TABLE OF CONTENTS

1............ Introduction. 3

1.1......... Preface. 3

1.1......... Context 3

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. 12

2.3......... Regional issues and international obligations. 13

3............ Economic criteria. 14

3.1......... The existence of a functioning market economy. 15

3.2......... The capacity to cope with competitive pressure and market forces within the Union. 19

4............ Ability to take on the obligations of membership. 21

4.1......... Chapter 1: Free movement of goods. 21

4.2......... Chapter 2: Freedom of movement for workers. 22

4.3......... Chapter 3: Right of establishment and freedom to provide services. 22

4.4......... Chapter 4: Free movement of capital 23

4.5......... Chapter 5: Public procurement 23

4.6......... Chapter 6: Company law.. 24

4.7......... Chapter 7: Intellectual property law.. 25

4.8......... Chapter 8: Competition policy. 26

4.9......... Chapter 9: Financial services. 26

4.10....... Chapter 10: Information society and media. 27

4.11....... Chapter 11: Agriculture and rural development 28

4.12....... Chapter 12: Food safety, veterinary and phytosanitary policy. 29

4.13....... Chapter 13: Fisheries. 30

4.14....... Chapter 14: Transport policy. 31

4.15....... Chapter 15: Energy. 32

4.16....... Chapter 16: Taxation. 33

4.17....... Chapter 17: Economic and monetary policy. 34

4.18....... Chapter 18: Statistics. 34

4.19....... Chapter 19: Social policy and employment 35

4.20....... Chapter 20: Enterprise and industrial policy. 37

4.21....... Chapter 21: Trans-European networks. 37

4.22....... Chapter 22: Regional policy and coordination of structural instruments. 38

4.23....... Chapter 23: Judiciary and fundamental rights. 39

4.24....... Chapter 24: Justice, freedom and security. 50

4.25....... Chapter 25: Science and research. 54

4.26....... Chapter 26: Education and culture. 54

4.27....... Chapter 27: Environment and climate change. 55

4.28....... Chapter 28: Consumer and health protection. 57

4.29....... Chapter 29: Customs union. 58

4.30....... Chapter 30: External relations. 58

4.31....... Chapter 31: Foreign, security and defence policy. 59

4.32....... Chapter 32: Financial control 60

4.33....... Chapter 33: Financial and budgetary provisions. 60

Statistical Annex. 62

1. Introduction 1.1. Preface

The Commission reports regularly to the Council and Parliament on the progress made by the countries of the Western Balkans region towards European integration, assessing their efforts to comply with the Copenhagen criteria and the conditionality of the Stabilisation and Association Process.

This progress report, which largely follows the same structure as in previous years:

– briefly describes the relations between Albania and the European Union;

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

– analyses the situation in Albania on the basis of the economic criteria for membership;

– reviews Albania’s capacity to take on the obligations of membership, i.e. the acquis expressed in the Treaties, the secondary legislation, and the policies of the European Union.

This report covers the period from October 2013 to September 2014. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are under preparation or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and enables an objective assessment.

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

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

1.1. Context

The Stabilisation and Association Agreement between Albania and the EU came into force in April 2009. Albania presented its application for membership of the European Union on 28 April 2009. Following a request by the Council, the Commission submitted its Opinion on Albania’s application in November 2010. In December 2010, the Council noted that the opening of accession negotiations would be considered once the Commission has assessed that the country has achieved the necessary degree of compliance with the membership criteria and, in particular, has met the key priorities set out in the Commission’s Opinion.

In view of the progress made by Albania, the Commission recommended in October 2013 that Albania be granted candidate status, on the understanding that it continues to take action in the fight against organised crime and corruption. In December, the Council stated that it would decide on whether to grant candidate status in June 2014, in the light of a report by the Commission focusing on Albania’s implementation of its judicial reform strategy and on the fight against organised crime and corruption. The Council stressed that sustained implementation of reforms and fulfilment of all key priorities would be necessary for the opening of negotiations. In its June report,[3] the Commission confirmed its recommendation that the Council should grant Albania candidate status. The European Council of June 2014 endorsed the decision of the General Affairs Council granting Albania candidate status.

1.2. Relations between the EU and Albania

Albania participates in the Stabilisation and Association Process.

Overall, Albania has implemented its obligations under the Stabilisation and Association Agreement (SAA) well. The protocol on the adaptation of the SAA, to take account of Croatia’s accession to the EU, was signed in February 2014; pending its ratification, the protocol is applied on a provisional basis with effect from 1 July 2013.

Regular political and economic dialogue between the EU and Albania has continued through the SAA structures. The Stabilisation and Association Committee and Council met in March and May 2014, respectively. Meetings of six subcommittees and of the special group on public administration reform were held. Albania participated in the multilateral economic dialogue with the Commission and the EU Member States to prepare the country for participation in multilateral surveillance and economic policy coordination under the EU’s Economic and Monetary Union. A High Level Dialogue on the key priorities for opening accession negotiations[4] was launched in November 2013, with subsequent meetings in March, June and September 2014. Joint working groups to structure work on the required reforms were established in September 2014.

Visa liberalisation for Albanian citizens travelling to the Schengen area has been in force since December 2010. As part of the monitoring mechanism in place since visa liberalisation, the Commission has been regularly assessing the progress made by the country in implementing reforms introduced under the visa roadmap. The monitoring mechanism also includes an alert mechanism to prevent abuses, coordinated by Frontex. The Commission has regularly submitted its post-visa liberalisation monitoring reports to the European Parliament and the Council. The next report will be presented by the end of 2014. A visa-waiver suspension mechanism entered into force in January 2014. On this basis, EU Member States can request the Commission, in an emergency situation and as a measure of last resort, to examine the possibility of temporarily suspending the visa waiver for third-country nationals. A readmission agreement between the European Union and Albania has been in force since 2006.

Between 2007 and 2013, the EU provided financial assistance to Albania under the Instrument for Pre-accession Assistance (IPA). Albania has benefited from IPA components I — transition assistance and institution building — and II — cross-border cooperation — receiving a total allocation of approximately € 594 million, which includes approximately € 82 million in 2013 for the national programme under IPA component I. The assistance is managed either by the EU Delegation in Tirana or by the Albanian government under indirect management.

The implementation of EU assistance was, in some cases, affected by missing or delayed construction permits, non-budgeting of funds for operating and maintaining EU-funded investments, missing or delayed utility connections, missing or delayed re-imbursement of value added tax to contractors and civil society organisations and a lack of coordination with other institutions, including local governments. Similarly, some staff replacements following the change of government affected people who had been trained with EU support. Strengthening national ownership and addressing the shortcomings above is essential to maximise the impact of future EU support.

Under IPA II, Albania will benefit from EU assistance for 2014-20, with a total indicative allocation of € 640 million. A 2014-20 country strategy, drafted in partnership with the Albanian government and in consultation with relevant stakeholders, was adopted by the Commission in August. Over this period, IPA II will address fundamental issues in the areas of rule of law, democracy, economic governance and public finances to support the successful reforms and investments needed for the integration process.

Albania will also receive support under the IPA multi-country programmes and will participate in cross-border cooperation programmes with neighbouring Western Balkan countries and Member States and in trans-national cooperation programmes under the European Regional Development Fund.

Albania participates in the following EU programmes: the Seventh Research Framework Programme, the Competitiveness and Innovation Framework Programme, Lifelong Learning, Europe for Citizens, Culture and Customs. Albania has also recently concluded or is in the process of concluding new agreements for a number of programmes, including: Horizon 2020, Competitiveness of Enterprises and Small and Medium-sized Enterprises, Fiscalis 2020, Erasmus+, Creative Europe and Employment and Social Innovation. Albania has applied for observer status in the EU Fundamental Rights Agency.

