[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 8.11.2006

SEC(2006) 1383

COMMISSION STAFF WORKING DOCUMENT

Albania 2006 Progress Report

{COM (2006) 649 final}

TABLE OF CONTENTS

1. Introduction 4

1.1. Preface 4

1.2. Relations between the EU and Albania 4

2. Political criteria 5

2.1. Democracy and the rule of law 5

2.2. Human rights and the protection of minorities 10

2.3. Regional issues and international obligations 15

3. Economic criteria 16

3.1. Introduction 16

3.2. Assessment in terms of the Copenhagen criteria 16

3.2.1. The existence of a functioning market economy 16

3.2.2. The capacity to cope with competitive pressure and market forces within the Union 20

4. European standards 22

4.1. Internal market 23

4.1.1. Free movement of goods 23

4.1.2. Movement of persons, services and right of establishment 24

4.1.3. Free movement of capital 25

4.1.4. Customs and taxation 26

4.1.5. Competition 27

4.1.6. Public procurement 28

4.1.7. Intellectual property law 28

4.1.8. Social policies 29

4.2. Sectoral policies 30

4.2.1. Industry and SME 30

4.2.2. Agriculture and fisheries 31

4.2.3. Environment 33

4.2.4. Transport policy 34

4.2.5. Energy 36

4.2.6. Information society and media 37

4.2.7. Financial Control 38

4.2.8. Statistics 38

4.3. Justice, freedom and security 39

4.3.1. Visa, border, control, asylum and migration 39

4.3.2. Money laundering 41

4.3.3. Drugs 42

4.3.4. Police 43

4.3.5. Fighting organised crime and terrorism 44

4.3.6. Protection of personal data 45

STATISTICAL ANNEX 46

COMMISSION STAFF WORKING DOCUMENT

Albania 2006 Progress Report

INTRODUCTION

Preface

Since March 2002, the Commission has reported regularly to the Council and Parliament on progress made by the countries of the Western Balkans region.

This progress report largely follows the same structure as in the previous years. The report:

- briefly describes the relations between Albania and the Union;

- analyses the situation in Albania in terms of the political criteria for membership;

- analysis the situation in Albania on the basis of the economic criteria for membership;

- reviews Albania's capacity to gradually approximate its legislation and policies with those of the acquis , in line with the Stabilisation and Association Agreement and the European Partnership priorities;

The period covered by this report is 1 October 2005 to 30 September 2006. Progress is measured on the basis of decisions taken, legislation adopted and the measures implemented. As a rule, legislation or measures which are under preparation or await Parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and permits an objective assessment.

The report is based on information gathered and analysed by the Commission. In addition, many sources have been used, including contributions from the government of Albania, the Member States, European Parliament reports[1], and information from various international and non-governmental organisations.

The Commission draws conclusions regarding Albania in its separate communication on enlargement[2], based on the technical analysis contained in this report.

Relations between the EU and Albania

Albania is participating in the Stabilisation and Association Process (SAP).

Albania signed a Stabilisation and Association Agreement (SAA) with the EU on 12 June 2006. The SAA provides a framework of mutual commitments on a wide range of political, trade and economic issues.

Trade-related parts of the SAA are implemented through an Interim Agreement while ratification of the SAA is being completed. The Interim Agreement enters into force on 1 December 2006. Co-operation provisions of the 1992 Trade, Commercial and Economic Co-operation Agreement (TCECA) will remain in operation until the SAA is ratified. Albania also benefits from autonomous trade measures granted by the EU.

The revised European Partnership , setting out priorities that Albania should address in the short- and medium-term, was adopted in January 2005. Albania adopted a plan to implement the European Partnership priorities in July 2006.

An EC-Albania readmission agreement entered into force in May 2006. In July 2006, the Commission made a proposal to the Council for a mandate to negotiate an EC-Albania visa facilitation agreement.

The EC allocated a total of € 45.5 million in pre-accession financial assistance to Albania in 2006. Albania also benefits from loans from the EIB and € 25 million in terms of EC macro-financial assistance.

POLITICAL CRITERIA

This section examines progress made by Albania towards meeting the Copenhagen political criteria which require stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. It also monitors regional cooperation, good neighbourly relations, and the respect for international obligations.

Democracy and the rule of law

Parliament

The role of the parliament as a central political institution has continued to increase. Relations between the parliament and other constitutional bodies, notably the Constitutional Court and the Presidency, and the subsequent interventions of these bodies, have been appropriate and effective. The Parliamentary Committee on European Integration has been very active, which has helped to raise awareness of the EU integration process in the parliament's activities. Efficient committee and plenary work allowed the Parliament to deal effectively with the 2006 budget law. The work of the parliament is now more transparent as specialised staff and equipment are now used to transcribe all plenary parliamentary sessions.

Periods of political deadlock in spring and summer 2006 hampered the parliament’s efforts to deal with important reform issues, particularly those which require broad political consensus. The poor political climate hindered the work of the parliamentary working group on electoral reform and slow political agreement delayed nomination of members of the Central Electoral Commission. This delayed work on implementing the recommendations of OSCE's Office for Democratic Institutions and Human Rights (ODIHR) following the 2005 parliamentary elections. A political agreement reached in August with international community help ended the summer deadlock. Albania has yet to demonstrate the capacity to achieve domestically-generated political co-operation.

The parliament still faces technical and administrative shortfalls. The parliament's limited budget is not consistently focused on core tasks. Procedures and equipment for voting do not yet ensure transparent and undisputed results. A number of ad hoc inquiry committees have been set up, sometimes with an unclear mandate. There is a risk of duplication. Parliamentary transparency could be further increased if the work of parliamentary committees were transcribed.

Overall the parliament is assuming a full role politically and making steady improvements in its technical operation. However, effective parliamentary work on reform, essential to fulfil SAA obligations, has been held back by difficulties in political co-operation.

Government

The government has adopted a revised national plan to implement the European Partnership priorities and the SAA. This plan makes a first attempt to cost the European integration process, which is necessary for budgetary forecasting. It also broadly schedules reform and capacity-building steps and defines institutional responsibility for them. The plan will form part of a new National Strategy for Development and Integration (NSDI). Work has begun on the development of 23 sector strategies and 10 cross-cutting strategies for the NSDI. Line ministry budget allocations will be limited to actions described in the 23 sector strategies. The NSDI will feed into the Integrated Planning System (IPS) though which national and donor resources will be allocated. This strategic and operational framework should help the government to fulfil SAA reform commitments.

The Council of Ministers has approved the establishment of EU Integration Units in twelve line ministries. Establishment of these units, through which the Ministry of European Integration will co-ordinate EU-related reforms, is underway. The Minister of European Integration has been appointed IPA National Aid Coordinator.

The Council of Ministers staff has largely been replaced by teams working on cross-cutting issues directly under advisors to the Prime Minister. This structure could help to address high-priority horizontal issues. There has been some effort to extend participation in designing new legislation beyond central government to local and civil society stakeholders, for example on the draft law on municipal borrowing.

However, much remains to be done to ensure wider consensus and the use of all available expertise on reforms. New horizontal teams working directly for the Prime Minister have not always drawn upon government and donor expertise in drafting legislative proposals, resulting in poor drafting. An increase in the number of institutions directly accountable to the Council of Ministers has taken place, and there is a tendency for direct oversight by the Prime Minister. This centralisation has led to many routine technical decisions being taken at the level of the Prime Minister, which has delayed key actions.

Implementation of the IPS is currently coordinated by the Council of Ministers’ Department of Strategy and Donor Coordination. However, the full complement of personnel has not yet been assigned to its IPS Implementation Unit, despite an approved staff plan. Sound co-ordination between the Department of Strategy and donor Coordination and the Ministry of European Integration will be essential, in particular to ensure appropriate support for SAA reform commitments.

Public administration

The new government has made significant changes to the public administration. Substantial staff changes have been made to address corruption, in particular in the customs and tax administrations. Ministerial portfolios have been changed: for example, the former Ministries of Public Order and of Local Government and Decentralisation have been incorporated into a new Ministry of Interior. Many ministries have also been restructured to improve co-ordination and effectiveness, as in the case of the Ministry of European Integration. This ministry now has appropriate premises.

However, hiring and dismissal of staff has in some cases occurred without due attention to the Civil Service Law. Administrative acts have been signed by temporary replacements who had not been not officially appointed. Both developments have to some extent undermined the legal certainty introduced by the Civil Service Law. The introduction of new structures and staff has led to a transitional reduction in capacity in many areas of the public administration. Albania now needs to build upon the changes to strengthen public administration effectiveness. The capacity of the Department of Public Administration to set common management strategies across the public administration remains limited. Career structures, career planning, salaries and performance management in the civil service and other public services remain poor. Political appointment of higher civil servants remains prevalent, restricting the growth of a professional senior civil service level.

Judicial system

A new law to overhaul the organisation of the judiciary has been approved by the Council of Ministers. The purpose is to improve judges’ career structure, clarify disciplinary proceedings and provide for administrative courts and for the random assignment of cases to judges. The capacity of the Office of Administration of the Judicial Budget has improved. The High Council of Justice has approved a new system for the professional evaluation of lower court judges. Work is beginning on a new building to house the district and appeal courts for serious crimes in Tirana.

