and thereturn of shareholders equity resulting from the diminution of capital.
2-

Outflow of capital transfers representing the amount of profits derived
from non-residents’ deposits placed with Albanian resident banks.

-

Outflow of capital transfers representing the wealth of Albanianemigrants leaving the country forever.

Any other outflow of capital transactions cannot be carried out freely either
by residents or non-residents. Residents and non-residents who may want
to transfer capital abroad, other than the above-mentioned cases, have toobtain prior written approval from the Bank of Albania. This regime will be
removed not later than 2010. No restrictions apply to the inflow of capital.
The first phase of the study “On free movement of capital” is over. The Bankof Albania prepared this study in collaboration with the European
Commission. This collaboration will continue in preparing the next steps tobe undertaken in order to finalize this process according to Albania’scommitments to WTO and the European Union.

During the first half of 2002,the Albanian economy has performed its activity
almost within the same framework as the previous year, being determinedby the following targets: the economic increase at a rate of 6%, annual
inflation rate of 2-4%, budget deficit at a rate 8 per cent of GDP, current
account deficit at about 8.2 per cent of GDP and financing through thedomestic lending at a rate of 3.2 per cent of GDP.

Industrial structure
The economic growth and the structure of GDP of the main sectors of theeconomy for 2002 are estimated as follows:GDP
Agriculture
Industry
Construction
Transport
Services

Growth
6.0
3.0
5.0
11.5
11.0
6.5

Structure
100.0
33.2
13.0
10.8
10.6
32.4

-Agriculture- is still the largest sector. There were positive developments
during the first quarter of year. There are favourable conditions for theincrease of the agricultural production and the increase of the agriculturalindustrial sector on this basis, which is expected to grow by 10 per cent.
Although the percentage of agricultural production of GDP is estimated to be
33.2 per cent, against 34.2 per cent resulted at the end of 2001, agriculture
still remains the main sector of economy. The domestic agricultural
production, although in low quantities, is exported to Germany, Italy, Greece
and Turkey. Imports come mostly from Italy and Greece.

3

-Industry- Due to the energy crisis the industrial growth is estimated to havefallen, from 6.5 per cent at the end of 2001 to 5.0 percent now or 13.0 per
cent on GDP.
-Telecommunication and transport manifested increases, but not to theextent as foreseen. It is projected that the growth, by the end of 2002, will beat the level of 11.0 percent which accounts for 10.6 per cent of Albania’s
GDP.
-Construction and services- mainly contribute on GDP, with expected
growth rates of respectively 11.5 percent and 6.5 percent, reflecting theincreased demand for buildings, trade centres, hotels etc.
-Unemployment rate- Registered unemployment declined from about 15.23
percent in 2001 to 14.2 percent in 2002. This was as a result of theincreased controls on enterprises and the grey economy.
-Inflation-The main reason for the growth of the economy is the anticipatedincrease of the agricultural production and as well a result of its contribution
to the GDP. Under these circumstances, the targeted rate of inflation andthe increase of GDP seem to be realistic. This year’s economic
development seems to prove these assumptions. In August 2002, theannual inflation was 5.5%, about one and half percent higher than thetargeted 4 per cent that the Bank of Albania had foreseen by the end of
2002. The annual inflation rate resulted to be higher than the target: for theentire year, their average was 6.6 per cent. The “food-staff” group has had
the highest impact on the monthly inflation as well as the group “rents,
electricity and fuel”.
The path towards lowering the inflation rate has already started by recording
a figure of 4.6 per cent for the month of May 2002.
The electricity crises had a direct impact on the development of prices. The
Bank of Albania will continue to strive at maintaining the price stability during
the next three years, aiming at a level ranging from 2 to 4 percent, under theconditions of a flexible exchange rate regime.

Socio economic infrastructure
Albania’s strategic transport infrastructure consists of a road networkof 18,000 km, including 2,900 km of paved and 4,900 km of unpaved
national roads, a railway network comprising 477 km of main lines and 230
km of secondary lines, the international airport at Rinas and the ports ofDurres, Vlore, Sarande and Shengjin. Traffic patterns have changed
dramatically since 1990 with substantial increases in the levels of domestic
goods and passenger traffic and also the rapid growth in international transit
traffic via the port of Durres to Greece and Macedonia. While road, air andsea traffic levels have all increased, rail traffic has fallen to insignificant
levels reflecting both the comparative advantage of road transport for shorthaul loads and operational difficulties faced by Albanian Railways. Most
infrastructure in the sector is under-designed for current traffic levels andhas suffered from inadequate capital and maintenance provision over many
years. The road network has faced rapid deterioration as a result of recent
increases in road traffic and axle loads. Road safety has become an urgent
issue since Albania now has the highest road fatality rate in Europe. Traffic
congestion and vehicle-related air pollution have become significant
problems in Tirane.
4Since 1991, the transport sector has undergone major reform. Road
transport, apart from some urban bus operations, has been deregulated andover 90% of the publicly owned vehicle fleet has been privatised. The portof Durres has been turned into an autonomous body. The Government has
formulated a programme to upgrade transport infrastructure for which it has
obtained substantial international support. This focuses on infrastructure
along two main arterial routes: (i) the 430 km North-South corridor between
the borders with Montenegro and Greece; and (ii) the 240 km East-Westcorridor which links the port of Durres with the Macedonian and Greek
borders.
Project financing has been secured for: (i) reconstruction of 171 km of
the North-South and 207 km of the East-West highways; (ii) a rural roads
rehabilitation programme covering the main agricultural areas in the coastal
plain; (iii) the redevelopment of Durres Port; (iv) the relaying of railway track
between Tirane and Durres; and (v) the modernisation of Rinas Airport. PIP
expenditures on the sector during 1996 and 1997 totalled US$ 84.8 million
compared with US$ 175 million projected for this period in the 1996-98 PIP
document. Apart from the effects of the 1997 crisis, this shortfall can be
explained by the much longer than anticipated lead-in time between theapproval of project financing and the commencement of implementation.
Roads
Experiences in implementing road projects have been mixed.
Progress on the IDA First Transport Project which is financing theimprovement of 84 km of main road and the provision of road maintenanceequipment has been satisfactory. By contrast, projects for the East-Westand North-South corridor projects and for the construction of bordercrossings have faced considerable delays. Key factors behind these delays
have been: (i) inadequate initial design; (ii) lengthy donor procedures; and(iii) delays in securing the expropriation of land. Of these the most pressing
issue is now the expropriation of land for which domestic financing of around
US$ 10 million will be required during 1998 if programme implementation is
not to be further delayed.
Ports
A first phase programme for development of Durres Port, financed by
the Kuwait Fund, IDA, PHARE and Italy has now been completed. This has
involved repair and upgrading of quay facilities, provision of cargo handlingequipment, institutional strengthening of the Port of Durres Authority, and the
preparation of a Ports Master Plan. Construction of a new ferry terminal at
Durres being financed EIB/PHARE has been delayed and is not now
expected to commence until mid 1998. Financing from IDA/OPEC for thesecond phase of the development of Durres Port has recently been
negotiated with implementation expected to commence by mid 1998. In
addition to further infrastructure investment, this project will support thecommercialisation and privatisation of port operations.
Railways
The project to relay rail track between Tirane and Durres has been
under implementation since 1995 with financing from Italy. Implementation
was halted during the disturbances, when the project was 92% complete.
5Resumption of work under the contract was delayed pending resolution of aclaim from the contractor, and resumed in November 1997 with completion
expected in 1998. However, a more critical issue is the sharp fall in railpassenger numbers and freight volumes during 1997 which has precipitateda financial crisis within Albanian Railways and has again brought into
question the long-term economic viability of the rail system.
Civil Aviation
A project to upgrade facilities at Rinas Airport involving runway
resurfacing, extension of apron areas and taxiways, and installation of
runway lighting and navigational aids has been under implementation since1996. When completed, in 1998, this will allow night-time operations at the
airport.
Sector Policy Framework
The main objectives of government policy in the transport sector are
to provide an adequate transport infrastructure necessary for thedevelopment of the economy and to ensure appropriate regulation oftransport operations in the interests of safety and the environment. The
primary role of government within the sector is in the provision andmaintenance of transport infrastructure, particularly in the roads sub-sector
and in the management of the regulatory framework.
The main strategies through which the Government is pursuing theseobjectives include:• rehabilitating and upgrading existing transport infrastructure including
roads, civil aviation and ports in order to permit the development of an
efficient transport system required to facilitate economic growth;• commercialising and where possible privatising port, airport, roadmaintenance and railway operations in order to promote greater
efficiency in operations and reduce financing demands on the State
Budget;• promoting private sector involvement in the development of transport
infrastructure;• strengthening maintenance of the road network requiring thereorganisation of maintenance arrangements and substantially
increased maintenance budgets;• increasing cost recovery in the sector through appropriate pricing andtaxation policies thereby reducing net demands on the State Budget;• establishing a legislative, regulatory and institutional framework forthe sector that ensures the safe operation of transport services while
promoting a high level of competition;• creation and extension of transport data information systems; and• monitoring and disseminating information on trends and requirementsin the transport sector so that private sector operators can plan thedevelopment of their operations.