2. Political criteria

This section examines the 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 with enlargement countries and Member States and compliance with international obligations.

2.1. Democracy and the rule of law

The government has shown concrete action and sustained political will in the area of EU-related reforms, covering a broad range of issues. In November, the government and the opposition joined forces to adopt a resolution on EU integration and have continued to support the process since then. However, further consensus building has been affected by an increasing confrontational climate between the government and the opposition, which often abstained from parliamentary work and, in July, launched a parliament boycott.

Constitution

Overall, the implementation of the Constitution has been upheld. Since the new government took office, the Constitutional Court has examined seven lawsuits filed by opposition, one filed by local government units and one filed by the President. Four cases relate to the functioning of state institutions. Swift implementation of Constitutional Court decisions is essential.

Elections

Building on progress in the 2013 parliamentary elections, Albania needs to implement the recommendations of the OSCE’s Office for Democratic Institutions and Human Rights (OSCE/ODIHR) election observation mission, notably strengthening the independence of the election administration bodies, well ahead of the 2015 local elections.

Parliament

In November, parliament consensually adopted a resolution on Albania’s European integration, endorsing a number of measures relevant to EU integration, mainly on the rule of law. The government secured a 3/5 qualified majority in parliament when two Members of Parliament (MPs) from the opposition decided to join one of the majority coalition’s parliamentary groups. EU integration remained a high priority for parliament. The opposition generally participated in the political discussions during parliamentary proceedings, although it often abstained from parliamentary work including on the administrative and territorial reform, and withdrew from key votes on legislative initiatives. Since July, the main opposition party has boycotted all parliamentary work. This followed a violent incident within parliament. Further action is needed from both the government and the opposition to ensure a constructive and sustainable political dialogue in parliament.

Parliament voted on appointments to judicial institutions and endorsed one nomination to the High Council of Justice and the re-appointment of the Chairman of the Constitutional Court for a new term. It rejected three presidential nominations to the High Court.

Parliament overruled the presidential veto on nine laws, including amendments to the Law on the High Council of Justice and the law on administrative territorial reform. The overruling of the veto on a normative act postponing the entry into force of the Civil Service Law (consensually adopted in the previous legislature) led to an opposition complaint to the Constitutional Court, which decided to annul the normative act, inter alia, on the grounds that a normative act cannot replace a law requiring a 3/5 majority.

Regarding parliament’s oversight role, the jurisprudence of the Constitutional Court on the scope and limits of parliamentary control through ad hoc inquiry committees needs to be fully applied by parliament. Relevant Constitutional Court decisions need to be implemented without undue delay.

The Parliamentary Committee on European Integration monitored and held a public hearing on the government’s road map on the five key priorities for opening accession negotiations. It also exercised its oversight role through hearings with the Minister for European Integration.

Parliament continued to monitor the work of independent institutions and discussed their reports more frequently. However, further action is needed to ensure appropriate follow-up to their findings and recommendations. There have been controversies over the set-up, appointment procedures and performance of a number of independent institutions which are accountable to parliament. The applicable legislation needs to be fully implemented and the professionalism, functioning and independence of these institutions ensured. The procedures of electing and dismissing the heads and boards of these institutions by a simple majority in parliament remain a matter of concern, as this seriously affects their independence. Steps to reinforce the independence and performance of these institutions need to be taken in an inclusive reform process.

Transparency and inclusiveness in the legislative process have improved. In December, an action plan was adopted to address the recommendations in the European Commission’s 2013 progress report relating to parliament. Draft laws, work programmes and agendas for plenary and committee meetings are generally published on the parliament’s website. Further work is needed on ensuring the timely publication of the minutes of committee meetings. Public access to the work of parliamentary bodies has improved overall with the simplification of accreditation procedures. Parliamentary committees have generally been proactive in holding consultations with civil society and interest groups. However, the short notice and the lack of clear rules on public consultations need to be addressed. In May, parliament decided to set up offices for MPs in 12 regions, with one MP from the majority and one from the opposition in each office. However, outreach by MPs to their constituencies remains limited. Work has been done to improve administrative and expert capacity in parliament, mainly through assigning new staff to key positions. Sufficient means need to be allocated for training parliamentary staff.

Overall, progress has been made on the functioning of parliament. Transparency and inclusiveness in the legislative process have improved. Further action is needed to ensure a more institutionalised consultation process and further strengthen parliament’s oversight role, including through implementation of the relevant jurisprudence and rulings of the Constitutional Court. Government and opposition should take steps to restore political dialogue in parliament. The government needs to ensure that the opposition has the possibility to fully perform its democratic control function. At the same time, the opposition also needs to engage constructively in the democratic processes. Increasing cross-party cooperation remains essential for a sustainable reform process.

Government

The new government carried out a broad redistribution of responsibilities and changed the structure and names of the ministries. It has 16 ministries, one more than the previous government, and three Ministers of State.

European integration is the first priority for the government’s programme, which pays particular attention to related challenges in the rule of law, public administration and fundamental rights areas. The government has actively engaged with the European Commission in the High Level Dialogue process on the key priorities. In May, the government adopted a comprehensive roadmap to structure Albania’s efforts in addressing the key priorities. In July, it adopted the 2014-20 National Plan for European Integration.

The government set up a delivery unit network to identify its policy priority objectives and monitor progress in meeting them. Delivery units were established in all line ministries, under the coordination of the Prime Minister’s Office. Six priorities have been identified (good governance, water, energy, land, foreign direct investments, structural reform) and a matrix of the expected results has been drafted. Its implementation is regularly monitored through performance indicators. Effective links between the delivery unit structures and EU integration reform planning will need to be ensured.

A Department for Development Programming, Financing and Foreign Aid has been set up in the office of the Deputy Prime Minister to ensure that budget allocation, donor funding and strategic business investment are consistent with government priority objectives.

The Ministry of European Integration has further consolidated its role as coordinator for EU affairs, including as regards the implementation of the 2014-20 National Plan for European Integration, and is working on the 2014-20 National Strategy for Development and Integration. To manage the challenges of upcoming reforms, the ministry’s institutional capacity needs to be further strengthened and its coordinating role systematically enforced.

Some steps have been taken towards improving the functioning of the interinstitutional working groups, but the majority remain ad hoc fora. Relations between state institutions continued to be difficult at times and interinstitutional cooperation needs to be improved.

Regarding local self-government, a Minister of State responsible for local affairs was appointed in September 2013. The Law on Territorial and Administrative Reform was adopted in July, reducing the number of local government units from 373 to 61, abolishing also the communes and keeping the 12 existing regions. The main opposition party abstained from voting and expressed its strong disagreement over the reform. The law aims to increase the units’ efficiency, financial sustainability and capacity to provide services. Local government units experienced difficulties in exercising their competences in the period leading up to the adoption of the law and the national strategy on territorial planning. In August, the National Territorial Council decided that the implementation of the already adopted local planning instruments should be suspended and that new development permits should be issued. The implementation of the new Civil Service Law by the newly established local government units has not been fully launched.

Decentralisation reforms progressed and work has started on clarifying the functions of local government units under the new territorial administrative division in the preparation of amendments to the Law on the Organisation and Functioning of Local Government.