A Constitutional Court ruling underlined the independence of the judiciary. A new law intended to eliminate conflicts of interest at the High Council of Justice (the independent body which appoints judges) required its members, most of whom are judges, to give up judging. This deprived six courts of their judges, delaying the courts' work for several months. The Constitutional Court subsequently declared much of the new law unconstitutional.

Judicial transparency has been increased through the publication of more judicial decisions and the results of checks on violation of the procedural code. Screens displaying court session information have been placed in the entry hall of several courts and court offices have been located closer to public entrances.

The Magistrates’ School has expanded its training programmes. It remains an important focal point for initial and continuous training and is the source for virtually all new prosecutors and judges. Its long-term strategy stresses that the School will be sustainable without donor support, provided government support continues.

There has been some progress in the field of enforcement of final judicial decisions through the reorganisation of the Bailiff Service and the upgrading of the level of its employees.

However, judicial proceedings remain lengthy, poorly organised and lack transparency. The proposed new Law on the Judiciary does not address three long-standing shortfalls: improving the independence and constitutional protection of judges, improving the pay and status of the administrative staff of the judicial system (who are not civil servants) and the appropriate division of competences between the judicial inspectorates of the High Council of Justice and the Ministry of Justice. The two inspectorates currently divide work informally. The proposed provisions for the transparent assignment of cases to judges will require implementing legislation to establish objective rules. A system for the evaluation of prosecutors is not yet in place. Implementation of a planned reorganisation of district courts is needed to improve efficiency, but has not yet begun. Many courts still lack adequate space for courtrooms, judges’ offices, archives and equipment. Co-operation between the police and the judiciary generally remains poor. The Bailiff Service remains hindered in executing judgements by lack of funds, unclear court decisions, and the refusal of many state organisations to meet their judgment obligations.

The draft Law on the Judiciary provides that all new judges will have to be graduates of the Magistrates’ School, but no other steps have been taken towards appointing judges and prosecutors through competitive examinations. Expansion of the academic possibilities for studying law will require an appropriate system of quality control. The profession of notary and advocate continue to be weak points in the judicial system, with little legal or practical development.

The transformation of the Legal Reform Commission from a full- to a part-time body risks reducing its capacity to ensure the coherence of new laws and their compliance with European and international legal frameworks, and provide for public information and participation.

No efforts have been recorded to further develop the legal framework for witness protection so as to ensure that the safety of vulnerable witnesses is appropriately balanced with the accused right of defence. There are plans to devote a whole police directorate to witness protection, but sufficient resources are not yet available to fully implement existing legislation. Basic witness protection measures, such as the protection of witnesses in court and the use of screens or close circuit television, are not given sufficient attention. No progress has been made on operational guidelines for witness protection. Given the confidentiality and sensitivity of witness protection, the stability and continuity of staffing in the sector requires greater attention.

A special investigative commission of parliament resulted in a vote recommending that the President dismiss the General Prosecutor. The President subsequently rejected this recommendation. The General Prosecutor is appointed by the President with the consent of the Assembly.

Legal certainty is fundamental to Albania's reform progress and is an important precondition for a number of obligations under the SAA. In particular, the possibility of effective legal sanction is important for successful trade under the Interim Agreement and the SAA.

Anti-corruption policy

The government has taken determined measures to reduce corruption, particularly in the tax and customs services where the problem was most severe. This addresses a key European Partnership priority. Large-scale dismissals have been undertaken to regain control of departments where corruption was widespread. This has led to some improvement, notably in customs.

The government has also sought to address corruption by reducing the role of the state in the economic and social life of the country, through reducing central administration staff and simplifying administrative and licensing procedures. It has proposed reforms to the tax administration, public procurement and business registration to reduce corruption and improve the environment for business.

The number of public officials prosecuted for corruption has increased. Of 237 prosecuted in 2005 and 75 in first quarter of 2006 (compared with 171 in 2004) 84 were sentenced, including mid- and high-level officials. Despite fears that staff changes could be used as a political weapon, leniency has not been shown towards those affiliated to the governing party. The number of disciplinary procedures against corrupt prosecutors is an indicator of the scale of corruption, but a positive signal that steps are being taken to combat it (71 cases since 2002, i.e. 25-30% of total number of national prosecutors).

The government has set up an Anti-corruption Task Force headed by the Prime Minister. It consists of line ministers and heads of sensitive government agencies such as taxation, privatisation, licensing and public procurement. It analyses and assesses corruption problems in specific sectors and formulates strategic priorities and practical measures. The seniority of its membership gives it the authority to make real changes. The existing Anti-Corruption Monitoring Group has been merged into the Department of Internal Administrative Control and renamed the Department of Internal Administrative Control and Anti-Corruption (DIAC). It operates under the Prime Minister’s office and comprises a director and ten inspectors who analyse reported cases of corruption in all branches of the public administration. They propose administrative measures or send the cases for criminal investigation.

The Law on Conflict of Interest has been amended to address practical problems resulting from the implementation of the existing law. The High Inspectorate for Disclosure and Verification of Assets has intensified its activity and officials of the inspectorate have now been authorised to investigate bank accounts of officials outside the country. The task force of selected prosecutors and judicial police officers established at the Tirana district court now deals with corruption cases as well as financial crimes.

Steps have been taken to increase the transparency of the public administration: website publication of government orders, decisions and other public acts; public information units in ministries, free telephone lines and post-boxes for public comment in central institutions.

Albania participates in two regional anti-corruption initiatives: the Council of Europe GRECO (Group of States against Corruption) and SPAI (Stability Pact Anticorruption Initiative). Implementation of GRECO Evaluation Report recommendations has been limited. The government has followed a new approach rather than using the framework of the National Anti-Corruption Strategy which it has not updated. A new law to encourage citizens to denounce corruption in the public administration puts into action a GRECO recommendation on whistle-blowing. However, this has led to concerns that denunciation could be abused for score-settling.

Some legislative measures designed to combat corruption have been rejected by the Constitutional Court following concerns on individual rights (for example a law against nepotism in the customs and tax administrations). A government proposal to lift the immunity of members of parliament for the purposes of prosecution for corruption is still pending in parliament as a 3/5 parliamentary majority is required and the opposition objects on constitutional grounds.

New legislation is required for Albania to implement the Civil Law Convention on Corruption and the Criminal Law Convention on Corruption, the UN Anticorruption Convention and the UN Convention against Trans-national Organised Crime (the Palermo Convention, which contains provisions on corruption), the development of which is delayed. Albania still has no specific legislation on bribery of foreign officials and is not a signatory country of the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Sustained progress in fighting corruption is a fundamental condition for successful implementation of the SAA and the Interim Agreement. This will require following up strong initial measures with systematic efforts to tackle the causes of corruption by fixing legal loopholes, improving salaries, stabilising the public administration, further simplifying complex and opaque administrative procedures and improving the professionalism of civil servants. Designing and adopting effective legislation for the required systemic reforms will require broad political consensus on how to tackle corruption in the medium and long term.

Human rights and the protection of minorities

Observance of international human rights law

Albania signed the following conventions in late 2005: the Council of Europe Convention on Action against Trafficking in Human Beings, the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism, Council of Europe Convention on the Prevention of Terrorism and Council of Europe Framework Convention on the Value of Cultural Heritage for Society. However, these conventions have yet to be ratified by the Albanian Parliament. Albania has now ratified Protocol 12 of the ECHR concerning a general prohibition of discrimination and signed Protocol 14 amending the control system of the Convention.

Albania executed the first of two European Court of Human Rights (ECHR) judgements against it via an individual decision of the Council of Ministers. However, Albania’s civil and criminal procedure codes still lack specific provisions to give the ECHR’s decisions legal status systematically. The second ECHR judgement was made against Albania in August 2006 concerning property restitution. Albania has not yet ratified Protocol No. 13 to the ECHR which it signed in May 2003. This concerns the abolition of death penalty in all circumstances.

Human rights and fundamental freedoms are guaranteed by Albanian law, and the government generally observes them. However, enforcement of international agreements on human rights in areas such as torture prevention, the rights of detainees and the right to a fair trial remains weak. Details of shortfalls in specific areas are given below.

Civil and political rights

Regarding prevention of torture and ill-treatment , Albania’s Criminal Code is not yet in line with the standards of the UN Convention against Torture, particularly the definition of torture (see also Prison system).

As regards the fight against impunity, prosecution is taking place under criminal law and the code of ethics for the prison system in cases of ill-treatment and torture by law-enforcement bodies. In 2005 and the first quarter of 2006, 40 cases were initiated, 16 cases submitted to court and 3 people so far sentenced.

However, those responsible for the ill-treatment of prisoners are often still not charged with appropriately serious offences. Measures are not yet in place to ensure adequate compensation to persons who have suffered ill-treatment by law enforcement bodies.

Regarding access to justice, Albanian legislation provides for free legal defence for defendants who cannot afford a private lawyer. However, this service does not always provide timely and appropriate legal assistance. A separate jurisdiction has not yet been established for the trial of juveniles.

There are persistent reports of arbitrary arrest and mistreatment of homosexuals by the police.