6Priority Areas for Technical Assistance
Priority areas for technical assistance support under the PIP include:(i) transport sector planning; (ii) the establishment of data information
systems; (iii) the preparation of a roads master plan; (iv) road safety andenvironmental legislation; (v) advice on the commercialisation andprivatisation of Durres Port and Rinas Airport; (vi) establishment ofregulatory functions; (vii) review of the viability of Albanian Railways;(viii) project feasibility and design studies; and (ix) contract supervision andmanagement. Special measures may also be required in order to retain
qualified Albanian engineers and transport economists within the MoPWT
and the General Directorate of Roads.
Legislation in Infrastructure
The Ministry of Public Works and Transportation acts according to thelegislation of Albanian Republic. The comple- tion with legal clauses about
foreign investments in general and especially investments in public works
and transport field are considered as very important. Low No.7764, Dt.
2/11/1993 "For foreign investments" foresees that each physical andjuridical entity, native or foreign has the right to make investments in the
territory of Albanian Republic.
The law No.7980 Dt.27/07/1995 "For the land sell" gives the possibility
to foreign investitors for the purchasing of land, after the physicalcompensation of owners is carried out. Its sell is done according to theprices set by MCD No. 312 Dt.30/06/1997, "For the prices of land and forthe rent of land that is given to physical and juridical entity for use".
The law No.7973 Dt.26/07/1995 " For concessions and the participationof the private sector in public services and infrastructure " presents new
forms of investment where each physical and juridical entity, native or
foreign, is entitled to take in the form of concession a wealth, to carry out the
specialised services for a long period of time.
Law No.7720 Dt.l4/06/1996 " For the control and the discipline ofbuilding " is applied for all the physical and juridi- cal entities, native or
foreign that make design and implementa- tion of construction works.
Law No 8093 Dt21/03/1996 " For water reserves" aims at thepreservation, development, utilization as well as environ- mental protection
and consumption of water reserves. Based on that, it has been approved
Law No.8103 Dt.28/03/1996 " For the privatisation of the enterprises ofwater supply sector and removal of waste water ".
Law No.8102 Dt28/3/1996 " For the regulatory frame- work of watersupply sector and the removal of waste water " aims to guarantee andprotect the public interest on one hand and to establish a legal fairframework on the other one.
Through the Law No.7848 Dt.25/04/1996 " For the expropriation of
public interest, and also for the temporary use of real estate ", the state is
entitled to expropriate or to take in temporary use only for public interest, thereal estate and accept the rights of the subjects affected by expropriation.
Through the Law 8094 Dt 21 /03/ 1996 " For the waste disposal " it isaimed at the protection of urban environment , according to yellow lines
under each municipalty, and at regu- lation of public services for waste
management.
7

Industrial Policy
Privatization
Private sector activity has expanded rapidly since 1990. Following theprivatisation of wholesale and retail enterprises, the initial growth was inenterprises supplying the domestic market for goods and services. Over58,000 small and medium-scale enterprises (SMEs) were establishedbetween 1994 and 1997. Foreign investment began to play an increasingly
significant role, involving mainly Italian investors in the Durres, Tirane, Vlore
corridor and Greek investors in the areas around Korce and Gjirokaster.
Most of this investment was in relatively small-scale joint venture enterprises.
The fall in industrial output was halted in 1995, even though many oldplants continued to close, and output increased in real terms by 14% in
1996. Most of this increase was attributable to investment in new SMEs,
although implementation of the mass privatisation programme for medium
and large scale enteprises, which was initiated in 1995, also played a role.
A substantial number of export-oriented SMEs were established, particularlyin the garment and shoe industries. These employed an estimated 130,000
workers by the end of 1996. The impact of economic recovery was also
apparent in the construction industry where output increased by 18% in realterms between 1995 and 1996. Significant investment had begun to takeplace in the tourism industry, initially in the construction and rehabilitation of
hotels in Tirane, but also extending the development of coastal resortcomplexes. Output in former strategic industries such as copper, chromium
and metallurgy which had remained under state control continued to decline
and enterprises in these sectors remained unprofitable.
Status of Programme Implementation
Privatisation
With the privatisation of small and medium-scale enterprises largely
completed by 1995, the emphasis of the privatisation process switched to avoucher-based mass privatisation programme covering the remaining
medium-scale and strategically important enterprises. However, the process
became increasingly politicised, lacked transparency and was not linked to
any wider strategy with clear economic and social objectives. The retentionof state majority shareholdings meant that many enterprises effectively
remained under state control. Excessively fragmented shareholdings, theabsence of a securities exchange on which shares could be traded and thelack of adequate information campaigns served to undermine the potential
economic benefits from privatisation. By mid 1997 only 16% of privatisation
vouchers had been utilised and some 53% of state owned enterprises
included in the mass privatisation programme had been privatised,
representing around 20% of the total assets of the economy. The
unsatisfactory initial outcome of the mass privatisation programme led theGovernment, during the second half of 1997, to reformulate its strategy for
privatisation.
8

Legal and Regulatory Framework
Basic legislation necessary for the development of a private entepriseeconomy was in place by the end of 19951. However, weak enforcement of
the legal and regulatory framework has continued to hamper thedevelopment of the private sector.
Particular problems have been:(i) difficulties in securing legal redress in cases of contractual default; (ii) thelack of effective procedures for claiming collateral in the event of loan
default; (iii) lack of respect of land titles and land ownership disputes causedby the restitution process; (iv) the absence of a central registry of companies
and the ease with which falsified company documents can be obtained; and(v) the tolerance of illegal business practices, especially evasion of customs
duties and taxes, which have placed compliant businesses at a competitive
disadvantage.
Credit for Enterprise Investment
In the absence of financial intermediation, a number of PIP projects
have provided credit lines for private sector investment which have beenhandled by the three state-owned banks. The most important of these credit
lines have been for SME development, agri-processing enterprises andtourism enteprises. However, their impact has generally been limited andundermined by the unwillingness of beneficiaries to repay their loans andthe absence of an operational framework for enforcing repayment. There
has also been minimal impact on the participating financial institutions, twoof which are now to be liquidated. It also appears that implementation of thecredit lines was adversely affected by the bureaucratic culture associatedwith public sector managed projects.
Against this experience, some international financial institutions haverecently sought a more direct involvement by providing credit directly to theprivate sector. The most important of these initiatives are the USAID
supported Albanian American Enterprise Fund and the KfW financed FEFAD.
The EBRD is also in the process of establishing an SME credit line to bechannelled through the privately-owned Italo-Albanian and Tirane Banks,
and, with co-financing from Italy, is also setting up an Equity Fund to provide
risk capital to enterprises recovering from 1997 crisis. Initial indications arethat supervision of these directly funded interventions is more effective andless bureaucratic than where credit lines are financed through the PIP.
Community-Based Micro-Credit Programmes
A highly successful community-based micro-credit programme has
been established by the ADF since 1992. The ADF is an autonomous
institution with the aim of addressing poverty and unemployment through theprovision of micro-credits and financing of small-scale public works projects.
It has received support from a number of donors. The programme has beencharacterised by careful and sensitive design, effective arrangements andhigh quality management. As a result implementation performance has
been impressive. At the end of 1997 the ADF had financed: (i) rural microcredits in around 200 villages with lending of US$ 2.5 million in loans of up
to US$ 1,000; and (ii) urban micro-enterprise credits with over 900 loans
1Including: (i) a liberal foreign exchange law; (ii) the civil code; (iii) legislation covering contracts, securities,
mortgages etc.; and (iv) legislation on rights of land ownership and land use.