Amendments to the Law on Territorial Planning were enacted in July with the aim of further clarifying the scope of national territorial planning instruments and strengthening the role of relevant institutions. The central government was more involved in managing urban development issues and has taken measures to strengthen the competence of central institutions such as the National Urban Construction Inspectorate and the National Territorial Agency. In March, the Constitutional Court ruled that the inspectorate could not interfere with local government’s authority to demolish illegal constructions. The transparency of the decision-making process in the National Territorial Agency and Council and in local government bodies needs to be improved.

Total local government expenditure in 2013 was estimated at 2.2 % of GDP, while revenues remained at 0.8 % of GDP. Local taxes continued to dominate revenues for local government.

Local government human resources management and financial control remain weak. Transparency and strategic planning in central funding to local authorities remain a challenge. Strong politicisation still hinders relations between central and local governments and limits local authorities associations’ role. Local authorities still need to develop an inclusive dialogue with civil society and local communities.

Overall, the new government undertook a number of reforms to bring the country closer to meeting the key priorities for progress towards the EU and deliver further tangible results, notably in the area of rule of law. Steps have been taken to strengthen and streamline government structures and improve interinstitutional cooperation. Further strengthening of capacity, coordination and strategic planning for EU integration is needed.

Regarding local self-government, substantial efforts have been made to advance territorial-administrative reform. Further action is needed to strengthen the administrative capacity of local government units, allowing them to exercise their authority and implement legislation in a financially sustainable way, enforcing transparency, effectiveness and inclusiveness.

Public administration

The drafting of the new public administration reform strategy resumed in January, with the aim of broadening the strategic framework for public administration reform. The new strategy is foreseen to cover public administration organisation, policymaking, e-government and ensure also a link to public financial management and programming.

Regarding policy development and coordination, after the reshuffling of functions and staff under the new government, the administration is still trying to achieve its full capacity. The Prime Minister’s Office was significantly strengthened, enforcing inter-ministerial coordination and creating new units for delivery, research and policy development, legislation and programme monitoring, and support for strategic business investments, but there is not yet a fully operational annual and mid-term planning system. Coordination was further strengthened through the appointment of a Minister of State for Innovation and Public Administration, whose human and financial resources need to be increased to fulfil the Minister’s policy coordination role. The public administration reform special group in the framework of the SAA remains the main forum of dialogue on these issues between Albania and the EU.

With regard to public service and human resources management, following the elections and an extensive reorganisation affecting the structures of the 16 ministries, around 13 % of staff in the central government institutions were dismissed. In parallel, staff numbers were increased in key ministries such as the Ministry of European Integration. The restructuring of the public sector raised heated debate on the legality of the process that was followed and the number of personnel downgraded, dismissed and put on waiting lists, and on the results in relation to cutting expenditure. Albania needs to increase its efforts to ensure that the high staff turnover does not compromise capacity or business continuity.

The Department of Public Administration, which has demonstrated increasing transparency, estimated that since September 2013, around 380 civil servants in central institutions were dismissed, resigned or put on waiting lists and around 100 were downgraded out of a total of 1 392 current civil servants. The department also estimated around 5 200 dismissals and resignations in subordinate institutions and agencies. Further efforts are needed to ensure transparency and accuracy of data. Recruitment of civil servants was frozen from March to July to ensure proper implementation of the new legislation. It was also estimated that there were 137 appeals by employees in central institutions with 85 % of them still pending, while the same percentage in subordinate institutions and agencies is also high, reaching 75 % of 1 758 appeals. Two thirds of all concluded cases at first instance were won by the employees. Final court rulings should be fully respected and implemented.

The new Civil Service Law became effective in February. By March, the government adopted 10 by-laws, covering significant issues such as recruitment, transfer, promotion, dismissal, the description and classification of job positions and the new senior management staff. From April to September, the Department for Public Administration produced five sets of guidelines on job descriptions, disciplinary measures, the competencies of the Restructuring Committee, lateral transfers and executive positions through open competitions. It introduced an electronic system for applications for recruitments and for data collection of personnel in public institutions. It has organised intensive training for the proper implementation of the law, which remains a challenge.

Building a comprehensive monitoring mechanism is essential. In this respect, the Civil Service Commission has been replaced by the Civil Service Commissioner, whose appointment by the parliament is still pending. The functioning and independence of the new institution must be ensured, something essential for proper monitoring of public institutions.

The approval of the necessary implementing legislation for the Law on the Organisation and Functioning of the Public Administration is still pending. The government needs to assess all existing legislation on the organisation and functioning of all subordinate institutions and align it to the principles and provisions of this law.

The Department of Public Administration has started to play a more prominent role. It facilitated training regarding the new legislation, including at local level. Departmental capacity has been increased from 22 to 35 with a view to reach 43, according to the Prime Minister’s order adopted in February. The implementation and extension of the human resources management information system has been subject to delay. Implementation was resumed in August and work advanced on data entry of personnel files from central government institutions, relating just to the human resources module of the system. The roll-out of the system to all public institutions and linking it to the Ministry of Finance’s treasury system have been delayed. The School of Public Administration is operating with its full annual budget and new premises, implementing its annual work plan and ad hoc extra activities in cooperation with the Department of Public Administration.

With regard to accountability and service delivery, a new Code of Administrative Procedures was adopted by the government in June and is currently in parliamentary procedure. The law aims to strengthen the principles and standards of good administration and transparent administrative decision-making, including e-administration. Implementation of the Law on Administrative Courts progressed when the courts started to operate in November 2013. They work regularly, providing rulings in reasonable timeframes despite the heavy workload. Vacancies for judges and assistant judges have not yet been fully filled and the case management system needs to become operational.

Public financial management was identified as one of the key priorities in the government programme and as an integral part of good governance reforms. A comprehensive reform programme, including a public financial management strategy for the period 2014-20 is planned to be finalised by the end of the year. The Ministry of Finance needs to enhance its human resources to this end. Albania has taken short-term measures for improved public financial management through the adoption of the arrears prevention and clearance strategy and the partial payment of arrears through IMF and World Bank loans. Temporary measures improving monitoring by the Ministry of Finance were gradually introduced to address the urgent need for commitment controls aiming to prevent new arrears. Systemic actions will be implemented as part of the 2014-20 public financial management strategy.

Overall, some progress has been made on public administration reform with the coming into effect of the Civil Service Law and its implementing legislation and some first steps for its implementation. The new legislation provides an opportunity to build a professional, effective, depoliticised and accountable public administration. Proper implementation and monitoring are now essential. The appointment and independence of the Civil Service Commissioner and transparent and merit-based practises, especially in future recruitment, need to be ensured. Applicable legislation and court rulings must be fully respected. The Department of Public Administration was reinforced to meet its increasing responsibilities. The new Minister of State for Innovation and Public Administration should have the necessary means and human resources to fulfil policy coordination tasks. Albania has also committed to substantial reforms in public financial management over the period 2014-20. A comprehensive reform programme will address and sequence reform actions in the relevant parts of the public financial management system.

Ombudsman

The Ombudsman has continued to actively promote human rights. He has recommended legislative changes to improve respect for the rights of vulnerable groups, including lesbian, gay, bisexual, transgender and intersex people, the Roma, former political prisoners and persecuted people. His cooperation with civil society organisations improved further with the establishment of a civil society advisory board on human rights in December. The Ombudsman submitted his annual report to parliament in April. His special reports have started to be published on the parliament’s website, but their follow-up remains limited. In 2013, the Ombudsman conducted 180 inspections and on-site visits in prisons and other institutions, handled 220 complaints and issued 55 recommendations. Follow-up on his recommendations has improved but needs to be further strengthened. Further action is needed to ensure that the Ombudsman is properly informed and consulted by the government on draft legislation and reforms, notably those directly affecting his areas of competence. The budget allocated to the Ombudsman’s Office was reduced and remains insufficient. The institution needs stronger political and financial support from both parliament and the government to continue to carry out its duties in a fully effective manner.