As regards human rights in the prison system , obligatory training courses on human rights have been introduced for judges, prosecutors, police officers and prison personnel and these issues have been included on the School of Magistrates curriculum. Cooperation with NGOs on prison monitoring has improved. A new standard regulation covering the pre-trial detention system has been approved. Albania's Ombudsman's office has been playing an increasing role in the protection of individual human rights generally. The scope of its activities has been extended to include unlimited access to prisons. The Ministry of Justice has abandoned a plan to establish a new juvenile detention centre in Pogradec, instead opting for Kavaja, near Tirana, where the centre would be more accessible to family members.

However, little progress has been made overall on improving conditions in prisons and detention centres. The human and material resources available for prison management remain insufficient. Building new prisons and pre-trial detention centres according to the Master Plan for Judicial Infrastructure is advancing slowly. Implementation of the Master Plan for the pre-trial detention system is behind schedule. 80 convicted prisoners are still being held in police detention facilities. A new pre-trial detention regulation is a step forward but does not meet international practice, which requires that the pre-trial detention regulation should be made into a law.

Basic safeguards against ill-treatment during pre-trial detention such as access to a lawyer and doctor and notification of detention to relatives are not yet regularly applied. The code of ethics for the prison system is not yet rigorously observed and measures to ensure the safety of prisoners are weak. The Supervisory Commission for the Execution of Imprisonment Sentences is not yet operational. This body advises the Minister of Justice on enforcement issues and protection of the rights of prisoners and detainees.

Freedom of religion is guaranteed in law and in practice. According to the Constitution, there is no official religion and all religions are equal. Despite some isolated incidents, Albania continues to provide a valuable example of religious harmony in the region. However, religious communities are adversely affected by the authorities' failure as yet to provide for full restitution of properties and other belongings.

Freedom of expression is constitutionally guaranteed in Albania. Legislation which could have a strong bearing on media freedom is pending in parliament. The status of journalists in the labour code has been improved. Changes to the membership of the National Council of Radio and Television and the Steering Committee Council of Albanian Radio and Television to include experts and NGOs should make media supervision more representative and efficient, and the public service broadcaster more neutral, if implemented in line with European standards (see also Audiovisual Policy) . However, the August political agreement (see Parliament) will have to be implemented with care to avoid limiting the positive effect of this reform.

A legal amendment prevents the owners of electronic media from participating in public sector tenders. This could present problems from the acquis point of view in terms of business competition. It should be complemented by a more comprehensive approach to media ownership. Nevertheless it is a strong anti-corruption measure and should contribute to media freedom. A new Council on Media Ethics has the potential to promote media self-regulation and improved journalistic standards.

However, overall progress in this field, a key short term European Partnership priority, has been limited. Most media outlets remain subject to political or economic interests. The legal framework for media freedom remains inadequate. Poor implementation of existing legislation is also a major shortcoming. The professional and ethical standards of the Albanian media remain low. Measures to are under discussion with international community partners but have not yet been implemented.

Journalists are still subject to threats of prosecution for libel or defamation, which carry severe penalties. Defamation remains subject to prison sentences of up to three years. Although prison sentences are no longer applied, and an amendment of the Penal Code to abolish custodial sentences is planned, Albania has not yet adopted appropriate legislation on defamation and needs to amend its penal code to remove imprisonment as an option for punishment for defamation.

The Constitution provides for freedom of association and assembly , and the Government generally respects these rights.

A liberal law on NGOs has led to a proliferation of Albanian civil society organisations which operate without government restriction. There are some examples of successful public campaigns by civil society actors to counter public political apathy.

However, civil society actors in Albania suffer from a lack of sustainable resources, a lack of organisational capacity and skills (particularly advocacy skills) and the absence of a tradition of involvement in policy-making. For these reasons NGO dialogue with Albania's government remains weak. Albania would benefit from a government policy which actively encourages NGO involvement in the mainstream decision-making process. Civil society actors would also benefit from forming closer ties with peer organisations regionally.

Economic and social rights

Concerning women's rights , legal provisions exist for equal rights in a number of fields of life such as social insurance and education. The 1995 Labour Code (Art. 9) sets out a guarantee of non-discrimination in both the public and the private spheres. The Labour Code and the Gender Equality Act of 2004 refer to the principle of equal treatment of women and men, provide that employers must render equal pay for work of equal value and are applicable to both the public and the private sectors. Labour legislation accords special protective measures for pregnant and breastfeeding workers over and above the general protective measures in forces for all workers. Government financial support promotes women's employment, in particular helping disadvantaged women find long-term employment. These include victims of trafficking, Roma women and girls, the disabled and divorced women with social problems.

However, women are still subject to numerous forms of discrimination in economic and social life and remain under-represented in political and economic decision-making processes. Women's participation in the labour market is low and limited to certain sectors. Although the Gender Equality Act specifically aims to eliminate direct and indirect discrimination, it does not define these concepts. Mechanisms to enforce the principle of equal treatment of women and men, such as the State Committee on Equal Opportunity, are relatively weak. Forced marriage and domestic violence against women are not specifically addressed by government strategy or by legislation and continue to be a serious problem . At least a third of women in Albania are estimated to have experienced physical violence within their families.

Children’s rights are generally protected by current legislation. A National Plan of Action for Children is in place and a focal point for children has now been designated at the Ministry of Labour, Social Affairs and Equal Opportunities. However, in practice protection is limited. Several cases of child trafficking and child abuse, including sexual abuse, have been reported. Children kept at home are deprived of their right of education. Article 7 of the European Social Charter concerning the right of children and young persons to protection is not fulfilled in that the authorities' measures to protect minors from sexual exploitation have so far had limited effect. Establishing a national child protection system and strengthening efforts to combat poverty could improve the situation.

Albania achieved full enrolment in basic education at the start of transition, but began with among the poorest enrolment rates in secondary and tertiary education in the region. In the last three years, modest improvements in enrolments rates have been made at all education levels. Many private schools have opened, mostly in the larger towns. The government has announced major reforms to improve Albania’s low education levels. Limited measures have been taken to increases wages in the public education system. The government has announced plans to greatly increase the education budget.

However, on average children only attend school for 9.6 years: this is almost 5 years below the OECD average. Measures are not in place to control the quality of private education at primary, secondary and tertiary levels (see also Education under Social Policies.)

Concerning socially vulnerable persons , blood feuds and related crime continue, in particular in the north of the country. The main grounds for feuds remain disputes over property and trafficking in persons. Implementation of a law providing for the establishment of a national coordination council to develop a national strategy against the problem and to coordinate activities of relevant government agencies has not yet begun. Concerning disabled persons , initial steps have been taken for the implementation of the National Strategy on People with Disabilities. A contact group has been set up to co-ordinate ministries involved. A decision has also been taken to increase state benefits for disabled people. However, much further work is needed. The setting up of a community centre in Tirana has allowed admissions to institutions for stationary mental health care to be reduced by 40%. It is intended to replicate this model.

In the area of labour rights and trade unions, workers have the right to form independent trade unions. The Labour Code regulates the establishment of such trade unions and a legal framework exists for mediation, conciliation and arbitration. The position of trade unions is undermined by the weakness of the industrial sector, the dominance of very small enterprises, high unemployment, significant emigration and a substantial informal economy. Despite the fact that employment is mainly in the private sector, the state still plays a dominant role in organising the economy and social dialogue. The main body for social dialogue is the National Council of Labour. Albania's denial of the right to strike to civil servants and some other categories of employees is not in line with Article 6 of the European Social Charter, which concerns the right to bargain collectively.

As regards property rights , the State Committee for the Restitution and Compensation of Property has been transformed into the Property Compensation and Restitution Agency, becoming part of the executive whereas previously it had been responsible directly to parliament. This has the potential to make the administration of property rights more efficient. A new law offers the residents of dwellings constructed without permission on state land the opportunity to legalise them against the payment of a fee, even if there are other claims on the land. Part of the fee contributes to the compensation fund for former owners. This mechanism needs to be tested but could contribute to establishing clear property rights and bringing more people into the formal economy.

However, registration and restitution of property confiscated during the communist era remain a serious concern. Registration of much valuable coastal and urban property has remained particularly slow. The deadline for submitting property claims has been further extended until the end of 2008. This issue is a key European Partnership priority, reflecting the fact that legal certainty on property ownership is vital to fulfil SAA commitments and is a precondition for the domestic and foreign investment needed for economic development.

Minority rights, cultural rights and the protection of minorities

In the area of cultural rights , Albanian legislation recognises three national minorities (Greek, ethnic Macedonian and Montenegrin) and two ethno-linguistic minorities (Vlach and Roma). The Greek minority is the largest group, led by its cultural association Omoneia. A spirit of tolerance in relation to minorities prevails. Protection of minorities has been recently placed under the direct responsibility of the Prime Minister. Albania has made some effort to create a legal framework to protect minorities, and it has provided schools and classes for certain minorities in specific areas. Albania recently signed the UNESCO Convention on the protection and the promotion of the diversity of cultural expressions.