9

issued in amounts up to US$ 2,500. Loan delinquency rates on the credit
sub-programmes have been very low and are currently around 3% of theloan portfolio.
Investor and Business Advisory Services
PIP financing has been used to support the establishment of investor
and business advisory services. The most important initiatives have been
the establishment of the SME Foundation (SMEF) and Regional BusinessAgencies (RBAs) which have received assistance from PHARE and from
USAID. The SMEF was intended as a national coordinating unit for SME
support activities and credit lines. It also oversaw the establishment of
seven RBAs2 covering the 37 districts of the country. The RBAs provide
advice to local entrepreneurs and assistance with the preparation ofbusiness plans. Financing to support foreign investment promotion activities,
through the Albanian Centre for Foreign Investment Promotion (ACFIP) has
been provided by UNDP. Proposed PHARE assistance for a Trade
Information Centre was not taken up as a decision could not be reached on
the establishment of the Centre.
6.3.9 The impact of these initiatives has been less than expected . The RBA
network has worked with around 500 clients each year, preparing some 200
business plans with the approval of 59 business loans in 1996. A number ofproblems have been encountered with the implementation of the programme.
These have included the absence of a clear mandate for the SMEF,
insufficient attention to policy and marketing issues and the limited
professional capacities within the RBAs. To some extent these problems
reflect the inherent difficulties of publicly funded organisations in providing
advice and assistance to private sector businesses.
Sector Policy Framework
Government policy aims at providing the conditions for thedevelopment of a competitive and internationally integrated enteprise sector.
The main elements of the strategies to achieve this objective are:• privatisation of the remaining state-owned enterprises including the
progressive privatisation of enterprises in the strategic sectors of
telecommunications, energy, transport, mining and public utilities;• the establishment of an enabling policy, legal and regulatory
framework and a secure and stable environment in which the private
sector can flourish;• the promotion of foreign direct investment and of efficient financial
intermediation in order to make available investment resources to theprivate sector;• the promotion of business information and advisory services,
particularly to serve the SME sub-sector; and• investment in infrastructure necessary for the development of amodern private enterprise-based economy.
In implementing these strategies the main focus will be on policy
measures rather than on direct interventions involving substantial
2

Located in Tirane, Shkoder, Kruje, Elbasan, Vlore, Korce and Gjirokaster.

10commitments of public investment resources. Measures will be taken to
ensure effective coordination between government ministries anddepartments which have direct dealings with the private enterprise sector.
Privatisation of Strategic Sectors
In early 1998, the Government introduced its new privatisation
strategy for strategically important sectors. Recognising that the vast
majority of these enteprises continue to operate unprofitably and represent a
net drain on the State budget, the Government will pursue a more active andtransparent programme for privatisation with the objectives of: (i) increasing
economic efficiency; (ii) promoting competition; (iii) attracting foreign direct
investment; and (iv) establishing the basis for a capital market.
Three main methods of privatisation will be pursued involving:(i) the transfer of shares to a strategic investor able to bring management
skills and capital to the company, with limits set for the proportion of shares
to be exchanged for privatisation vouchers; (ii) the issuing of management
contracts and operating concessions, such as for power and water utilities,
with the state retaining ownership of the enterprise; and (iii) the award ofconcessions to private investors to exploit natural resources such as oil, gas,minerals, and hydropower resources. Where privatisation involves thetransfer of some element of monopoly powers, it will be linked to theestablishment of regulatory bodies3.
The Business Environment
The most critical requirement for the 1998-2001 period is toprovide a more certain environment for private enteprise and to restore theconfidence of businessmen and investors following the 1997 disturbances.
The measures, outlined in Chapter 9, to strengthen security, ensure fairness
in the operation of the tax and customs collection systems, improve thelegislative and regulatory framework, strengthen the judicial system andimprove standards of public administration will play a key role in establishingsuch a framework. Further initiatives will be taken to bring Albanian trade,investment and business legislation in line with accepted international norms
and thereby enable Albania to move towards accession to the WTO andother international and regional bodies.
Promotion of Business Investment
A priority for the 1998-2001 period will be the implementation of
measures to restore foreign investor confidence in Albania. These will
include:• The establishment of a credit instrument to cover the costs of repairs
to business property damaged during the crisis and the restarting ofbusiness activities. This will involve the provision concessional
financing to be extended in conjunction with commercial bank loans.
• The establishment of a political risk guarantee scheme for foreign
investors for which IDA financing has been sought.

3

The privatisation programme in the telecommunications, power and water sectors is considered further in the relevant
sectoral strategies in Chapter 7.

11Experience from previous initiatives supported under the PIP
suggests that the financing of credit for enterprise investment is mostappropriately provided directly through private sector banks.
The
Government will therefore give greater emphasis to encouraging theinternational financial institutions (IFIs) to become directly involved insupporting investment lending to enterprises, rather than to seek funding
under the PIP for credit lines. However, some further financing for SME
credit lines is expected to be required linked to the implementation of the
new strategy for SME development (see para 0).
The activities of ACFIP will be reviewed and a programme forfurther support developed. Emphasis will be given to encouraging foreign
investment in natural resources based industries, particularly in the energy
sector, which will be facilitated by the Government’s privatisation programme.
With the support of the IFIs, the Government will also encourage private
sector investment in business parks and the development of serviced
industrial sites as a means of reducing the cost and risks of setting up
businesses in Albania. Future initiatives to promote investment in the
tourism sector will be linked to the restoration of stability and the scope for
Albania to market itself as a potential tourist destination. The privatisation ofexisting state tourism enterprises will be pursued.
SME Development
A review of the SME support programme and the role of the
SMEF and RBAs will be undertaken during 1998 and will lead to a new
strategy for SME development. The aim will be to provide a morecomprehensive and inclusive framework for SME policy development
involving the strengthening of inter-ministerial cooperation and greater
involvement of SME representative groups. The legal status of the SMEF
and RBAs will be reviewed with the aim of transforming them into
independent bodies and increasing the impact of their activities. A strategy
for supporting the training of entrepreneurs and the provision of businessrelated services (legal services, accountancy etc.) will be developed, andthe possibilities for providing financial support for training initiatives
investigated.
Community Micro-Credit Schemes
The experiences under the ADF have shown that community-based
credit schemes can play an important role in supporting the development offarm enterprises and micro-businesses. During the 1998-2001 period, it isplanned to initiate the development of savings and loan cooperatives as ameans of channelling increased resources for investment in such enteprises.
Initial support will be provided through the ADF in establishing savings andcredit societies in those districts where economic conditions are consideredsufficiently favourable. Building on this experience, the creation of acooperative credit system will become an integral part of the Government’s
strategy for financial sector reform
Priorities for Privatisation

12• The end of 2003 will complete in the energy sector, the restructuringof the Albanian Electro-energetic Corporate (KESH) with the aim ofprivatisation.
• Start of the privatisation of the Local Hydropower Plants (under 2
Meg Watts), by beginning with the bidding.
• In the oil and gas sector will continue the preparatory proceduresfor the privatisation of Albpetrol”Sh.a. and “Armo”Sh.a supported by
the assistance of the international adviser IMI. The preparatory
procedures for the privatisation of the “Servcom”Sh.a and the othercompanies created after its restructuring will continue.
• In the international Airport of Rinas the services of Albtransport Join
Stock Company should be transformed through a concessionagreement on BOOT basis after the restructuring phase. This
process is going to be concluded by the end of 2002.
• The phase of the liberalizing the services market for the “General
Directorate of Railway” state company will continue during 2003.
• The Water Supply Join Stock Companies of the cities Kavaja, Berat,
Kuçove, Durres, Lezhe, Fier Sarande will sign the management
contracts with private companies by end of 2002.
• In the Telecommunications sector the Government aims tocomplete the privatisation of Albtelecom during 2003.