Civil society

An empowered civil society is a crucial component of any democratic system and should be recognised and treated as such by the state institutions. Cooperation between state institutions and civil society organisations (CSOs) has improved. Civil society was regularly consulted on policy and legal initiatives, although with limited follow-up. The National Council for European Integration, which has the potential to play a key role in institutionally reflecting the broad national consensus on European integration, has not yet been established. A new Supervisory Board of the Agency for Support to Civil Society was nominated. The Ministry of European Integration set up a unit for civil society coordination to cooperate with CSOs on European integration. The new law on access to information has been adopted in September. Access to information and the transparency of policymaking and legislation need to be further improved. Consultations with CSOs need to become more systematic and transparent, including follow-up on their recommendations. Preparations to set up the National Council for Civil Society, a consultative body to enable regular dialogue between the government and CSOs on key issues related to civil society development in Albania, are at an early stage. No steps have been taken towards revising the tax framework for CSOs and removing provisions that undermine their financial viability, particularly on VAT reimbursement for received grants. Cooperation between CSOs and local government units remains very weak due to the lack of adequate capacity to ensure proper cooperation and funding for CSOs. The civil society sector remains fragmented and overly dependent on donor funding.

Judicial system

Albania has demonstrated commitment to judicial reform, notably by interacting with the Venice Commission to improve the independence, accountability and professionalism of the system. Measures were taken to increase the accountability of judges, prosecutors, MPs and other senior officials through the adoption of legislation regulating their immunity. Disciplinary proceedings against magistrates have led to a number of sanctions. Rules on the suspension and removal from office of members of the High Council of Justice were introduced, although concerns have been expressed on their expeditious adoption without including and consulting all relevant actors. The administrative courts started to function, but they still need to be made fully operational. A school for lawyers has been set up and new criteria for the selection of the magistrates’ school management and staff were introduced.

Albania needs to vigorously pursue judicial reform with the constructive cooperation of all stakeholders and through continued engagement with the Venice Commission, including on the new judicial reform strategy for 2014-20 which is being prepared, and a comprehensive review of the applicable legislative framework. Appropriate implementation of adopted measures is essential and the legal gap resulting from the Constitutional Court’s repeal of the Law on Judicial Administration needs to be addressed. Training for judges and judicial staff needs to be improved. The role of the Council of Prosecutors should be reinforced. Full public access to all court decisions needs to be ensured without delay. The regulatory framework for the private bailiff enforcement system should be improved. Measures need to be taken to streamline and reduce the backlog in the High Court. Further measures are required to ensure that the appointment, promotion and transfer of judges are clearly based on merit and other objective criteria. Expeditious and transparent court proceedings should be ensured.

The functioning of the judicial system continues to be affected by politicisation, limited accountability, poor interinstitutional cooperation, insufficient resources and backlogs. The status of the High Court and the process of appointing its members remain of concern in terms of possible politicisation, as long as the relevant constitutional provisions are not amended. The disciplinary system for magistrates needs to be substantially improved, including through a more transparent and efficient inspection system. Corruption in the judiciary remains a serious concern.

For a detailed analysis of the developments in the judicial system, see Chapter 23 — Judiciary and fundamental rights.

Fight against corruption

Albania has taken further steps and has demonstrated continued political will to prevent and combat corruption. Reporting, policy coordination and monitoring at central level have improved through the appointment of a National Anti-Corruption Coordinator and the establishment of a network of anti-corruption focal points in all line ministries. Legal amendments to address corruption offences by high-level state officials have been adopted. Albania should now focus on their enforcement. The 2014-20 anti-corruption strategy and action plans remain to be adopted. The structural reforms that have been introduced illustrate an all-encompassing approach aiming to develop a more robust anti-corruption framework and to include a wide range of institutions. As a positive step towards increased transparency, the 2012-13 asset declarations by senior officials have been published by the High Inspectorate for Declaration and Audit of Assets and Prevention of Conflict of Interest (HIDAACI). Sufficient resources, training and specialised staff need to be ensured to improve the efficiency of investigations and to develop a convincing track record of investigations, prosecutions and convictions at all levels. Proactive investigations, systematic risk assessments and interinstitutional cooperation need to be improved. Corruption remains prevalent in many areas and remains a particularly serious problem.

For a detailed analysis of the developments in the area of anti-corruption policy, see Chapter 23 — Judiciary and fundamental rights.

Fight against organised crime

A number of legislative initiatives reforming the police and establishing a National Bureau of Investigation were adopted. International police and judicial cooperation has increased through the implementation of extradition agreements. An operational agreement with Europol was ratified and work began on its implementation. Financial investigations, and seizures and confiscations of assets have increased. The national referral mechanism against trafficking in human beings has been improved and coordination of the relevant authorities and actors, including at local level, has increased. Seizures of drugs have increased, and the national plan for fighting the cultivation of cannabis has been implemented with positive results. The authorities have taken serious steps to fight against the cultivation and trafficking of cannabis, most notably through a major successful police operation in the village of Lazarat. Cooperation and joint training between prosecution officials, police and the judiciary on trafficking has been stepped up in key areas. Organised crime remains a considerable challenge and Albania needs to increase its efforts to build up a consistent track record of investigations, prosecutions and convictions in all areas and at all levels. Albania still lacks a comprehensive overall strategic approach towards organised crime on its territory. The number of confiscations of criminal assets and convictions for money laundering need to be increased through the systematic use of financial investigations. Trafficking in human beings, both international and internal, remains a serious challenge, calling for more emphasis on a holistic approach of prevention, protection and prosecution, and improved international cooperation. Cannabis eradication campaigns and the fight against drug trafficking, which remains a serious concern, should be further developed through international cooperation and the proactive use of special investigative means and risk assessment.

For a detailed analysis of the developments in the fight against organised crime, see Chapter 24 — Justice, freedom and security.

2.2. Human rights and the protection of minorities

In the area of freedom of expression, implementation of the Law on Audiovisual Media has been slow, mainly due to a lack of political agreement on filling the vacancies in the media regulator, the Audiovisual Media Authority. As a result, the authority has not been able to fully perform its statutory tasks, such as licensing, audience measurement, and implementation of the digitisation strategy. The lack of transparency of media financing and the interference in the media by political and economic interests remain major challenges. This includes the non-transparent allocation of funds for advertising by state-owned companies and the government.

As regards women’s rights, the National Council on Gender Equality began its work and coordinators on gender issues were appointed in all line ministries. The number of reported serious offences and cases of domestic violence against women increased. An online system to report cases of gender violence has been launched, but is operational in only 29 municipalities. Other measures have not yet been implemented, such as an extension of the referral mechanism for domestic violence and mainstreaming women’s employment in the strategies of all municipalities. As regards children’s rights, Albania remains a source country for forced child labour.

Regarding the area of anti-discrimination policies, the number of cases examined and inspections initiated by the Commissioner for Protection against Discrimination has increased. The Law on Protection from Discrimination is largely in line with the EU acquis; however, its implementation is insufficient and a solid anti-discrimination case-law needs to be built. The legal framework for persons with disabilities was revised; its implementation needs to be ensured.