However, implementation of the Council of Europe Framework Convention for the Protection of National Minorities remains incomplete. Minority language education is not yet available in all areas where there is a demand. There has been little progress on the administrative use of minority languages, use of traditional names and access to media for minorities. The lack of reliable statistical data on the size of minorities hinders the development of policies to protect them. The work of the Special State Committee on Minorities continues to be hampered by a lack of clear rules concerning its composition and mandate. Albania has not signed the European Charter for Regional and Minority Languages.

There are an estimated 95,000 Roma in Albania. A National Strategy for the Improvement of Living Conditions of the Roma Minority is in place. Initiatives on labour integration, education and children’s registration have targeted specific Roma groups under the strategy. Regional information activities and discussion round tables have been held.

However, the disparity between the social and economic situation of Roma and that of the rest of the population is increasing. 78% of the Roma population are living in poverty and 39% in extreme poverty. Only 12% of the Roma are enrolled in secondary school, compared to a national average of 81%. The situation of the Roma community in Tirana has notably worsened in recent months. There are currently about 40,000 Roma people in need of social and economic support in Tirana.

The government's Roma strategy suffers from a lack of human and financial resources for implementation. The Ministry of Labour and Social Affairs (MoLSA) has allocated three civil servants to monitor its implementation. Five other ministries are involved in the implementation of parts of the Strategy (Ministries of Health, Culture, Education, Transport and Interior).

Public information on the existence and content of the Strategy remains weak in Albania’s twelve regions. The Roma community suffers from a lack of acknowledgement by local authorities in the regions of their situation and a lack of civil society organisations to represent their interests. Social factors and the mobility of certain groups make lack of access to education and health services, especially vaccination, a particular problem. Weak or non-existent birth registration of Roma children as well as lack of personal documents makes them particularly vulnerable to human trafficking.

The number of refugees and internally displaced persons in Albania continues to be small and does not therefore constitute a serious problem.

Regional issues and international obligations

In June 2003 Albania ratified a bilateral immunity agreement with the United States which runs counter to the “EU guiding principles concerning arrangements between a state party to the Rome Statute of the International Criminal Court and the United States regarding the conditions of surrender of persons to the court” adopted by the Council of the EU in September 2002. No new developments have taken place in this respect.

Regional cooperation and good neighbourly relations form an essential part of the process of Albania's moving towards the European Union.

Albania has continued to play an active and constructive role in the region. It is an active member of multilateral regional initiatives in South East Europe, including the Stability Pact, the South East Europe Cooperation Process, the Central European Initiative, the Adriatic-Ionian Initiative, the Border Security Initiative and the Black Sea Economic Cooperation Organisation. Albania is committed to the establishment of the Regional Co-operation Council. In 2006, Albania held the presidency and hosted the summits of the Central European Initiative and the Adriatic-Ionian Initiative. Albania is party to the Energy Community Treaty which entered into force in July 2006. It also signed the agreement on the European Common Aviation Area in June 2006.

Albania is actively participating in the negotiations on the establishment of a regional free trade agreement within the framework of an enlarged and amended Central European Free Trade Agreement (CEFTA), which were launched in April 2006. Albania has free trade agreements with all countries in South-East Europe. It also has a free trade agreement with Kosovo.

Albania has further developed its relations with neighbouring and other countries in the region:

Relations with the former Yugoslav Republic of Macedonia continued to be considered a priority. Reciprocal high level visits have been accompanied by the signing of cooperation agreements in the fields of police cooperation, transport, energy, defence, tourism, culture, information, and the opening of an additional border crossing point.

Relations with Montenegro have continued to be very good. Albania was amongst the first countries to recognise Montenegro's independence following the May 2006 referendum and plans to open an embassy in Podgorica. Cooperation agreements on railway and lake transport, and a Memorandum of Understanding for Cross-Border Development of Shkodra Lake have been signed.

Relations with Croatia, Bosnia and Herzegovina and Serbia have been positive and stable, although their full potential in terms of trade and co-operation has yet to be realised.

Albania has maintained a constructive policy towards Kosovo . Mutual high-level visits have signalled Albania's more active engagement on this issue. At a March 2006 meeting with the EU Troika, Albania made clear its position on the future of Kosovo, which is in line with that of the international community.

Italy remains Albania’s main commercial partner, with 40% of Albania’s trade, and its largest bilateral donor. Italy has invested substantially in areas such as infrastructure, transport, health and energy. However, legal and administrative problems have obstructed sizeable investment projects promoted by Italian companies in the infrastructure sector.

Greece remains Albania’s second largest trade partner, and a significant bilateral donor and investor. Relations with Greece are considered strategically important by the Albanian Government. Bilateral relations have continued to be good and mutual high-level visits have taken place. A 5-year development cooperation agreement was extended until 2011.

ECONOMIC CRITERIA

Introduction

In examining the economic developments in Albania, the Commission's approach was guided by the conclusions of the European Council in Copenhagen in June 1993, which stated that membership of the Union requires the existence of a functioning market economy, and the capacity to cope with competitive pressure and market forces within the Union.

Assessment in terms of the Copenhagen criteria

The existence of a functioning market economy

Economic policy essentials

Cooperation with international financial institutions continued to be an important anchor for economic policies. The previous IMF programme was successfully completed in November 2005 and a new three-year programme started in February 2006. The prudent monetary policy remained unchallenged and contributed to keeping inflation under control. The fundamentals of fiscal policies aimed at fiscal consolidation were pursued further. Consensus on the fundamentals and directions of economic policy was broadly maintained.

Macro-economic stability

Albania's macroeconomic environment continued to be characterised by strong GDP growth and subdued inflation. However, the country suffered frequent power supply shortages for almost four months at the end of 2005. This was mainly as a result of the strong dependence on hydro sources for electricity supply and the failure of tenders for purchasing additional electricity from abroad. The repercussions of the crisis on economic growth were estimated at 0.5% of GDP in 2005, when combined with weakening economic activity in the construction sector and deceleration in export growth. The estimate of real GDP growth was thus revised downwards to 5.5% for 2005. Overall, Albania's stable macroeconomic environment was maintained.

The share of people living in poverty decreased from around 25% in 2002 to around 18% in 2005. This represents more than 220,000 people lifted out of poverty during these three years. This is mainly due to sustained growth in disposable income. Considerable progress continued in reducing poverty.

The trade deficit widened to 24.1% of GDP in 2005, compared to 21.7% of GDP in the previous year. Due to appreciation of the Albanian lek and stronger competition in the textile industry, growth in export of goods declined to 9% in 2005 from 23% in 2004. For the same period, imports of goods grew at 15%, mainly on the back of sustained growth and electricity imports at the end of the year. During the first semester of 2006, the trade deficit widened further by 19% on an annual basis. Part of this continuing deterioration also likely reflects the improvements in customs administration, with more goods going through the formal channels. Export base in Albania remained very low, narrow and undiversified, mainly due to a lack of non-price competitiveness, resulting -among others- from poor infrastructure and uninviting business environment. Due to deterioration in the trade balance, the current account deficit (excluding official transfers) recorded an increase to 7.8% of GDP in 2005, compared to 5.5% in 2004. In general, external deficits markedly widened.

Transfers from abroad and other remittances were estimated at around 14.6% of GDP in 2005, 19% higher compared to 2004. Private transfers have thus become an important and relatively stable source of income. According to national sources, they have reached 33% of disposable income of an average family and almost 40% in rural areas. Gross reserves continued to rise throughout 2005. This was partly due to inflows of private transfers and foreign direct investment (FDI), but also to the Bank of Albania’s foreign exchange market interventions in the first half of the year. Foreign currency reserves reached Є1.2 billion at end-of 2005, a 17% increase compared to the end of 2004. This is equivalent to around 4 months of imports. External debt declined to 17.6% of GDP in 2005, from 18.0% in 2004. In general, significant remittances and other transfers from abroad continued to cover large part of the trade deficit.

The unemployment rate (based on official data) declined marginally to 14.2% in 2005 from 14.4% at end-of 2004. Data for the first quarter of 2006 indicate a further decrease of the unemployment rate to 14%. The exact rate of unemployment is nevertheless difficult to assess due to significant informal employment, particularly in the agricultural and construction sectors. It can be concluded that the labour market situation improved marginally.

In July 2005, the Bank of Albania (BoA) changed the direction of its operational instruments by starting to perform reverse repurchase agreements, injecting additional liquidity into the banking system. The direction of the BoA's intervention changed again in the first quarter of 2006, as it withdrew excess liquidity from the commercial banks. The key interest rate had remained unchanged until July 2006, when the BoA raised it to 5.25%, on the back of rising inflationary pressures and in order to contain the strong expansion in credit growth. The BoA examined prerequisites for a gradual change in its monetary policy strategy towards an explicit inflation targeting regime with the aim of enhancing transparency and credibility of its monetary policies. Overall, the monetary policy pursued by the BoA was credible.

Buoyant growth in money supply, peaking in mid 2005, slowed down. A reduction of public borrowing was partly offset by a massive boom in credit induced by high demand for monetary assets. Annual growth of the monetary aggregate M3[3] thus decreased from 19% in mid-2005 to 14% in the last quarter 2005 and further down to 11% in May 2006. Appreciation pressures of the Albanian lek against the euro eased towards the end of 2005. The lek appreciated against the euro by approximately 3% in nominal terms during 2005, and remained relatively stable vis-à-vis the euro during the first eight months of 2006. Overall, growth of money supply moderated.