Trade and investment system
FOREIGN INVESTMENT PROTECTION AND AGREEMENTS TO
AVOID DOUBLE TAXATION
The foreigners, either juridical or physical persons, enjoy the right of
exercising different economic activicies in Republic of Albania and invest
their capital in different sectors of the Albanian economy.
They are allowed to exercise economic activity and carry out investments in
Albania generally enjoying no less favorable conditions than thoserecognized to local subjects. except the right of ownership on land.
The most important law, which in really provide a number of basic
guarantees and protections for foreign investors is Law No. 7764, dated
November 2,1994 “On Foreign investments”.
According to this Law, all the foreigners either physical or juridical persons,
who intend to invest in Albania have no need to demand for permission or
autliorization, they shall not be expropriated or nationalized or be subject to13

any other measure equivalent with these.The foreign investor enjoys theright to transfer out of the Republic of Albania all funds in currency and any
article related to his investment.
The investor enjoys juridicai protection of his rights related to an investment
made in Albania. Such a protection is guaranteed both for a dispute thatarises betvveen a foreign investor and the Albanian party.
It is up to the parties to define the procedures for the resolution of the
dispute that implies the Arbitration Clause and in the event of failure of suchprovision, the foreign investors enjoy the right to submit the matter to an
Albanian court or to an Arbitration Court in Tirana.
In the event of a dispute involving discrimination, transfers of assets, orindirect exprpropriation of a foreign investment by the Albanian Government,
the investor may submit the dispute to the International Center for the
Settlement of Investment Disputes (“ICSiID”). Special protection is
guaranteed to foreign investments in Albania and to foreign investors fromthe states with which the Republic of AI-bania has signed agreements
concerning avoidance of double taxation and mutual guarantee ofinvestments.
To provide security and protection against loses arising from political risks,
thereby providing confidence to potential exporters and investors in Albania,
the International development Association (the World Bank) has approved acredit of USD 10 million to the AIbanian Government under its Private
Sector Recovery Project to support a Political Risks Guarantee Facility, tobe administered by the Albanian Guarantee Agency (AGA), a statutory
corporation owned by the Government of AIbania.
It is a Program to give guarantees to private sector entities that havefinancial exposure in Albania for a productive purpose. The guarantee
covers a range of political risks, including the risk of civil disturbance of thekind experienced in March of 1997.

BANKING SYSTEM
To facilitate the transition to a market economy the Albanian banking system
underwent major changes from the year 1992. The bank system wastransformed according to Law 7559, dated 22.04.1992 “ On the Bank ofAlba-nia” and Law 7560 dated 28.04.1992 from a centrally planned system
to a two tiered system. The reviewed legislation of 1996 and 1997 further
developed banking sector. Actually, the structure and functioning of thebanking system is regulated by the Law 8269 dated 23.12.1997 “ On the
Bank of Albania” and the Law 8365 dated 2.07.1998.
The main principle is that banks should operate on a fully commercial basewhether they deal with private or public sector. According to this new system
the commercial banks and other financial institutions can provide a whole
range of services under the supervision of the Bank of Albania which
operates as an independent legal entity bound directly to the AlbanianParliament, and is responsible for the formulation and implementation of themonetary and foreign exchange policy in Albania.
The primary objective of the Bank of Albania is to achieve and maíntain
price stability in the country. In order to reach this objective· the Bank of
14

Albania is empowered to foster monetary and credit conditions beneficial tothe economic development of the country. It license, supervise, and regulate
the activities of banks and fìnancial institutions, hold and manage the official
foreign exchange reserves of Republic of A!bania, emit the domestic
currency in the Republic of Albania, distribute securities for the account of
the state and issue securities for its own account.
The Supervisory Council of the Bank of Albaania is responsible forapproving the monetary and foreign exchange policy of the Bank of Albania,
determining the interest rates for deposits and extensions of credits, andsetting the types and levels of reserves the commercial banks are required
to maintain with the Bank of Albania.
To promote private commercial banking sector development. the Bank ofAlbania has adopted a liberal policy regarding the licensing ot privatecommercial banks·and this sector will see significant growth in the future.
Commercial banks may be established as joint stock companies according
to Law 7638 on Commercial Companies, and they may be founded
exclusively with Albanian capital, foreign capitaI, or with common capital.
These banks have the right to hold all kinds of deposits, borrow funds andextend credit lines, provide banking and consulting services etc. Any person
wishing to act in the business of banking must obtain a license from the
Bank of Albanìa. Banks licensed under foreign law can open subsìdiary,branch, agency, or other banking offices in Albania. The license to operate
as a bank in Albania is unlimited in duration and is not transferable.
Subsequent requests to expand or change the bank’s network in Albania
must be approved by the Bank of Albania.
The principal credit lines in Albania are as follows:
The National Commercial Bank, FEFAD (Foundation for Enterprise Financeand Development), Savings Bank, International Finance Corporation (IFCMember of World bank Group), Albanian Development Fund, Italian
Albanian Bank,
Albanian American Enterprise Fund, Interntional Commercial BankMalaysian Bank, Tirana Bank, Alpha Credit Bank,
National Bank of Greece and Arab Albanian Islamic Bank will have their
credit lines in Albania.
Investment Funds
Law no. 7979, dated 26.7.1995, regulates the establishment and operationof Investment Funds.
Investment Funds are joint stock companies involved in in investment,
reinvestment, hold or exchange of privatisation vouchers. The minimum
capital requirement is the equivalent in lek of USD 20 000. Foreign entities
and companies whose capital is partly owned by foreigners may subscribe
no more than 50% of the basic capital of the Fund. The Fund is managed bya licensed administrator in accordance with the management contract. The
administrator must be a subject not employed in the investment fund. The
investment fund must appoint a licensed depozitor to accomplish depositor’s
duties as well as a certified public account. Normally the organisation of an
Investment fund follows the rules found in the company Law for joint stock15

companies. except for some specific rules and regulation as specified in theInvestment Law.

TAXATION SYSTEM
During the transition from a central to a market economy, Albania hasdeveloped new tax laws. These laws have been developed with theassistance of the International Monetary Fund, the European Union, theUnited States Treasury Department, and others; and Albania is continuing torevise its tax legislation to accommodate it to the needs of market economy.
Therefore, the foreign investor should seek counsel in order to ascertain therelevant tax regime in force.
Albania has already signed international agreements on avoiding double
taxation with numerous countries, like Croatia, Greece, Hungary, Italy,
Malaysia, Poland, Turkey, Rumania, Czech Republic, Russian Federation.
The Albania taxation system includes:• profit tax• income tax• property tax• value added tax• excise tax• Profit Tax
The profit tax applies to all legal entities performing commercial activity in
Albania, whether domestic or foreign ones. This tax applies equally tocompanies with their seat in Albania and to branches of foreign companies.
All taxpayers pay profit tax at the rate of 30% of the profit resulting by theend of fiscal year the balance is set of. If after the balance is set of, there isa loss, than the loss is carried forward to the following tax period. Tax losses
can be carried over into next year for a period up to three years. However,for entities generating profits through tourism activities, the rate is 40% andfor profits generated from oil and gas exploration, the rate is 50%.
Profit tax is paid in advance during the course of the year, based on thebusiness results stated in business books and financial reports.
Tax credits of up to 60% may be available when a company reinvests its
profit in the production sector. In addition, if a company does business in the
production sector in Albania for at least ten years, profit earned during thefirst four years of activity is exempt from profits tax. If the company ceases
its activity prior to the expiration of the ten year period, it becomes liable forthe full amount of the taxes ex-empted.
Companies that act in the tourism sector enjoy a five-year tax exclusion on
profits as well as certain customs and excise tax benefits.
• Income tax
Taxpayes liable to pay income tax are Albanian and foreigner, physicalpersons realising profit in the Republic of Albania. Foreigners are liable for
personal income tax if they have an income in Albania and spend a periodof more than 183 days ìn Albanïan territory.
16