Albania presents a mixed picture on the protection of minorities. While inter-ethnic relations have remained good overall, comprehensive legislation on minorities has not been adopted and the legal framework for the protection of minorities remains fragmented. Living conditions, access to education, employment, health and social care for the Roma population need to be improved, following up on the seminar on Roma and Egyptians in February. Better coordination between central and local government and improved inter-ministerial cooperation are essential.

For a detailed analysis of the developments in the area of human rights and the protection of minorities, see Chapter 23 — Judiciary and fundamental rights. For developments in the areas of trade union rights, anti-discrimination and equal opportunities, see also Chapter 19 — Social policy and employment.

2.3. Regional issues and international obligations

Albania still maintains a 2003 bilateral immunity agreement with the United States, granting exemptions for US citizens from the jurisdiction of the International Criminal Court. In doing so, it is not complying with the EU Common Positions on the integrity of the Rome Statute or with the related EU guiding principles on bilateral immunity agreements. Albania needs to align with the EU position.

Regional cooperation and good neighbourly relations form an essential part of Albania’s process of moving towards the EU. Albania has continued to actively participate in regional initiatives, including the South-East European Cooperation Process (whose Chairmanship Albania took over in June), the Central European Initiative, the Regional Cooperation Council, the Energy Community Treaty and the Central European Free Trade Agreement. During its one-year presidency of the Adriatic and Ionian Initiative, Albania organised the Conference of Parliament Speakers and the meeting of the Council of Foreign Affairs Ministers. Albania continued to actively participate in all events related to the implementation of the Trans-Adriatic Pipeline and Ionian Adriatic Pipeline projects. The country is continuing to contribute to the EUFOR ALTHEA mission in Bosnia and Herzegovina.

Overall, Albania has continued to act as a constructive partner in the region, further developing bilateral relations with other enlargement countries and neighbouring EU Member States. A bilateral convention on regional cooperation, under Article 13 of the SAA, has not yet been concluded with either Montenegro or Serbia.

Relations with Bosnia and Herzegovina remained good. Bilateral consultations were held in February aiming to strengthen cooperation in all areas of mutual interest. A bilateral agreement on mutual protection of classified information was signed in May.

Good relations with the former Yugoslav Republic of Macedonia continued, with frequent high-level visits and despite some short-lived tensions following demonstrations and statements in July over the verdict in the ‘Monster’ case. In March, both countries signed a memorandum of cooperation on tourism.

Relations with Montenegro continued to be good. An agreement on cooperation in the field of tourism was signed in April.

Albania and Serbia demonstrated their willingness to improve bilateral relations by taking steps towards improving the rights of their respective national minorities. A regular air link between Belgrade and Tirana was established in September.

Albania continued to have very good relations with Kosovo,* with which it signed a new declaration on cooperation and strategic partnership aiming to boost economic growth. Bilateral agreements were concluded in the areas of health, tourism, culture, taxation, use of joint border customs points, energy, unification of the employment market, the opening of joint consular offices, and on collaboration on the use of the EU acquis translated into Albanian. Albania continued to support the ongoing dialogue between Kosovo and Serbia, facilitated by the EU, and Kosovo’s participation in regional and international initiatives.

Albania continued to have good relations with Turkey, with several high-level visits in both capitals. An Albania-Turkey economic and trade forum was held in February. In April, the two countries agreed to establish a strategic partnership and high-level cooperation council to structure their cooperation in the fields of foreign policy and international cooperation, justice and home affairs, defence and security issues, the economy, energy, environment protection, culture, education and science. A memorandum of understanding on bilateral cooperation on information technologies was also signed in April.

Relations with Greece intensified. Several bilateral agreements, including on the delimitation of the Greek-Albanian continental shelf and maritime zones, are under discussion. A joint declaration was signed in May, paving the way for a solution on the use of place names in official documents.

Italy remains Albania’s main trade partner. The two countries maintained very good diplomatic relations and intensified their bilateral cooperation in the area of rule of law.

Overall, Albania continued to play a constructive role in contributing to the stability of the region, and continued to implement the Stabilisation and Association Process commitments in this regard. Albania needs to align with the EU position on the integrity of the Rome Statute and with the related EU guiding principles on bilateral immunity agreements.

3. Economic criteria

In examining 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.

Monitoring of the economic criteria needs to be seen in the context of the increased role of economic governance in the enlargement process, as welcomed by the General Affairs Council of 17 December 2013.

Economic and structural reforms are at the forefront of the government’s agenda to re-launch growth and increase competitiveness. The European Council in June 2014 encouraged Albania to pursue its policy of improving economic governance and investment climate.

3.1. The existence of a functioning market economy

Albania maintained macroeconomic stability but still faces significant challenges. Persistent fiscal imbalances have caused public debt to reach high levels and fiscal buffers are largely exhausted. Large accumulated government arrears have sapped liquidity and confidence in the economy, despite the government beginning to clear these in March. The high current account deficit reflects weak competitiveness and a narrow production base. The private sector is held back by weaknesses in the regulatory environment and the rule of law. Substantial efforts are required to improve the labour market.

Economic policy

Macroeconomic stability was broadly preserved, but vulnerabilities remain elevated mainly as a result of fiscal and, to a lesser extent, external imbalances. In January, Albania submitted its eighth Economic and Fiscal Programme, covering 2014-16. The programme’s medium-term macroeconomic scenario assumes a reacceleration of growth coupled with fiscal consolidation; such an outlook faces challenges and requires sustained effort to be achieved. The conclusion in February and May 2014 of loan agreements with the IMF and the World Bank respectively is expected to provide an anchor for increasing macroeconomic stability and implementing growth-boosting reforms. A National Economic Council, chaired by the Prime Minister and involving the business community, was set up in the last quarter of 2013 to provide guidance and consistency in economic reforms. Overall, the consensus on the main fundamentals of economic policies has been maintained.

Macroeconomic stability

GDP growth decelerated further to an estimated 1.4 % in 2013 from 1.6 % a year earlier. The main driver of the slowdown remained sluggish domestic demand, as both private consumption and especially investment were adversely affected by weak confidence and anaemic lending. Uncertainty, partly related to the high level of unpaid government obligations towards businesses, was slow to dissipate, even if the repayment of arrears started in March. Net exports maintained their positive contribution in 2013 as a result of stagnating imports and good export performance. In the first quarter of 2014, GDP growth was still low at 1.7 %, but survey indicators point to a broader-based recovery of private domestic demand in the second quarter. Per capita GDP in purchasing power standards remained at 30 % of the EU-28 average in 2013. Overall, the timely execution of the plan to clear accumulated government arrears and the removal of obstacles to bank lending are key to further improving confidence, bolstering investment and reviving growth in the short run.

External imbalances remained large, reflecting a narrow production base, the overall low competitiveness of the economy and a large fiscal deficit. The current account deficit increased slightly to 10.6 % of GDP in 2013. Strong growth in exports of goods, driven by crude oil sales and electricity exports thanks to favourable hydrological conditions, and a slight decrease in goods imports helped the substantial trade deficit to narrow, but the traditional surplus on the services account practically disappeared due to weak tourism sector performance. The current transfer surplus also declined substantially due to a 26 % drop in remittances from migrant workers in 2013. In the first quarter of 2014, the current account deficit widened by 31 % year-on-year as strong growth of goods exports was offset by a pick-up in imports, reflecting stronger consumption and private investment. The services account deficit also widened despite inbound tourism showing signs of improvement, as tourism outflows also increased. In the same period, the decline in remittances slowed down but did not reverse.