Average annual inflation stood at 2.5% in August 2006. It followed an upwards trend since July 2005, when CPI inflation reached a low of 1.8% (year-on-year). It peaked in October 2005 (3.3% year-on-year) due to persistent pressure from rising oil prices on certain domestic prices. Average inflation reached 2.4% in 2005, remaining at the lower end of the BoA's informal 2-4% target range. After a temporary decline in the first quarter of 2006, modest inflationary pressures resumed in the second quarter of 2006. These were derived from external developments, continuing excess liquidity in the banking sector and reduced supply of agricultural products. As a result, the Albanian lek appreciation moderated vis-à-vis the euro. In general, inflation remained moderate.

In October 2005, the IMF and the authorities agreed on the remainder of the 2005 budget and key parameters of the 2006 budget. These envisaged a set of reforms for the tax administration and public finance management. These measures aimed at improving fiscal discipline, tax administration efficiency, tax collection as well as public expenditure and debt management. Preparation for a thorough analysis and reform of the pension system also gained momentum. The 2005 budget execution had been more favourable than expected, mainly due to better performance of revenues and only moderate increases in expenditures. At the end of 2005, the general government deficit had reached 3.6% of GDP against 5.1% in 2004. Given a favourable performance of the budget in the first half of 2006, a supplementary budget was adopted for the second half of the year to match higher tax revenues and customs duties collection. It envisaged additional expenditure of 2.2% of GDP mainly for infrastructure development. Total public debt declined to 55.3% of GDP in 2005 compared to 56.5% in 2004. However, very limited progress has been achieved in strengthening public debt management. The Ministry of Finance still lacks a comprehensive debt management strategy and an adequate risk management capacity. These would enable the maturity of the domestic debt to be lengthened and new debt instruments to be introduced. Fiscal consolidation has generally continued, but a more vigorous position for further debt reduction remains critical.

The monetary policy of the BoA was broadly neutral over most of the reporting period with a minor upward adjustment of the main policy rate in July 2006. Further fiscal adjustment was pursued. Overall, the macroeconomic policy mix has remained broadly adequate.

Free interplay of market forces

The private sector accounted for approximately 80% of GDP in 2005, i.e. 5% of GDP higher compared to 2004. In the first quarter of 2006, private sector employment accounted for more than 80% of all working people, out of which 72% worked in the agriculture sector. The number of the new registered enterprises rose by almost 10,000 in 2005, a 4% increase compared to 2004. Another 7,500 new businesses were established and registered over the first five months of 2006, confirming the favourable trend towards a less informal economy. Private businesses were mainly active in trade (49%), services (24%), industry (11%) and transport (10%). In general, the private sector has expanded further.

Delays in large-scale privatisation have continued, in particular in the telecommunication and energy sectors. The ratification of the sale agreement that would complete the privatisation of Albtelecom was rejected by the Albanian parliament in October 2005. This led to a review of the sale contract and the tender procedure. The privatisation of Albanian Refining and Marketing Oil failed in the absence of satisfactory bids. The privatisation of the state-owned insurance company INSIG has been prepared. Large-scale privatisation has continued to suffer further delays overall.

Free market entry and exit

Administrative barriers to market entry were reduced in 2006. The average time needed for business registration went down significantly from 30 days to 8. Other administrative formalities have been simplified and the Commercial Register decentralised. These measures were introduced on the basis of the new Action Plan for the Removal of Administrative Barriers, adopted by the Council of Ministers in March 2006. However, several major challenges still remain, especially the relatively high cost of starting and closing a business, the limitations of cadastral records and the size and scope of the informal economy[4]. The business climate has continued to suffer from a weak legal environment such as a lack of clearly defined property rights, from poor infrastructure, unreliable power supply and wide-spread corruption. The government appeared committed to addressing the latter. Overall, certain progress has been achieved in improving the business environment, however, despite determined government action, much still needs to be done in terms of combating corruption.

Adequate legal system

Delays in the courts have continued to have considerable negative effects on the business climate. This is due to the difficulty of obtaining court rulings and enforcing contracts on issues such as commercial litigation or enterprise liquidation. Land ownership rights have not yet been guaranteed, particularly in urban and coastal areas. The related legal uncertainty on collateral recovery still impedes bank lending, investment and economic development. Enforcement of property rights has continued to be weak and only marginal progress has been achieved in improving the efficiency of the judicial system.

Sufficiently developed financial sector

Total credit reached 14.6% of GDP at the end of 2005, compared to 9% of GDP at the end of 2004. The credit-to-deposit ratio surged further, up from 19% in 2004 to almost 29%. Credit provided to the private sector also recorded a rapid expansion, growing by 74% in 2005. This was twice as fast as in 2004. Fast growth in credit continued in the first half of 2006, reaching 65% year-on-year. Foreign currency denominated loans accounted for around 75% of the total lending stock in 2005. This continued to raise potential foreign exchange risks, requiring very prudent risk management in Albanian banks. Preparation for establishing a credit information bureau has advanced, with a view to increasing the availability of credit to small and medium-sized enterprises by improving the efficiency of credit risk management. Overall, the level of financial intermediation has increased from relatively low levels.

The banking sector consists of 17 banks, of which three are fully-owned by local investors and 14 by foreign or joint-ventures. All banks are under private ownership, except for the state’s 40% stake in the United Bank of Albania. The concentration of the sector remained relatively high, with the three largest banks in Albania dominating the market with almost three quarters of total deposits and almost two thirds of total assets at the end of 2005. The lending-deposit interest rate spread stood at 8% in mid 2006 for lek-denominated loans and deposits. The average return on assets increased to 1.4% in 2005, and the average return on equity to 22.2%. The share of non-performing loans to total credit remained moderate at 2.3% at the end of 2005 and increased to 3.0% by March 2006. The capital adequacy ratio decreased by 3% to 18.6% in 2005, which is still well above the minimum level of 12% established by the BoA. The banking sector has remained sound, liquid and profitable, with relatively high degree of concentration.

The new law on the banking sector was approved by the Council of Ministers in July 2006 and was expected to be enacted before the end of the year. It brings the banking legislative framework broadly in line with international standards. The regulatory, governance and supervisory framework for the non-bank financial sector remained weak, lacking sufficient capacity, transparency and independence. Certain progress has however been recorded in preparing for the establishment of the new Financial Supervision Authority. This is expected to supervise insurance, pensions and capital markets. Financial regulation and supervision have generally improved.

The capacity to cope with competitive pressure and market forces within the Union

Existence of a functioning market economy

Economic growth was robust and reached a satisfactory degree of resilience, despite the energy crisis at the end of 2005. Fiscal indicators have continued to improve, monetary policy has been prudent and managed to keep inflation low. However, the deterioration in trade and current account deficits has increased the mid- and long-term vulnerability of the country's external position. The booming credit growth has remained a challenge in view of these external account imbalances. Overall, Albania has broadly achieved macroeconomic stability. This has contributed to its progress towards being a functioning market economy.

Sufficient human and physical capital

Primary education has been almost universally established. However, secondary and tertiary net enrolments stood at 55% and 18% respectively in 2005. The average school attainment increased to 9.6 years in 2005 (from 8.6 years in 2002), which is almost 5 years less than the OECD average. Serious educational and skill gaps exist between gender and regions (urban/rural). Education attainment has nevertheless increased slightly but overall educational and skill levels remain low.

Labour market policies have led to some encouraging results in efforts to formalise employment and improve the functioning of the labour market. However, the effectiveness of programmes for attracting jobseekers has remained constrained by inadequate design, lack and irregularity of funding and insufficient training capacity. Labour market policies overall have continued to maintain a broadly flexible framework.

Adequate sectoral and enterprise structure

Management of public investment was passed from the Ministry of Economy to a newly established Directorate of Public Investment Management at the Ministry of Finance in 2005. This was to strengthen procedures and the institutional framework for public investment management planning, execution and monitoring. Albania's legal framework for procurement, privatisation and concessions has nevertheless remained weak. A slight fall in public investment to 4.6% of GDP was balanced by a respective increase in private investment, reaching 19% of GDP in 2005. FDI declined from 4.6% of GDP in 2004 to 3.1% in 2005. However, the figure for 2004 was boosted by the privatisation of the Savings Bank. Most of the FDI was directed to industry (28%) and transport (22%), and the remainder to telecommunication (18%), the service sector (17%) and other sectors (15%). Gross fixed capital formation has remained stable overall, representing 23.6% of GDP in 2005.

The quality of the infrastructure network has remained inadequate, hindering economic development. Transport and communication sectors accounted for about 36.5% of total public investment in 2005, with the largest share (89%) allocated to road infrastructure. Around 67% of the road network was in poor or very poor condition in 2005, with 17% in fair and 16% in good condition. Almost two thirds of investments in road infrastructure have been allocated to new capital expenditure projects and only one third to maintenance and repair needs. The latter is estimated to be only 60% of what is needed. Infrastructure continues to require considerable investment.