The minimum wage and remuneration taxable is 10000 Lek/month. The
maximum level of personal tax is 20%. Other kind of incomes are taxed a;l0%. Exception is for creative work which is taxed at the level of 5%.
• Property Tax
There is a tax on agricultural land and buildings imposed by Law 7805 on
Property Tax Revenues Tax on agriculture land which varies depending on
the quality and dimensions of the agricultural activity.
The tax on buildings is paid by the owners of the buildings. It varies from 3
to 6 lek/m2 per year for living houses depending on whether the house issingle building, buildings in co-ownership or in the countryside. For buildings
for manufacturing activities or service activities including trade activity, thetax rate varies from 50 to 100 lek/m2 per year.
• Value added tax
On July 1, 1996, Albania implemented a value-added tax (VAT), Law 7928
on value-added Tax provides for a VAT at a rate of 20% (October 1, 1997).
Currently, there are very few exemptions (e,g, financial services), although
exports are zero rated. Businesses are required to register for this tax if theirannual turnover exceeds 5 million lek (1 January 1998).
VAT taxpayers are required to issue receipts (according to the model
approved by the General Directorate of Taxation at the Ministry of Finance).
Also, they are required to keep detailed books documenting the VAT paid onpurchases and charged on sales. At the end of each month, VAT taxpayers
must total the amount of VAT paid and charged and submit this information
on a VAT declaration. To the extent VAT is due, the proper payment must
accompany this declaration.
A VAT taxpayer may request fund of VAT paid if two conditions are met.
First, the taxpayer must have carried forward a VAT tax credit for six
consecutive months; and second, the total refund claimed must exceed
400,00 lek.
• Excise tax
Actually, law 7678 on Excise Duttes imposes an excise tax on certain items,
including tobacco, alcohol, petroleum products, leather, soft drinks, andwater. This excise tax is levied on all individuals and legal entities. The
excise duty is only paid once by importers or producers of goods and not on
subsequent transfers.
In the actual Albanian legislation, there is a discrimination between theimported products such as tobacco, cigars, cigarettes, alcoholic drinks, softand fresh drinks, electrical energy, derivatives of petrolium and coffee. For
these products there is a difference in excise between domestic andimported products.
The Government has prepared a new law on excise. In this law there will besome excise system for both products that are produced in the country andthose imported.

INSURANCE SYSTEM

17

Law 7506, dated 31.7.1991 “On the Insurance Institute” and law nr 8081,
dated 7.3.1996 “On insurance and reinsurance activity” established themodern insurance system in AIbania.
Private insurance companies can be established. Foreign insurancecompanies can exercise their activity in Albania only through their branch inAlbania, upon the condition that the mother company must have at least aten years activity in the field.
Participation of foreign capitals in Albanian insurance companies can notexceed 40% of the capital and voting rights.
The required capital for insurance and reinsurance jointstock companies,
excluding the contributions in kind, must be no less than 30 million lek.
The license for insurance and reinsurance companies is granted by theSupervisory Commission of Insurance.
The Insurance Institute (INSIG) is for the moment the only insurance entity
exercising insurance activity in the territory of Albania. It is a state owned
entity and has branches in 28 districts of Albania.
INSIG offers the following services:• insurance of property against fire and other risks, such as explosion,lightning, earthquake,• insurance against any kind of tempest, snow, avalanche etc.
• insurance of economic units from burglary• CAR, EAR and machinery insurance• cash in transit insurance• contractor’s all risk insurance• business interruption insurance,• agriculture insurance• insurance of livestock• insurance of liabilities toward third parties• KASKO insurance• Green Card
• marine hull
• insurance from personal accidents• credit life insurance• traveller’s health insurance• insurance of passengers• credit insuran• reinsurance and coinsurance activity and co-operation with well known
interantional reinsurance companies.
FINANCIAL SECTOR
Albania is trying to develop a diversified modern financial system. The
operators in the Albanian financial system can be classified as follows:
The central issuing bank, commercial banks including saving bank, stock
market,investment funds, insurance and reinsurance companies and credit
associations (cooperatives)
Banks
18

Law nr. 7559, dated 22.4.1992 " On the Bank of Albania" and Law nr.
7560, dated 28.4.1992 transformed bank system from a centrally planned,
single tier system, to a Westem two tier system with the Bank of Albania as
the central bank and second level or commercial banks. Law nr 8076, dated
22.2.1996 and law nr. 8075 dated 22.2.1996 further developed the banking
sector. The activities of the Bank of Albania have paralleled those of central
banks in other market economies. The main principle behind the legislationis that banks should operate on a fully commercial base whether they deal
with public or private sector.
Bank establishment
Joint banks or totally private banks with Albanian or foreign capitalcan be established. The licence to establish and operate a bank is obtained
upon written application at the Bank of Albania. In accordance with a form
issued by the Bank of Albania, a list of documents must be presented
together with the request for getting a license. Actually in Albania there arethree state-owned commercial banks, two joint banks with participation offoreign capitals, three foreign private banks and the branch of the Nationai
Bank of Greece. Other foreign banks or branches of foreign banks have got
the license and are in the process of establishment. There are programs forthe privatisation of second level state-owned banks.
Credit policy
Substantially all Albanian banks provid2 a full range of services andoperations for their clients and operate in accordance with the private-sectorbanking practices. The majority of commercial banks generally lend theirfunds preferably to private persons although they can also finance major
public works. The most common credits are of short and medium
terms .Indications on credit and deposit interest rates of some commercial
banks ( as per second quarter 1996
Stock market
Tirana stock exchange was established on May 1996 and is arelatively new institution. For the moment govemmental bonds, treasury bills
with 12 month maturity and privatisation vouchers are traded. A National
Stock Exchange Commission controls the activity of the stock exchange andco-operates in the development of its regulations Indication on security rates,
as per July 1996.
Insurance
Law 7506, dated 31.7.1991 " On the Insurance Institute" and law nr
8081, dated 7.3.96 "On insurance and reinsurance activity" established themodern insurance system in Albania. Private insurance companies canestablished. Foreign insurance companies can exercise their activity in
Albania only though their branch in Albania, upon the condition that themother company must have at least a ten years activity in the field.
Participation of foreign capitals in Albanian insurance comanies can notexceed 40% of the capital and voting rights. The required capital for
insurance and reinsurance joitstock companies , excluding the contributions
in kind, must be no less than 30 million lek. The license for insurance andreinsura  ce companies is granted by the Supervisory
19

Commission of Insurance.
The Insurance Institute ( INSIG ) is for the moment the only
insurance entity exercising insurance activity in the territory of Albania. It is astate owned entity and has branches in 28 districts of Albania.
INSIG offers the following services :-insurance of property against fire and other risks, such as explosion,lightning, earthquake,-insurance against any kind of tempest, snow, avalanche etc.
-insurance of economic units from burglary-CAR, EAR and machinery insurance-cash in transit insurance-contractor's all risk insurance-business interruption insurance-agriculture insurance-insurance of livestock-insurance of liabilities toward third parties-KASKO insurance-Green Card-marine hull-insurance from personal accidents-credit life insurance-traveler's health insurance-insurance of passengers-credit insurance-reinsurance and coinsurance activity and cooperation with wellknown international · reinsurance companies
Investment Funds
Law nr. 7979, dated 26.7.1995 regulates the establishment andoperation of Investment Funds. Investment Funds are jointstock companies
involved in investment, reinvestment, hold or exchange of privatization
vouchers. The minimum capital requirement is the equivalent in lek of USD
20 000. Foreign entities and companies whose capital is partly owned byforeigners may subscribe no more than 50% of the basic capital of the Fund.
The Fund is managed by a licensed administrator in accordance with the
management contract. The administrator must be a subject not employed in
the investment fund. The investment fund must appoint a licensed depositor
to accomqlish depositor's duties as well as a certified public account.
Normally the organization of an Investment Fund follows the rules found in
the company Law for jointstock companies, except for some specific rules
and regulation as specified in the Investment Law.
TAX SYSTEM
There are two level of taxation in Albania:
at national levelat regional level ( municipality level)