Risks resulting from a large current account deficit continued to be mitigated on the financing side by a healthy reliance on foreign direct investments (FDI) as opposed to debt-generating flows. Net FDI inflows, driven by investments in extraction and privatisations in the hydropower sector, surged by 38 % in 2013 to 9.2 % of GDP and covered the bulk of the current account shortfall. Official reserves increased in 2013 and at year-end covered 4.7 months of imports; the import coverage was at around the same level at end-June 2014, providing an adequate level of safeguard against adverse shocks. Net FDI inflows increased by 11.7 % year-on-year and continued to be substantial in the first quarter of 2014. Overall, continued strong emphasis on attracting foreign direct investment is crucial both for mitigating vulnerabilities linked to high external imbalances and for transferring knowledge, boosting productivity and broadening the production base.

Labour force survey data suffer from shortcomings but indicate continued deterioration in labour market conditions. The average rate of unemployment increased in 2013 by 2.2 percentage points to 15.6 % and remained on an upward trend throughout the year, reaching 18.3 % in the first quarter of 2014. While some aspects of the labour market, such as the ease of hiring and firing or the link between pay setting and productivity, display sufficient flexibility, the high prevalence of long-term unemployment and large gender differences in labour force participation indicate significant structural impediments. The activity rate of the population aged 20-64 is comparably low at 68 %, as is the employment rate, which stood at 57.2 % in 2013. Informal employment remains widespread, hindering company development and fiscal revenues, reducing job security and affecting social security entitlements. Overall, Albania needs to continue its work to address the high unemployment rate and the high prevalence of informal employment.

Macroeconomic stability continued to be supported by a sound monetary policy operating under an inflation-targeting regime. Weak aggregate demand and low imported inflation led the average inflation rate to decelerate to 1.9 % in 2013, slightly below the lower band of the Bank of Albania’s target range of 2-4 %, and it continued to hover around this level in the first half of 2014. Low inflationary pressures created room for further monetary policy easing, and the Bank of Albania cut the key interest rate several times, bringing it down to a new historic low of 2.5 %. However, the stimulus has only partly been passed on to the economy in the form of lower lending rates, due to banks’ high risk aversion amid a large proportion of non-performing loans on their balance sheets. The free-floating exchange rate of the lek remained broadly stable against the euro in 2013 and the first eight months of 2014, helping to keep imported inflation low. The degree of euroisation of the financial system decreased somewhat but remains high, constraining monetary policy. Alleged theft at the Bank of Albania led to the prosecution and dismissal of a number of officials, including the governor who is accused of abuse of office. When addressing this issue, central bank independence should be safeguarded and the proper functioning of the institution should be ensured. Overall, low inflation allowed the monetary policy easing cycle to continue, but its impact on aggregate demand remained constrained by banks’ high risk aversion.

The budget deficit was at 4.8 % of GDP in 2013, exceeding the initial target of 3.5 %. Disappointing revenue from direct taxes and election-related spending increases in the first half of the year necessitated a substantial revision of the budget in October. In 2013 as a whole, total revenues were 8.9 % lower than initially planned. In terms of expenditure, efforts to contain the budget shortfall focused again on cutting capital spending, which ended up 7.8 % lower than planned, although it did increase marginally as a share of GDP (to 4.8 %).

The need to finance the budget deficit and the recognition of accumulated arrears, estimated at 5.3 % of GDP, pushed up the level of public debt to 70.5 % at the end of 2013, from 62.3 % a year earlier. Even though efforts to lengthen the maturity profile of the debt stock achieved some results in 2013 (notably with the first successful issuing of a 10-year bond), its short-term component remains high, exposing the country to refinancing risks. The narrow investor base, which comprises mainly domestic banks, adds to these vulnerabilities and also exposes local banks to sovereign risk.

The government adopted an arrears clearance and prevention strategy in February. It aims, with the support of loans from the IMF and the World Bank, to clear arrears within three years and implement substantial improvement in public finance management to avoid their re-emergence. Unpaid bills and outstanding tax refunds were not previously captured by official debt statistics; recognising and settling them therefore constitutes a major step forward in terms of increasing transparency and re-establishing trust in the government as a contract partner. In March, the government began the process of clearing outstanding arrears, clearing roughly 35 % of total arrears by end-July. An independent external auditor has been contracted to enhance the reporting framework and ensure proper oversight of the process.

The stated objective of fiscal policy in 2014 is to consolidate public finances while clearing a large part of government arrears. This translates into a deficit target of 6.5 % of GDP, which includes repayment of arrears worth 2.5 % of GDP. Increases in excise, fuel and building taxes, as well as an increase in corporate income tax from 10 % to 15 % are expected to underpin the forecast 11 % rise in overall revenue, while the introduction of progressivity in personal income tax is projected to have a slightly negative budgetary impact. Changes implemented by the new government to the tax and customs administrations caused disruption, but measures were taken to address fiscal evasion, uncovering several VAT and excise fraud schemes, and to improve tax collection. As a clear sign of progress, revenues in the first seven months of 2014 were up by 11 % in annual terms, driven by a 16.5 % surge in VAT receipts (See also Chapter 16 — Taxation). Due to an underspend on investment caused by a reassessment of existing projects and procedures, total expenditure was at the same level as a year earlier, despite beginning arrears repayments. The overall deficit in the first seven months was 38 % lower than a year earlier and amounted to around 2.2 % of the full-year GDP.

Fiscal consolidation is expected to continue after 2014, although this could require additional policy measures in the next two years. Significant fiscal risks stem from an unreformed energy sector where the government acts as financer of last resort and from the obligation for the state, confirmed by recent judgments of the European Court of Human Rights, to pay compensation to former property owners, unless the modalities for compensation are adjusted. The public debt to GDP ratio is forecast to decrease from 2015. With basic legislation amended in July, progress was made on reforming the pension system with a view to improving its sustainability in the long run and decreasing the long-term implicit liabilities of the state.

Overall, macroeconomic stability should be further increased by lowering the public debt-to-GDP ratio, while preserving fiscal space for growth-enhancing public investment. Fiscal consolidation, focusing on revenues, started with the 2014 budget, but continued work is needed to put public finances on a sustainable footing. The ongoing clearance of arrears and the improvements in public finance management constitute major steps forward and should be carried out as planned.

Interplay of market forces

The private sector remains dominant, accounting for about 80 % of GDP and 82 % of the workforce. Privatisation is advanced but there was no progress on the sale of the remaining stakes in energy, oil, telecommunications and insurance companies. The dispute following the earlier revocation of the privatised electricity distributor CEZ Shpërndarje’s licence was resolved in June, with a deal in which CEZ receives € 95 million as payment of receivables and for the transfer of shares. Efforts to increase private sector involvement in the energy sector resulted in the signature of 14 new concessions for electricity generation during 2013. The proportion of total electricity generation provided by private hydro power plants increased to 11 % in 2013, from an estimated 7 % in 2012. However, high distribution losses, accumulated arrears, regulated tariffs below cost-recovery level and a lack of market-based mechanisms are detrimental to investor interest in the sector and should be resolutely addressed, also in order to lower fiscal risks. (See also Chapter 15 — Energy). Overall, state involvement in the economy remains limited and is mainly concentrated in some sectors, such as energy which needs wide-ranging reform.