The service sector accounted for more than 54% of GDP in 2005, followed by agriculture (23%), industry (14%) and construction (9%). Industry’s share of total production increased by about 3% in 2005. The share of agriculture, construction and services in the economy declined by approximately 1% of GDP each. The Albanian economy has continued to be geared towards the service sector, although the agriculture sector retains a significant share in total production and employment.

The small and medium-sized enterprise (SME) sector accounted for about 99% of the total number of active private enterprises in 2005, contributing 64% to GDP and representing 66% of total employment. SMEs’ access to bank credit has improved, but remains below requirements needed. A lack of proper financial reporting and accounting at the firm level as well as excessive credit and legal risk related to collateral enforcement are problems to be addressed. SMEs have continued to form the bulk of Albania's private sector activity.

The operational and financial performance of a number of state-owned enterprises has strengthened[5]. However, the reform of their regulatory and corporate governance framework has not been completed. Significant deficiencies have continued to exist in the utility and railway sectors and the energy sector particularly remains one of the major risk factors for the economy. Measures to enhance electricity supply over the medium and long term and to improve the financial performance of KESH, the state power utility are needed to mitigate further negative impacts of major sector inefficiencies on economic development. The transmission network capacity and alternative energy sources to hydropower are also key factors. Overall, a high degree of vulnerability of the energy sector represented a significant source of risk to economic development.

State influence on competitiveness

The Competition Authority has continued its efforts to supplement the primary legislation in force by issuing a number of implementing regulations and explanatory guidelines in line with EC competition principles. Following the adoption of the Law on State Aid in April 2005, the institutional capacity in this area was further strengthened by the establishment of the State Aid Commission in March 2006 (a decision-making body with powers to authorize individual cases and schemes of state aid). In 2005, public subsidies represented a relatively low 1.6% of total expenditure of the budget, representing 0.4% of GDP compared to 0.7% of GDP in 2004. Further progress has been achieved in enforcing institutional capacity and the legal framework for competition and state aid.

Trade integration with EU

The value of exports and imports of goods and services rose to 67.4% of GDP in 2005, compared to 64.7% in 2004. Albania continues to be an import-oriented economy with total imports accounting for about 45.8% of GDP and total exports for only 21.6% of GDP in 2005. Trade openness has increased in 2005, but remained relatively low. The EU remained the main destination of exports in 2005 with 84% of total exports. Imports from the EU accounted for about 70% of imports. Trade with the countries of South East Europe has intensified substantially, helped by free trade agreements concluded in previous years. Exports to these countries increased by 19% in 2005 and accounted for approximately 9% of total exports according to national sources. Imports from this region recorded an even higher annual growth of 32% in 2005 and accounted for almost 15% of total imports. Overall, trade integration with the EU has remained high and regional trade integration has risen.

The real exchange rate of the Albanian lek vis-à-vis the euro slightly appreciated by 3% in 2005, based on consumer prices. In the absence of reliable data on unit labour cost and profitability in the manufacturing sectors, change trends in labour productivity and price competitiveness based on real unit labour cost are difficult to trace.

EUROPEAN STANDARDS

This section examines Albania's capacity to gradually approximate its legislation and policies with those of the acquis related to the internal market, sectoral policies, and justice, freedom and security, in line with the Stabilisation and Association Agreement and the European Partnership priorities. It also analyses Albania's administrative capacity

Internal market

Free movement of goods

In parallel with its trade commitments, Albania has undertaken obligations through the SAA to move closer to European standards in the areas of standardisation, metrology, accreditation, conformity assessment, and consumer protection.

Progress has been reasonable in the area of standards and certification . By mid-2006 Albania had adopted 8,348 European standards (ENs), representing 59 % of all of the ENs of the European Committee for Standardization (CEN) and the European Committee for Electrotechnical Standardization (CENELEC), in line with the targets of the National Plan for Approximation of Legislation and implementation of the SAA. Priority continues to be given to adoption and implementation of those ENs that are harmonised under the New Approach directives and give presumption of conformity to the essential requirements of the directives. However, line ministries responsible for approximation with EU technical legislation have been slow to transpose the relevant EU directives.

As regards conformity assessment, progress has been made in the field of certification of quality management systems. The number of Albanian companies certified to the requirements of ISO 9001:2000 standards, continued to grow. The first privately operated testing and certification bodies have now been established, mainly in the food and construction sectors. The limited size of the market means that third party certification is often not yet commercially viable.

There has been further progress as regards the functioning of the General Directorate of Standardisation (GDS) which is now an affiliate member of CEN and CENELEC and intends to achieve full membership by 2008. The 1999 Law on Standardisation has been amended to allow for the establishment of a supervisory board of GDS - to include representatives of all stakeholder groups in Albania - which will monitor GDS activities and increase its independence from the Government. A further proposed amendment would allow Albania to start separating certification from GDS activities (target 2007). GDS has enhanced its cooperation with ministries in the adoption of ENs and in withdrawing the mandatory status of Albanian standards deriving from government decrees. Mandatory standards still exist for petroleum, gas and construction products. GDS has made considerable effort to improve the awareness of the private sector of the benefits of standardisation and certification, which has led to an increase of EN sales.

Some progress can be reported in the area of accreditation. Despite entry into force of a government decree separating accreditation from standardisation in 2004, the national accreditation body – the Directorate of Accreditation (DA) – only started operations in 2005. Changes in the staff of the DA, and improved infrastructure, have helped speed up progress. The DA has been admitted as an associate member of the European Co-operation for Accreditation (EA). The objective of achieving full membership of the European Cooperation for Accreditation needs first to be achieved in the field of laboratory accreditation, with other fields to follow. Testing laboratories represent the overwhelming majority of potential accreditation clients for the DA at present. The relevant accreditation know-how and practical experience of DA staff will have to be further developed. Preparations to align with the acquis in the areas of standardisation and certification are underway.

There has been limited progress on metrology . The national strategy on metrology for the period 2006-2015 has been drafted and will be adopted by December 2006. Most Directorate General of Metrology and Calibration (DGMC) staff have been trained on technical, management and quality issues. An upgrade of laboratories is underway. A new law on metrology has been prepared, but not yet adopted. Provisions of this new draft law should ensure division of the verification and certification functions of legal metrology from market surveillance activities. Closer cooperation between all stakeholders would help Albania's national technical infrastructure function better. Preparations have begun in this field.

There has been limited progress in the area of market surveillance . The Department of Market Surveillance in the Ministry of Economy, Trade and Energy has been upgraded to a directorate, has been strengthened and has taken further steps to increase public awareness on consumer rights. The level of information nonetheless remains generally poor. Albania now needs to strengthen inter-institutional cooperation and clarify the position of the Ministry of Agriculture and the Consumer Protection Department to avoid duplication or gaps in coverage. A plan to align market surveillance legislation with the acquis has not yet been finalised. Preparations in this area remain at an early stage.

There has been notable progress in the area of consumer and health protection . The incorporation of the Consumer Protection Department into the Department of Market Surveillance within the Ministry of Economy, Trade and Energy is a positive step as enforcement and regulatory issues now fall under one separate and more coherent Surveillance Directorate. However, the detailed legal powers of the Department still need to be clarified. Access for all consumers has not yet been established. Weaknesses remain as regards allocation of financial resources and staff to the department. Adoption of a market surveillance policy and of the 2006-2008 National Strategy on Consumer Protection and Market Surveillance is still awaited. Preparations in this area have just been initiated.

Movement of persons, services and right of establishment

Albania has undertaken significant commitments under the SAA as regards the movement of workers, freedom of services and freedom of establishment.

No developments can be reported in the area of movement of persons . No progress has been made in the field of the coordination of social security systems. Preparations in the field of movement of persons are at an early stage.

There has been some progress in the area of freedom of services . Albania's economy is relatively open to foreign companies and investments, and related progress on freedom of establishment has a positive impact in this field. Progress has been made in the banking sector. Investment by foreign banks has had positive impact on both banks’ governance and quality of services and the banking network has expanded throughout the country. A new banking law was adopted by the Council of Ministers in July 2006. However, further efforts are needed to align it with European standards. There has been an improvement concerning the deposit insurance scheme as well as of the bankruptcy framework and of collateral enforcement. The Ministry of Public Works, Transport and Telecommunication has started the second phase of liberalisation of postal services and is preparing a Council of Ministers' decision on gradual liberalisation.

The regulatory framework needs to be adapted in order to remove remaining legal barriers for EU natural and legal persons. There remains no clear distinction, as required for SAA implementation, between operators providing services in a temporary manner and those providing services through a permanent establishment in Albania. The Law on Postal Services is not yet aligned with the acquis . An independent regulatory structure in the field of postal services has not yet been established. Preparations are underway in the areas of freedom to provide services.

Some progress can be reported as regards the right of establishment . A new Action Plan on Regulatory Reform aiming to remove administrative barriers has been adopted by the government. Discrimination on registration fees to be paid by foreign companies has been removed, in line with SAA requirements. Procedures for registration of businesses have been simplified. Time needed to register a business decreased from 42 to 8 days, and the circulation of information from the commercial register to tax offices is now mandatory. A new law has decentralised the commercial register, allowing businesses to register at district courts.