20

Taxes at national level are by far the most important one, while thoseat municipality level are mostly related with hotels, restaurants,
advertising, cleaning and ambulatory trade.
National tax system in Albania can be classified as follows:
Direct taxes:a) On income:corporate income tax (tax on profit)
personal income taxb) On assets:
tax on buildings
tax on agriculture land
Both these taxes are marginal and normally doesn't play any important role
Indirect taxes:-value added tax
excise tax
custom duties on imports
Legal acts
The main legal acts that determine the Albanian tax system are thefollowings:-Law nr. 7681, dated 4.3.1993 "On the administration of taxes
and fees in the Republic of Albania"
Law nr. 7677, dated 3.3.1993 " On the tax on profit"
Law nr. 7678, dated 3.3.1993 " On excise tax"
Law nr. 7679, dated 3.3.1993 " On small business tax"
Law nr. 7928, dated 27.4.1995 " On value added tax" and theiramendments. There are a number of circulators issued by the Ministry of
Finance on the implementation of the legal acts concerning the tax system.
Corporate income tax (Tax on profit)
This tax applies to all legal persons, Albanian or foreigner, thatexercise economic activity in territory of Albania and for that reason are
considered as resident in Albania for tax purposes. This applies equally tocompanies with their seat in Albania and to branches of foreign companies.
A tax on profit of 30% is level on profits made by resident companies in
Albania, irrespective of their legal form. Normally the tax on profit is prepaid
each quarter and by the end of the year the balance is set off. For
companies that exercise economic activity in tourism, this tax is 40%.
Companies that exercise economic activity in oil and gas exploitation pay anaverage of about 50a/o tax on profits depending on the quantity produced.
Taxable income is determined according to the Law No.7671, dated
19.1.1993 "On the Accounting" and is in line with standard westem businesspractices.
Personal income tax
21This tax is a progressive one. Foreigners are considereå as residents
in Albania and liable for personal income tax if they have an income inAlbania and spend a period of more than 183 days in the country. The
minimum wage and remuneration taxable is 10000 lek/month. The
maximum level of personal tax is 20%. Other kind of income are taxed at
10%. Exemptionally the creative work is taxed at the level of 5%.
Tax on assets.
The tax on buildings is paid by the cwners of the buildings . It varies
from 3 to 6 fek/m2 year for living houses depending on whether the house issingle building, buildings in co-ownership or in the country side. For
buildings for manufacturing activities or service activities inciuding tradeactivity, the tax rate varies from 50 to 100 lek/m2 year.
Tax on agriculture land varies depending on the quality of agriculture
land from 1500 to 6000 lek/ha year.
Value added tax
The value added tax entered in force in July 1,1996 and substituted
the tumover tax that was applied up to that moment. The basic purpose of
VAT law was to adapt the Albanian legislation to EU VAT directives andregulations. The value added tax is levied on all legal and natural persons
that performs goods or services supply. supply and is calculated based on
the total sum paid for the goods or services. The tax rate is 2C%.(Law 8240
dates 16.9.1997) For exports and intemational services the tax rates in 0%.
Following the EU model certain transaction are VAT exempt e.g. services
and supplies of goods related to financial activities, transaction related toshares, stocks, bonds and other securities, transactions related to bankaccounts, transfers, cheques, transaction related to life insurance policy,
management of pension funds, rental of residential property etc. Also goods
supplied under the temporary importation regime for job processing
activities, are VAT exempt. VAT must be paid within the first 14 days of thenext month.
Excise tax
Excise tax is applied on limited number of goods such as tobacco,
cigars, cigarettes, alcoholic drinks, soft and fresh drinks, electrical energy,
derivatives of petroleum and coffee. This tax is applied only for goods
produced in Albania or imported. For goods produced in Albania the excise
tax is calculated on the bases of the value of each lot of goods sold and forimported goods it is calculated on the bases of the custom value. Excise tax
is not applied on above mentioned goods when they are exported. Excise
tax for tobacco and tobacco products is 50% to 70% when produced in
Albania and 100% to 105% when imported. Alcoholic drinks have an excise
tax of 40% to 105% when produced in Albania and an additional of 25%
when imported. For derivatives of petroleum the excise tax is in the range of
25% to 85% and for some specials derivates up to 300 %. Normally theexcise tax stimulates the domestic production of goods rather than import ofgoods
Custom duties
The "Harmonized Goods Classification System" have been in force inAlbania since 1992. The main body of legal acts concerning customs is22comprised by: Law nr. 7599, dated 2.9.1992 " On Custom Code" Law nr.
7609, dated 22.9.1992 " On Custom Duties", and a series of amendments
updating it as well as a number of Council of Ministers Decisions andCirculators of the Ministry of Finance . According to the Custom Code, themanagement, organization and the control of the custom activity in Albania
is realized by the General Directory of the Customs. Normally the custom
value includes the price of the good, and transport and insurance expenses.
There are four levels of custom duties for imported goods: 5 %,10 % 30 %and 40% Some indications about custom tariffs are provided on the annexesof this guide.
Tax on small businessThis tax is applied on individuals exercising private economic activities.
It includes learned professions as well as small scale individual ambulatory
trade activity. It is calculated on the bases of the total revenues and varies
from 2% to about 10% depending on the type of activity.

Investment incentives in Albania
In order to respond to investment expectations and the need topromote growth, a system of incentives is implemented in Albania. These
incentives apply equally to foreign investors and Albanian investors. The
most important incentives are the followings:
There is a four years tax holiday for all companies that exercise for atleast 10 years economic activity in manufacturing or production sector.
There is a 60% reimbursement on tax on profit for re-invested profits
in production sector.
There is a five years tax holiday for companies that exercise"promoted activity" in a tourism development zones, in accordance with the
Law No. '7665, dated 21.1.1993 "On priority tourism development zone".
There is a package of tax incentives for companies operating in a freezones or entering a concession contract
There is no limit on debt/equity ratio
Losses can be carried on for three consecutive years in addition to
the year the loss occurred.
Albania does not levy a withholding tax on outgoing dividends.
To help investors in recovering losses due to the damages of therecent political and social unrest, a law was adapted by March, 1997 on the
Temporary exemption from custom duties and VAT on importation ofmachineries, equipments and necessary materials for their assembly,which
are imported for investments on manufacturìng, construction and services intelecommunication, banking as well as in water suppy and electric energy.
The law will have effects till December 31,1997.
23

Accounting
The regulations governing the accounting records to be kept bybusinesses In Albania are contained in the Accounting Law ,( law nr. 7661,
dated 19.1.1993) in force since 1993. According to this Law, all theenterprises must keep orderly accounts, appropriate to their activity, without
prejudice to the requirements of special laws or regulations.
Bookkeeping practices vary, from companies which have theiraccounts computerized and bind the computer sheets in sequential order toform their obligatory accountings records, to companies that keep theiroffcial ecords by hand. In the later case , entries are often posted monthly
summarizing the transactions of the month, one month being the maximum
period permitted for transactions to be grouped together for recording
purposes. Accounting entries must be posted in Albanian currency, lek. The
accounting principles which aim to ensure that a company's annual financial
statements are clear and present a true and fair view of its financial position,
are much in line with those used in EU countries:-Prudence-Going-concern-Recording-Cost bases-Accrual bases-Matching the revenues and expenses-Consistency-Materiality
Principles of calculation include among others the followings: Fixed
assets and circulating assets are estimated according to the consignment or
production cost. Deprecation schedules are determined by the Ministry of
Finance. Intangibles are depreciated within a five years period, unless it isotherwise determined in the General Accounting Plan or in the absence ofsuch a determination, a different schedule of deprecation is approved by the
Ministry of Finance. A general assembly can only distribute a dividend after
having approved the financial statements and having taken note of theexistence of distributable earnings. Distributable earnings are derined as net
earnings of the financial year minus prior losses and allocation ;o the legal
reserve or a reserve made mandatory by the articles, increased by any
earnings carried over. The minimum balance for the legal reserve can not
be distributed.
Annual financial statements include the balance sheet, profit and loss
account and an annex with the disclosure requirements. The presentation of
cash flow statement is not obligatory. Normally the financial year correspondto the calendar year Normally the annual inancial statements must be
audited before presenting them to the tax offces. Auditing is not obligatory
for companies that do not exceed two of the three following indices:-a balance of 6 million of lek at the end of the respective year
-12 million lek in total revenues-an average of 10 employees during the financial year
The majority of the companies must present their financial statementsin the relevant tax offce within March 31 of the next year.