Market entry and exit

Market entry is adversely affected by bureaucratic procedures and weaknesses in the regulatory environment. Although the time it takes to start a new business is relatively short, the associated costs can be high. In 2013, the number of registered new businesses declined slightly by 1 %, following strong growth the year before. Bankruptcy procedures remain slow, while the recovery rate for debtors in most cases turns out to be low. As a result, the bankruptcy regime does not appropriately support efficient debt resolution. Under the bankruptcy regime, eight applications for restructuring were registered in the first half of 2014, compared with just four in the whole period 2008-2012 and one in 2013. The number of new liquidation cases also increased in the first half of 2014. Preparations for the revision of the bankruptcy law have started. Overall, both market entry and exit procedures should be further improved to facilitate an efficient allocation of resources.

Legal system

The pace of property legalisation, restitution and compensation remains slow. The first registration of properties has yet to be completed in 470 land registry zones, of which 399 are rural. Parliament decided in December to postpone the deadline for processing the verification of titles concerning agricultural land until the end of 2015.

There was some progress on setting up administrative courts, which became operational in November. In March, the Ministry of Justice adopted guidelines on the fees to be paid to private bailiffs, allowing negotiation of payments upon successful completion of the collateral execution process, instead of a full upfront payment. This is expected to align incentives with creditors for a prompt execution of collateral. The Economy Ministry is conducting a survey of wrong and harmful procedures with a view to addressing regulatory weaknesses, while a cross-institutional working group has been set up to consider any necessary legal and procedural changes to improve the business environment. Overall, progress is needed on reforms to deal with uncertainties over property ownership, deficiencies in the regulatory framework and weaknesses in contract enforcement and the rule of law, which continue to be detrimental to the business environment.

Financial sector development

The predominantly foreign-owned banking sector continued to dominate the financial system, accounting for 90.8 % of all financial system assets. Sluggish credit demand and banks’ increased risk aversion caused the stock of outstanding loans to decrease by 2.1 % in 2013, with business loans contracting the most. Despite continued monetary policy stimulus, the downward trend in lending continued in the first half of 2014, but in July the stock of loans increased in annual terms for the first time in twelve months, albeit at a slow pace (0.5 %). Overall credit to the economy fell to 40.6 % of GDP at end-March from 42.8 % a year earlier, suggesting that there is significant scope for deeper financial intermediation.

The share of non-performing loans has begun to level off after almost five years of steady increase, but it remains high (24.1 % in June 2014) and is the main source of concern in the banking sector. In February, the Bank of Albania’s Supervisory Council adopted a requirement for banks to write off, from January 2015, non-performing loans no later than three years after they had been classified in the ‘loss’ category. It also strengthened credit underwriting practices and non-performing loan recovery and resolution for large borrowers. Banks are also exposed to credit risk stemming from the currency mismatch of borrowers with foreign currency loans but with domestic currency income. Such loans make up more than 30 % of the total stock and are particularly sensitive to large exchange rate depreciations.

Despite very high NPLs, lingering credit risks and exposure to sovereign risk through significant holdings of government securities, the banking sector appears stable. Capital and liquidity ratios largely exceed requirements and deposits continued to be the main source of funding for banks, which have very limited reliance on external sources and parent bank credit lines. Loan losses are well provisioned, which has weighed on banks’ earnings. However, profitability indicators remain positive and have been improving since the fourth quarter of 2013.

The size of the non-banking financial sector has increased but remains small; its assets amount to 5.4 % of GDP, up from 2.8 % in 2012. It comprises the insurance and private pension segments, as well as investment funds. Their regulatory and supervisory framework requires further strengthening. Overall, the banking system is well capitalised and liquid. However, further measures are needed to address the issue of non-performing loans which hamper financial intermediation.

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

Human and physical capital

Despite significant improvements over the last decade, Albania still has considerable gaps to close in terms of years of schooling, secondary enrolment rates, education quality and the market relevance of qualifications. Public spending on education is low at around 3 % of GDP, and is expected to stay at this level in 2014 as more spending allocations for primary and secondary education will be offset by cuts in higher education funding (mainly as regards capital expenditure). A draft national employment and skills strategy was unveiled in February; it will run until 2020 and aims to overhaul active labour market policies, improve vocational education and training, reform social safety nets and strengthen labour market governance.

Gross fixed capital formation as a share of GDP dropped again to around 26 % in 2012; the downward trend was expected to continue in 2013. Public capital expenditure, at 4.8 % of GDP in 2013, is often targeted by spending cuts when budget adjustments are needed. Public spending on research and development is set to increase by 4 % in 2014, but it continues to represent only 0.01 % of GDP. The foreign direct investment stock has reached € 4.5 billion, representing 46.5 % of Albania’s GDP in 2013.

The need for investment is evident in many areas, including the energy sector. An almost exclusive reliance on hydropower exposes Albania to large fluctuations in power generation, resulting in large electricity imports in low-rainfall years. Work to increase the capacity of transmission and interconnection networks achieved some results, notably a financial agreement for the construction of the Albania-Kosovo interconnection line. The imminent start of construction of the Trans-Adriatic Pipeline through Albanian territory may introduce gas to the energy mix in the longer term. Nevertheless, significant weaknesses in the electricity sector remain and need to be addressed. (See also Chapter 15- Energy). Overall, given the substantial need for investment in human and physical capital, it is necessary to rebuild fiscal space for growth-enhancing public expenditure, to improve education outcomes to meet labour market needs and to attract private investment, in particular foreign direct investment, by improving the overall investment environment.

Sectoral and enterprise structure

The Albanian economy continues to be dominated by the services sector, which accounted for around 50 % of gross value added (GVA) in 2013, followed by agriculture, providing more than a fifth of GVA, and industry (15 %), comprising both manufacturing and the booming extractive industries (crude oil production increased by 18 % in 2013). Manufacturing relies to a large extent on the low value-added textile and footwear industries. Following a deep contraction a year earlier, the construction sector recorded modest growth. Agriculture continues to provide a very large proportion of employment (around 45 %), although this fell by almost 3 percentage points in 2013. The sectoral composition of merchandise exports remained highly concentrated, with 83 % of total exports in 2013 accounted for by mineral products (40 %), textiles and footwear (28 %) and construction materials and metals (15 %). This lack of diversification exposes the economy to industry-specific shocks.

Small and medium-sized enterprises (SMEs) play a very significant role in the economy, providing 80 % of employment and 68 % of value added. Micro-businesses in particular make up a high proportion of the number of companies and account for more than 50 % of all people employed by SMEs. Various state and donor-funded schemes exist to increase SMEs’ competitiveness and help them access finance. Overall, agriculture continues to have a large role in the economy, suggesting that there is significant scope for productivity gains from sectoral shifts in employment. The sectoral composition of exports remains highly concentrated.

State influence on competitiveness

Total state aid granted declined by 6 % in 2013 and amounted to 1.5 % of GDP. The share of less distortive horizontal (i.e. non-sector-specific) aid increased further to 89 %. Similarly to previous years, the government provided loan guarantees worth € 83 million or 0.8 % of GDP to the state-owned power company KESH to help it survive financial difficulties and enable it to import electricity in late 2013 and early 2014. The unresolved problems of the electricity sector are an enduring drain on public resources.

Economic integration with the EU

Albania’s openness to trade, defined as the ratio of total imports and exports to GDP, increased slightly to 88 % in 2013. Imports exceeded exports by a margin of 18 % of GDP, but the trade deficit has shrunk for the last two years, despite a more than 2 % appreciation of the lek’s real effective exchange rate since September 2013. Exports constituted 40.2 % of GDP in 2013, up from 33.3 % in 2012.