However, firms wishing to set up in Albania still face resistance from existing establishments. The unresolved issue of property rights hinders certainty, discouraging establishment (see Economic and social rights) . Preparations in the area of right of establishment are at an early stage in Albania.

Little progress can be reported in the field of company law . The Ministry of Finance organised further training and certification of auditing activities for Albanian Certified Accountants. However, considerable improvement in the implementation of accounting and auditing standards is needed. Legal procedures between branches of the administration concerned in setting up a business have not yet been unified. Preparations in this area are underway.

Free movement of capital

There has been some progress in the area of capital movements . Work has started on the drafting of a Foreign Exchange Law to regulate the capital movements regime, which aims to progressively liberalise the capital account in line with SAA obligations. However, significant restrictions remain, in particular on the acquisition of real estate by foreigners as well as portfolio investments and other short-term capital movements. This aspect will need attention to ensure compliance with SAA obligations. A draft law for establishment of the Authority for Financial Supervision has been adopted by the Council of Ministers. This Authority will incorporate insurance and pension fund supervision, replacing the current Securities Commission, Insurance Supervisory Authority and Institute on Private Pensions. The Authority will report to the Parliament. The creation of this body will strengthen non-banking financial supervision. The current supervisory agencies are weak and lack independence. The Bank of Albania continues prudential monitoring of the financial sector. In this area, Albania has started to prepare its targets, which relate in part to commitments it has made under the SAA.

Some progress can be reported in the area of payments systems . Automated payment systems are still being developed, but cash remains the major means of making payments in Albania. The Post Office provides services for low-value domestic payments and some money transfer operators are specialised in cross-border services. The Bank of Albania continues to operate a Real Time Gross Settlement system for inter-bank payments, the Albania Interbank Payment System (AIPS). The AIPS was established to provide real time processing and settlement for high value payments. The Bank also offers clearing services for retail payments, currently for payment orders and cheques. An automated clearing house has just been completed, with settlement amounts to be calculated on a multilateral net basis. However, despite some individual card facilities linked to international systems, card infrastructure still does not allow full interoperability. Reforms in the area of payment systems remain at an early stage.

Customs and taxation

Limited progress can be reported in the area of customs rules . Reference prices have recently been established and the transaction value is rejected in 20% of cases. Legislation and implementation on customs valuation needs to be in line with WTO principles and GATT methodology on valuation needs to be respected. The Albanian tariff is based on the Combined Nomenclature 2005, but in accordance with the Interim Agreement the latest version of the Combined Nomenclature will need to be applied to the classification of goods in trade between the parties from the entry into force of the Agreement. Further alignment to EU legislation and procedures is needed, particularly in the area of simplified customs procedures and transit procedures, customs warehouses (the new legislation in this area is further way from the acquis than the former law) and binding tariff information. In this area, Albania has started to prepare.

There has been significant progress in the strengthening administrative and operational capacity for customs. In 2005 the Customs Administration collected 108% of target revenue. This positive trend was confirmed in the first half of 2006. Considerable progress has been made in implementing the ASYCUDA computerised customs declaration and processing system. More than 95% of all customs declarations are now processed automatically through ASYCUDA. ASYCUDA's selectivity module has been implemented and a risk analysis system has entered into operation in Tirana and Durres customs houses.

Progress has been made on control and management of origin. The customs Authority has a new web page including free trade agreements signed by Albania. An annual training programme based on the needs of the administration has been drawn up for 2006. The increase of the basic salaries adopted by the Council of Ministers is a positive step towards tackling administrative corruption. Some progress can be reported as regards the customs service’s role in fighting organised crime, drugs and smuggling. The Customs maritime branch is being reactivated and some patrol boats have entered into service. Cooperation between police and customs has been strengthened and several effective actions have taken place. A joint force with the police is now operational.

The high turnover of staff requires continued monitoring, with 90% of all managerial staff changed since mid-2005. Protection of officers’ employment rights has been reduced following changes in the overall personnel legal framework. All authorisations for customs warehouses have been revoked, which is harmful to honest traders. Further efforts are needed on effective control of IPR and dual-use goods. Improvement in the management of origin needs to continue. Customs infrastructure, especially the Tirana customs house, requires urgent improvement. An effective customs system is vital for the implementation of the Interim agreement and the SAA. Overall, preparations in the area of customs are moderately advanced.

Some progress can be reported in the area of taxation . VAT was introduced in 1996 and the VAT rate is 20%. VAT refunds on exports have been simplified by no longer requiring an import document of the importing country. Waiting time for VAT repayments has been reduced and a general audit plan for 2006 has been prepared. Some modifications have been made to the VAT system, in particular exemptions. Sales of new houses are now exempt, as well as gambling enterprises. A risk analysis system is being introduced for VAT enforcement.

The corporate income (profit) tax rate has been reduced from 23% to 20%. The small business tax rate has been decreased from 3% to 1.5%. The number of tax scales for personal income tax has been reduced from six to four, and the maximum tax rate reduced from 25% to 20%. The tax collection rate has increased. The new appeal procedure allows the business sector to be represented in the commission dealing with complaints. Computerisation of tax offices is progressing further and a new network is being introduced, covering 12 district tax offices (including 80% of taxpayers). Smuggling of excisable goods seems to be decreasing.

Tax reforms in the field of direct taxation need to begin, particularly taking into account the company tax directives. A Treaty Network based on the latest OECD model needs to be completed. The Albanian authorities have not yet undertaken a gap analysis aimed at identifying existing harmful measures which could contradict the principles of the Code of Conduct on business taxation. A comprehensive tax collection and control strategy has not yet been adopted. This should include a review of the role and function of the Tax Police.

Overall, further alignment with EU legislation and best practices is still needed. The size of the grey economy and the fight against fraud require further attention. The high turnover of staff in the tax administration means accumulated know-how needs to be re-established. New laws limit employment guarantees to staff, making them more vulnerable to outside pressure.

Overall, preparations in this area are being started.

Competition

Some progress can be reported in the area of anti-trust . The Competition Authority (ACA) has issued regulations and explanatory guidelines on the control of concentrations, immunity from fines and horizontal and vertical agreements. It also started to assess mergers and acquisitions notified to it. As regards enforcement, the ACA is proceeding with two major files, regarding mobile telephony and car insurance at border crossings, respectively.

Progress has been made in the functioning of the ACA. Staff members have received training and regional awareness raising workshops have been held for the business community. However, it is not clear yet to what extent the Competition Authority may work independently. Most of the staff is recently recruited and thus inexperienced, and the lack of resources means staffing targets have not been met. Further efforts are needed to improve effectiveness of competition control. Albania has undertaken significant commitments in this field under the SAA. Preparations in this area are being launched.

Substantial progress can be reported in the area of state aid . Translation of the relevant EU Regulations into Albanian has been completed. In December 2005 the Council of Ministers completed the legal framework in the field of state aid by adopting conditions and procedures for granting regional as well as restructuring aid. A system for electronic notification for authorising, granting and controlling state aid has been installed. The inventory of state aid has been completed and comprises data on state aid granted since 2000.

A State Aid Commission has been created as the decision-making body in this area. It has the power to authorise state aid schemes and individual aids, as well as to order the recovery of incompatible aid. It includes professionals in the field of law and economics who represent civil society or institutions which are not directly involved in providing state aid. The State Aid Department in the Ministry of Economy, Trade and Energy remains in place as an administrative body which directly reports to the Commission. Training has been provided to representatives of central and local administration on the new legal and institutional framework for state aid and their legal obligations.

This area has progressed rapidly and considerable expertise has been developed. The next challenge for the Albanian authorities is to further ring-fence the State Aid department in the Ministry of Economy, Trade and Energy and to clarify the operational reporting line to the State Aid Commission. Preparations are on track towards meeting SAA commitments in the area of state aid.

Public procurement

There has been limited progress in the field of public procurement. In the SAA, Albania has committed itself to align to the acquis in this area. Progress in this field is also vital for improving public sector governance, a key European Partnership priority. A new law which takes into consideration the principles and most of the procedures provided for by EU directives is pending in parliament. Some progress has been made as regards organisation of the Public Procurement Agency (PPA). Introductory public procurement training courses have been held for central institutions and city officials. A training unit has been created in order to liaise with public bodies involved in procurement activities throughout the country, including line ministries. The Agency has designed a new website to increase transparency.

The current public procurement legislation neither provides a specific criterion to identify abnormally low offers nor allows use of the most economically advantageous offer criterion. In the absence of an independent body for complaints, efficiency and independence of the review procedures cannot be guaranteed. Political influence and corruption remain due to insufficient investigation and criminal prosecution of procurement offences. Lack of transparency still constitutes an obstacle to the promotion of competition within the private sector, which leads to a few local economic operators holding a key advantage. The PPA remains weak and underfunded, with insufficient staff and little clarity in task attributions. Staff removed recently from the high and middle-management levels need to be replaced.

No particular progress can be reported as regards procurement procedures. The use of direct tender procedure by procurement entities remains too frequent. The Council of Ministers has further increased the threshold value for tendering construction contracts, deepening the gap between EU and Albanian requirements. In awarding public contracts, procuring entities still award tenders solely on the basis of the lowest price. Albania is lagging behind in the field of public procurement.