24

LABOR LAW
The basic legislation is the Labor Code approved by the Parliament in
12.7.1995. Other important acts related with labor are: law nr.7995, dated
20.9.1995 " On the promotion of employment", law nr 7939, dated 25.5.1995"On migration", law nr. 7986, dated 13.9.1995 " On state inspectoriate forlabor' and a number of Council of Minister's Decisions.
Labor contracts are normally bargained at two levels: at factory level
for the so called collective labor contract and at individual level for the socalled individual labor contract.
The collective contract contains dispositions concerning theemployment conditions, individual labor contracts, professional education as
well as mutual obligations of the contracting parties. The parties in acollective contract are one or more employers on one side and one or moretrade union on the other side. The collective contract is settled at enterpriselevel or branch level as the parties agree.
The written labor contract must include in particular:· identity of the parties· place of the work
· general description of the work
· the initial date of the work
· duration if the contract is a contract with a fixed duration· duration of the paid vacancies· the time period of notification for contract resolution· the constitutive elements of the wage and the date of payment· the normal duration of the working hours of the week
· the labor contract must include also the collective contract in force
The labor contract can be settfed:· without a fixed duration· with a fixed duration
The first three months of the work are considered as test period.
During the test period each party can withdraw from the contract by notifying
the other party at least five days before.
The working hours
Daily working hours are fixed in the collective labor contract orindividual labor contract. The normal working time in a day is 8 hours. Thiscan be longer or shorter only within the limits of the maximal weekly working
time. Employees under 18 years old have a daily working time of no morethan 6 hours.
Night shift begins at 22 o'clock and ends at 6 o'clock in the morning.
For any working hour from 19 o'clock up to 22 o'clock the additionalhour wage shall be no less than 20 %.
25

For any working hour from 22 o'clock up to 6 o'clock in the morning
the additional hour wage shall be no less than 50 %.
The maximal weekly working time is 48 hours.
The weekly unpayable holiday is 36 hours and normally includes
Sunday.
For the work done during a holiday the additional payment is at least
25 % or it will be compensated with another holiday.
The maximum additional working hours are fixed in collective labor
contract or individual labor contract. The employee can not be asked for
additional working hours if he has worked 50 hours during that week. The
additional working hours are compensated either by holidays or by anadditional payment of at least 25 % more than the normal rate.
Annual vacation
The duration of paid annual vacation shall be fixed in the collective
labor contract or individual labor contract. It can not be less than 3 weeks.
Special protection for underage and women are foreseen by thE: labor
legislation. These are mainly related with night shifts, heavy weights, special
working conditions during pregnancy etc.
Wages
The wage can not be less than the minimum wage fxed by thedecision of the Council of Ministers.
The employer pays regularly the employees every two weeks if thewage is calculated based on hours, days or weeks worked or by the end ofeach month if it is calculated on monthly base.
The employer deducts from the payroll of employees the individual
income tax and social irsurance payments.
Procedure for dismissal
For the period after the test period, if the employer wants to dismiss
the employee, he must inform him in a written form at least 72 hours before
discussing the problem with him. The employer presents his reasons for thedismissal. The decision can be taken only 48 hours after the discussion withthe employee. It must be in a written form. This procedure is not applied incase of massive dismissal. A dismissal is qualified as a massive dismissal
when the number of employees dismissed within 90 days is at least 20,
independently form the total number of the employees in the enterprise. In
such a case the employer must discuss first with the trade union that
represent the employees or in the absence of such trade union with theemployees.
The duration of consultation must be at least 20 days. The employer
must inform in a written form the competent authorities for any massive
dismissal. A copy of the project of massive dismissal must be sent to the
Ministry of Labor. The Ministry of Labor helps the parties to achieve anagreement but does not have the right to forbid a massive dismissal.
Social security system.
All employers, their employees, self-employed persons, civil servants
etc. must be registered with and pay contributions to the Albanian social
security system. Under this system, social security contributions are paid
partly by the employer and partly by the employee. There is a minimum and26

a maximum wage used for the calculation of social security calculations,which are ordinarily revised from time to time. Employees whose totalcompensation or wage exceeds the maximum base, pay their social security
contribution according to this base. For 1996 the minimum wage and the
maximum one were respectively 4100 lek/month and 12300 lek/month.

FDI IN ALBANIA
Albania may not be the first country that sprang to mind when you
decide to invest abroad, but there are good reasons why it should be top ofyour list. Albania offers:-Strong commitment of the government to a market economy,
supported by stable social climate and friendly, liberal legislation.
-Rapid GDP growth rate.
-Wide and quick privatization and widespread of private property-Availability of skilled labor coupled with low labor costs-Market proximity and rich natural resources including tourism
Basic legal principles of foreign investment in Albania
Foreign investment in Albania can be classified in the following
categories:-direct investment, including green field investment·
participation in
Albanian companies-portfolio investment-other forms of investment as specified in the Foreign
Investment law.
The rationale behind the legal principles of foreign investments is thefundamental truth that open regimes with respect to foreign investment andtrade are necessary for enhancing international competitiveness andintegration into the global economy. Albania has adopted the national
treatment clause, that is foreign investments are treated on a bases no lessfavorable that that accorded in like situations to Albanian investments. This
principle is bases on the general premise that equal treatment of investors insimilar circumstances and free competition among them are prerequisite ofa positive investment environment. Foreign investments in the Republic ofAlbania are not conditioned by any preliminary authorization.
Albania offers in ali cases and at all times a fair and equitable
treatments to foreign investments. They enjoy full protection and security inaccordance with the basic principles of International Economic law. The
foreign investor has a wide variety of options to be considered when decides
to make an investment in Albania. Practically Albanian legislation provides
room for all internationally accepted forms of FDI.
It should be stressed that practically all kind of assets can be freelytransferred outside Albania subject to the payment of taxes and thesatisfaction of claims and adjudicatory judgments. No withholding tax is
applied on such transfers.
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A liberal attitude is adopted by Albania also in matters conceming
expropriation, discrimination, compensation and transfer of money; Albania
consents to the submission of the dispute for resolution to the International
Center for Settlement of
Investment Disputes to be treated in accordance with the Convention on the
Settlement of Investment Disputes between States and Nationals of Other
States.