Intellectual property law

Limited progress can be recorded in Albania as regards intellectual property rights (IPR). Under the SAA, Albania is to align to the acquis in this area and offer a high level of IPR protection. The General Directorate of Patents and Trademarks has been moved from the Council of Ministers to the Ministry of Economy, Trade and Energy. The Directorate's 13 staff now includes six IP specialists. The Directorate periodically publishes patents and trademark information bulletins to increase public awareness. Albania has signed the Strasbourg agreement on the international classification of patents. A database including all registered trademarks, patents and industrial designs since 1994 is now operational and procedures have been automated, but delays still occur in the publication of registered rights. In the field of industrial property, an agreement on exchange of information on legislation, publications and training has been signed with the Industrial Property State Office of the former Yugoslav Republic of Macedonia.

The copyright office provided for under the law on copyright and related rights of 2005 has been set up but is not operational, which hampers the enforcement of international conventions signed by Albania. The collective management of rights is ineffective because of a lack of resources and capacity. Collection of royalties is rare and collecting societies therefore need assistance from sister organisations in other parts of Europe to cope with their costs. Piracy and counterfeiting remain widespread. There is a general lack of awareness about IP infringement and the damaging social and economic effects of counterfeiting amongst law enforcement bodies, including the judiciary. Preparations in the area of intellectual property rights are at an early stage.

There has been very little progress in the enforcement of IPR in Albania. Further training has been provided to judges and lawyers. A unit specialised in IPR has been established within the investigation department of the customs administration. However, institutional capacity and cooperation remains weak and enforcement actions are therefore very rare. Albanian courts still demonstrate insufficient experience and qualifications in this field, and no specialised judges or exclusive courts exist for intellectual property cases. In this area, the country meets its objectives only partially.

In the IPR law field as whole, government responsibilities remain too fragmented, and a coherent national strategy is required. Work towards fulfilling SAA commitments is at an early stage.

Social policies

Employment policies

Only modest progress can be reported in the area of employment. A number of programmes to foster employment have been implemented under the National Strategy for Economic and Social Development. However, their impact has been reduced by lack of proper evaluation.

The challenge for Albania is now to make proper use of its growing labour force by using a multi-sectoral approach to stimulate job opportunities. The main outstanding legislative and regulatory issues remain the creation of a modern legal framework regarding labour law and occupational health and safety and its implementation, creation of a labour inspectorate for the entire country, reform of the pension and social protection system and development of social dialogue.

Gender equality policies should be enhanced, in particular the strengthening of the State Committee on Equal Opportunities and the full implementation of the law on Gender Equality ( see also Political chapter, Economic and Social Rights ).

Albania is at an early stage in this field.

Education

Some progress can be reported in the area of primary and secondary education. National strategies for pre-university education and pre-university vocational training up to 2015 have been approved. The introduction of a new scheme on final exams and entry exams in Albanian universities (State Matura) was a positive development. A pilot scheme for psychological services has started in secondary schools. The use of textbooks has been liberalised, giving a choice to teachers of several sets of material for the same subject.

There has been limited progress in the area of higher education. For example, a working group has been set up to draft a new law to ensure follow-up of the Bologna process. All institutions have started to implement the Bologna process and the European Credit Transfer and Accumulation System has been introduced. Some measures have been undertaken to increase wages in the public education system.

Despite some recent positive trends (see Education under Economic and Social Rights) participation rates in education remain lower than average for the EU and for other countries of the region at all educational levels, but in particular at secondary level. Children in rural areas and girls are particularly disadvantaged. Drop-out rates in the final years of basic education are high, and a large percentage of children leave the school system without achieving any qualifications. Skill bottlenecks do not currently seem to be hindering the development of the Albanian economy, but technical skill gaps are starting to be reported by employers in urban areas where economic activity is more vibrant. In the medium term low skill levels threaten investment and the development of higher-value-added industries and services. Albania's preparations in the area of education are at an early stage.

Sectoral policies

Industry and SME

Some progress can be reported towards improving the business environment for industry and SMEs. In October 2005 the existing task force for the regulatory reform in respect to improvement of the business climate was re-approved by the new Government. The Government has approved a revised action plan on removing administrative barriers to business. Commercial legislation has been improved by reducing the target time needed for business registration to 8 days.

Albania has started to reform the tax regime and the fiscal burden for SMEs. The simple profit tax rate for SMEs, payment of which involved unfavourable upfront quarterly instalments, has been reduced by 50 % and payment schedules have been improved to reduce tax avoidance. According to Albanian statistical data, the economy has seen a clear rise in new company registrations (9,000 in the first nine months of 2006) partly due to a more favourable tax regime.

Steps have been identified to implement the action plan to reduce the informal economy, such as simplification of licences, permits and certificates but concrete progress remains slow. There has been no progress so far in setting up formal procedures to assess the business impact of planned regulatory measures, but the government aims to introduce such assessments by December 2006.

Albania's capacity for trade policy-making remains weak. Its WTO secretariat in the Department of Economic Co-operation and Trade, now called the WTO Relations and Economic Co-operation Section, is still understaffed.

The Government has established a new umbrella organisation, Albinvest, integrating the Albanian Investment Agency (ANIH), the Small Medium Enterprises Agency (SMEA) and the Albanian Export Agency (ANE) and reporting directly to the Minister of Economy, Trade and Energy. This new structure is in line with government policy to reduce the operational cost of public administration and is expected to enhance sustainability. The capacity of Albinvest to provide effective assistance as a one-stop shop to foreign investors is being tested by an increasing number of trade and investment missions which are visiting Albania. The new agency has inherited premises and staff of previous bodies, but a Council of Ministers decision on the internal organisation of the agency is still pending.

The company registration and start-up system remains slow, bureaucratic and inefficient. The overall registration and set-up process still involves 7 steps (11 with compulsory licenses included) and an average time of 41 days. There is no online registration and no silence-is-consent principle. Concrete steps to strengthen the Business Advisory Council remain to be taken. No developments can be reported on business incubators or technology parks. Albania has adopted a law on e-signature.

Little progress can be reported in the area of SME financing. The new leasing law, adopted in 2005, is now being implemented as a financing alternative for SMEs. Italy and Albania have concluded an agreement to set up a € 30 million SME credit facility, but establishment of the facility has been delayed for two years. Despite some progress in the procedures for establishing a guarantee fund for SMEs, it remains seriously delayed and is not yet operational. Albania's progress in implementing the European Charter for Small Enterprises has been relatively slow. There is little evidence of entrepreneurship learning having been included in education and training systems and there has been no mainstreaming of entrepreneurship education in the curriculum.

Albania is at an early stage in improving the business environment for industry and SMEs.

Agriculture and fisheries

Progress in the agriculture field has been very limited. Investment in fruit tree plantations, vineyards and the food processing industry has increased. Commercial banks have played a positive role in providing credit to the food processing industry. Sales of vegetables and milk to the processing industry have increased, improving farmers' revenues in these fields. The Ministry of Agriculture's agricultural and rural development strategy has been approved by the government.

However, overall productivity remains low and Albania is unable to compete with imported agricultural products. Despite improvement of the food trade balance (including processed food), imports in the livestock sector continued to increase, which is to a great extent due to the extremely low average farm size and underlines the need to achieve farm consolidation. The role of domestic industry in promoting agricultural growth remains limited.

Delayed land registration, restitution and compensation remains a major difficulty as clear and well-established legal title to land is vital for progress in this sector. Distribution channels still need to be improved and adequate produce storage facilities ensured. Preparations in the area of agriculture are at an early stage.

Some, but uneven, progress has been made in the veterinary and phytosanitary area.

There has been no progress in bringing the phytosanitary and veterinary standards of produce into compliance with EU requirements, even for those with a strong export potential, such as bivalve molluscs.

Some progress can be reported in the veterinary sector. The Albanian authorities have undertaken steps to transpose some parts of the acquis . A system for the control of diseases and monitoring the movement of small ruminants is being set up. However, no progress has been seen in clarifying competences in the veterinary services, strengthening control structures or in staff capacity. Moreover, there remains a lack of transparency in the handling of animal diseases, as recently demonstrated by the avian influenza cases.

Without prejudice to the necessary upgrading of food processing establishments to meet EU requirements, the Ministry will have to prepare a plan to improve related establishments in the fishery sector following a mission of the EC Food and Veterinary Office (FVO) on fish and bivalve molluscs. Fish farms are registered and controlled by the Competent Authority (CA). However, legal standards equivalent to EU requirements are still missing. The CA needs access to official laboratories able to carry out diagnosis of all fish diseases and is therefore not able to certify compliance with EU requirements. The FVO mission stressed deficiencies in several aquaculture establishments approved for export to the EU. This raises concern on the CA’s ability to ensure proper standards for hygienic packaging and to carry out proper assessments. Lack of official controls on the use of veterinary drugs in aquaculture was also pointed out. Moreover, some of the legal standards are neither applied by food business operators nor enforced by the CA. Whilst there is currently no export of aquaculture products to the EU, the failure of the CA to implement residue monitoring for fish farms in 2005, along with absence of controls on the use of veterinary medicines in this commodity, undermines CA's ability to guarantee the residue status for aquaculture products.

There has been limit