SUMMARY OF ALBANIAN COMPANY LAW
The law no. 7638, dated 19.11.1992 “On commercial compunies”
established the legal bases of any Albanian company. The main principles
are organized around two axes, the company as a contract among its
associates and the company as a legal entity distinct from its owners.
There are four forms of companies according to Albanian company law.:
PARTNERSHIPS, LIMITED PARTNERSHIPS, LIMITED LIABILITYCOMPANIES and JOINTSTOCK COMPANIES.
The Legal Foundation of any Albanian company rests on its articles ofassociation and by-laws (the articles). In general the articles may be innotaries form or simply signed by the associates as a private document. The
form, name ,duration, company desigation, principal place of business,
purpose and amount of capital must be indicated in the articles. Additional
items are required of a limited liability company or a joint stock company.
A company generally can be created when two or more persons associate
and agree to create a company. However according to the Albaniancompany law, limited liability companies or joint stock companies can exist
also as one - man company.
Each associate must make a capital contribution. Capital contributions cantake a number of forms: cash, in kind contribution or use of property. The
essential condition for a capital contribution is that it must have anascertainable value. The capital contribution by an individual of his technicalknowledge or services for an interest in the company is rarely permitted inany company form since service can not be subject to a forced sale tosatisfy the company’s creditors.
PARTNERSHIPS In Albanian company law, the general partnership isconsidered an entity (i.e. with legal personality) distinct from its partners,
who themselves may be individuals or legal entities. All partners in a generalpartnership are considered merchants and are jointly and severally liable forcompany debts. The minimum number of partners is two. No minimum
capital is required. Interests in a partnership can not be represented bynegotiable share certificates. No securities can be issued by the partnership.
THE LIMITED PARTNERSHIP has two classes of partners, generalpartners and limited partners. The general partners are deemed merchants
and have unlimited personal liability. The limited partners are only liable fordebts to the extent of their interest in the company’s capital.
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LIMITED LIABILITY COMPANY The associates are not consideredmerchants as such. They are liable for the company’ debts only to the extent
of their interest in the company’s capital. There is no limit on the maxìmum
number of associates. A limited liability company is managed by one ormore managers.
THE MINIMUM CAPITAL required for the establishment of a limited liability
company is 100 000 lek (roughly the equivalent of about USD 1000
calculated at the rate of exchange of January 1993).
The capital is divided into interest - shares of equal nominal value. The
minimum nominal value is set at 1000 lek. Cash or any property, real or
personal, tangible or intangible, can be contributed to a limited liability
company’s capital, either its use or total ownership. No contribution inservice is permitted.
ALL THE CAPITAL must be subscribed to and paid up before organizationof the company and the articles must state that the capital is all paid in.
Interest - shares in a limited liability company are not freely negotiable andcannot be represented by share certificates. Nothing prohibits certain
interest - shares from having a larger or priority share on the profits.
THE LIMITED LIABILITY COMPANY is administered by one or moremanagers. The identity of the first original managers must be mentioned in
the articles filed for registration. In the absence of a contrary close in thearticles, a manager has the power to perform any managerial act in thecompany’s interest.
ANY decision that amends the articles is considered “ extraordinary “ andrequires a greater majority than “ordinary” decisions.
Extraordinary decisions must be approved by at least three quarters of thecapital. This is also applied in case of decrease or increase of the capital ortransfer of an interest - share to a non - ássociate. Subject to thetransformation being nullifiable, all the associates must agree to theoperation of transforming a limited liability company to a partnership.
A limited liability company’s management’ s generally is supervised by the
Assembly. Two other management supervisory mechanism exist: the self dealing procedure and the rules requiring use of an official auditor.
JOINTSTOCK COMPANIES The Albanian jointstock company is deemedcommereial by form. The Albanian company law makes a distinction
between jointstock companies that have offered their shares for sale to the
public and those that have not. A jointstock company is deemed to make apublic offering of its securities when they are listed in the stock exchange,
are sold through banks, brokers or other types of financial institutions or
their sale is publicized in any other form. Normally it is quite rare for a
jointstock company to make a public offering while it is being organized.
This way no public offering is made during incorporation and the formalities
are simpler.
MINIMUM CAPITAL required for a public jointstock company is 10.000.000
lek (the equivalent of about USD 100 000 calculated at the rate of exchange
of January 1993), for a private jointstock company the minimum capitalrequired is 2 000 000 lek (the equivalent of about USD 20 000 calculated at29

the rate of exchange of January 1993). The par value of the shares can be
freely fixed in the articles.
DURING organization of ajointstock company , all authorized shares mustbe subscribed, but only one fourth of par value need be paid in immediately
and the remaining portion must be paid up within five years of company’s
registration. Normally, a privately - held jointstock’company will not use
subscription bulletins. Shareholders must share in earnings but notnecessarily in proportion to their rights to capital. Their share in losses islimited to their share injointstock company’s capital, however.
MANAGEMENT The management form comprises a directorate, which
manages the jointstock company and a supervisory board that controls the
directorate. Members of the directorate need not be shareholders, but theymust be physical persons. T’he supervisory board must have no less thatthree members and no more than twenty one. One third of the members ofsupervisory board must be from employees.
THERE ARE two types of general shareholder’s meetings, termed ordinaryand extraordinary. The extraordinary Assembly decides with the approval ofthree - forth of the voting shares present or represented. The ordinary
Assembly decides with the majority of shares presented or represented.
THE NUMBER of votes per share must be proportional to the proportioñ of
the capital it represent.
Fraction of shares are not taken into account.
SHAREHOLDERS are accorded a preferential right to subscribe to newshares resulting from cash increase in capital pro rata to their current
interests in the company. The company’s capital must be completely paid up
before new shares may be authorized to compensate cash contribution byshareholders.
SHARES A jointstock company can issue different types of shares: ordinary,
preferred shares, voting or non - voting shares, registered or bearer shares.
A jointstock company is not allowed to purchase its own shares, except tocancel them and thus reduce its capital when not motivated by losses.

Institution to promote foreign investment
ALBANIAN ECONOMIC DEVELOPMENT AGENCY
AEDA was founded in August,1998 with the initiative of the Albanian
Government, in the context of implementation of new policies to increase
investments and exports, as well as in the context of reformation of public
institutions. It plays the role of an operational branch wich actively helps
fulfilment of programs of the government.
AEDA's legal responsibility as joint stock company offers an operatíonal andflexíble activity like all other private companies, while by being a statecompany 100%, it has all the necessary facilities and authority to surpass
bureaucracy hinders ìn protecting businessmen in Albania.

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The main aim of AEDA is to incite economic development in the country,
and in accordance with this, it has chosen well developed forms, backed bya well-prepared staff af professionals and a wide network of outside
authoritative experts in the field of economy, finance, business, legislationand others.
In order to organise and reconstruct in Albania the bases of industry,
agriculture and servìces, in the context of the market economy, which will
enable Albania's integration in the global markets, it is necessary to develop
a quick exchange of qualitative, serious and professional information.
AEDA is engaged with its Information Department to gather, process anddeliver all standard information taken by state or private bodies as well as
every other kind of information of economic value collected during
implementation of different projects, from monitoring or specific study by
every other serious and credible source.
Materials published by this agency include a daily newspaper, electronic
newspaper in the Internet, publishing in the deferent sectors or enterpriseprofiles. The newspaper is specialised in economy, which will giveinformation to businessmen in a simple journalist like way, the economic
and juridical possibilities in setting up a business, it will publicly offer the
strategy and the ways of privatisation, economic policy of the government,
operational data of the economic development in Albania, of public and local
economy.and be helpful with information on currency exchange rate andmarkets of goods, on customs and fiscal regime, as well as on financial
instruments and programs.
Creatíon of a favourable environment for investments in Republic of Albania,
which will result in opening of new jobs, is the main aim of the Promotíon
Department activity, which will be able to offer suggestìons andrecommendations to the government in improvement of its legislation andprocedures in process of development of economy in general and of specificsectors.
The Promotion Department's most important job is promotion of investmentsfrom Albanians and foreigners, promotion of exports and commercial
exchange, promotion of the privatisation program for state owned sectors of
economy, study of potential possibilities of diferent branches of economy toattract private capital. It will also realise complete and professional services
towards local and foreign investors by offering them information, specialised
consultantcy, a study of the market and study on the credibility of a business,
etc.
AEDA develops its specialised activity according the formula "one stop", inservice of private and public subject of international organisation or theNGOs. It co-operates with its counterpart organisations and institutions.
AEDA's engagement in projects, contracts, conferences, seminars, fairs,round tables and other activities with foreign international financing bodies,with donors, as well as private subject enables realisation of a wide program,in favour of economic development of Albania.
Albanian SME-s and foreign businessmen, public and private institutíons,international organi-sations and every subject interested in Albanian market
and economy will profit by realisation of AEDA-s programs.
Programs of international bodíes, its publishìng activity, specialised andprofessional consultation, specific studies, different advertisement and31

logistics services, will make up the financial mechanisms which will secure
the activity of the Agency and will create possibilities of fund accumulation
for promotion of new initiatives.

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