The EU remains by far Albania’s largest trading partner. Exports of goods to the EU increased by 18 % in 2013 and accounted for some 84 % of total merchandise exports, while imports of goods from the EU made up 64 % of the total. Although in recent years Albania has managed to diversify somewhat its client base away from Italy (notably to Spain, Turkey and Kosovo), Italy remains its single largest trading partner, purchasing more than half of Albanian merchandise exports and providing a third of its goods imports. The EU also remains the main source of inward investment in Albania. Trade links with fellow Central European Free Trade Agreement (CEFTA) countries loosened in 2013 on account of a 16 % fall in merchandise imports from the bloc, partly reflecting weaker demand in Albania. CEFTA countries accounted for some 12 % of Albanian merchandise exports and 7 % of its imports of goods. Overall, Albania’s openness to trade slightly increased. The EU remains its dominant trading partner, while trade links with CEFTA countries weakened.

4. Ability to take on the obligations of membership

This section examines Albania’s ability to take on the obligations of membership — that is, the acquis as expressed in the Treaties, the secondary legislation and the policies of the Union. It also analyses the country’s administrative capacity to implement the acquis. The analysis is structured according to the list of 33 acquis chapters. In each sector, the Commission’s assessment covers the progress achieved during the reporting period, and summarises the country’s overall level of preparation.

4.1. Chapter 1: Free movement of goods

Some steps have been taken in the area of horizontal measures, mainly in the field of standardisation and conformity assessment.

As regards standardisation, Albania adopted an additional 1 413 European standards, mostly via the ‘cover page’ method, without translation. It also adopted 565 standards from the European Telecommunications Standards Institute, 248 ISO standards and 158 International Electro Technical Commission standards. The draft national strategy on consumer protection and market surveillance, covering also accreditation and metrology has not yet been adopted.

On conformity assessment, work is in progress towards signing the European Cooperation for Accreditation multilateral agreement on testing areas by the end of 2014. Five new conformity assessment bodies were accredited, bringing the total number to 30. The testing laboratory for fuel dispensers discontinued the accreditation process and one testing laboratory for water and two medical laboratories have applied for accreditation.

The Law on Accreditation was amended aiming at further approximation with the acquis. The General Directorate for Accreditation has started to implement the new standard ISO/IEC 17020:2012 for inspection bodies. The General Directorate continued its awareness-raising activities through public events and the publication of its decisions and activities on its website. Albania continued its efforts towards becoming a full member of the European Cooperation for Accreditation.

In the area of metrology, the General Directorate of Metrology has completed its calibration of etalons in four regional metrology centres and in the Metrological Inspection Department. The General Directorate conducted inspections in the hydrocarbon and trade sectors and issued fines for infringements of legislation. There has been an increase in verification activities by the General Directorate and in its collected revenue. The Law on Metrology, aiming at further approximation with the acquis, is yet to be adopted. Alignment with the Measuring Instruments Directive has yet to be achieved.

The legislation in the area of market surveillance needs to be better enforced. In December, an order on methods of risk classification and assessment of serious risk was adopted, aiming to align legislation with the acquis. An order on standard mandatory operating procedures for market surveillance was adopted in May. The market surveillance inspectorate has not been established.

Preparatory work for further alignment with the ‘New and Global Approach’ product legislation has continued, mainly through the revision of existing technical regulations.

In the area of procedural measures, the draft Law on Cultural Heritage, aiming to align legislation on the return of cultural objects, is still awaiting adoption.

Conclusion

There has been some progress in the area of free movement of goods, notably on standardisation. Overall, legislative approximation with the acquis requires further action. The national strategy on consumer protection and market surveillance, covering also accreditation, standardisation and metrology has not yet been adopted. A market surveillance inspectorate needs to be established. Overall, preparations are moderately advanced.

4.2. Chapter 2: Freedom of movement for workers

As regards access to the labour market, 17 pieces of implementing legislation for the Law on Foreigners were adopted in February, specifying procedures related to working conditions for foreign workers and aiming to guarantee equal treatment for EU workers in the Albanian labour market.

As regards coordination of social security systems, negotiations on bilateral agreements with Romania, Hungary and Luxembourg have been completed, but the agreements have yet to be adopted. Negotiations with the Czech Republic, Canada and the former Yugoslav Republic of Macedonia are ongoing.

Conclusion

There has been some progress in the area of freedom of movement for workers, notably in establishing the legal basis for improving EU workers’ access to the Albanian labour market. Overall, preparations in this area are still being initiated.

4.3. Chapter 3: Right of establishment and freedom to provide services

As regards the freedom to provide cross-border services, the pilot screening of the legislation in the area of mining has been finalised with a view to preparing for alignment with the Services Directive. Manuals on proportionality tests, which will be used by line institutions during further screening, have been prepared for the gambling, pharmaceuticals and taxation sectors. The institutional capacity for preparing for legislative alignment with the Services Directive needs to be further strengthened.

In the field of postal services, the new organisational structure of the Electronic and Postal Communications Authority has been put in place and a department for postal market regulation has been set up and staffed. The draft postal law has not been finalised yet. A working group has been set up for that purpose.

In the area of the mutual recognition of professional qualifications, legislative measures have been adopted to include the professions of social worker and psychologist to the list of regulated professions, whilst provisions on architects and engineers remain to be approved.

Conclusion

There has been some progress in the areas of right of establishment and freedom to provide services, mainly in the increased capacity of the Electronic and Postal Communications Authority. The capacity of other relevant institutions needs to be further strengthened. The legislation in the area of right of establishment and postal services has yet to be aligned with the acquis. Overall, preparations in this area are moderately advanced.

4.4. Chapter 4: Free movement of capital

In the area of capital movement and payments, preparations are at an early stage.

As regards the payment systems following the adoption of the Law on Payment Systems, the Bank of Albania issued a licence in October 2013 to the national card payment operator Paylink and adopted in June a regulation on the organisation and functioning of the National Committee of Payment Systems. During 2013, the number of transactions processed through the Albanian Inter-Banking Payment System increased to 86 350 or 12 % in comparison to 2012, while maintaining its upward trend in terms of volume/value. The number of transactions processed through the Albanian electronic clearing house marginally increased by 0.5 % in 2013, while the value of transactions rose by 8.6 %. The Ministry of Finance dominates the clearing house system, representing 73 % of total transactions, as well as some 25 % of total payments system transactions.

Regarding the fight against money laundering, Albania continued to implement recommendations by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (Moneyval). In October 2013, a law on measures against the financing of terrorism was endorsed by parliament and the list of people declared to be involved in the financing of terrorism was updated in July. The number of fines imposed by the General Directorate for the Prevention of Money Laundering decreased, as did the total number of inspections conducted during 2013, while around 66 % of the volume of imposed fines was collected in 2013, as compared to 30 % in 2012. The total number of suspicious transaction reports showed an increasing trend especially in the first half of 2014, when 546 reports were registered. In 2013, the banks and the General Directorate of Customs submitted an increased number of suspicious transactions reports, while there was a decrease in the number of these reports that were submitted by exchange offices, notaries, money transfer offices and the Central Office for the Registration of Immovable Property. The number of reports referred to police and the prosecutor’s office in 2013 increased by 38 % to 283. This upward trend continued during the first semester of 2014 with a total of 229 cases reported. The number of administrative sanctions increased from 13 in 2013 to 33 in the first half of 2014.

Conclusion

There has been some progress on the free movement of capital thanks to steps towards the implementation of the Law on Payment Systems, the licensing of the national card payment operator and the adoption of legislative measures to fight money laundering. Further work is needed on the enforcement of legislation. Overall, preparations are moderately advanced.

4.5. Chapter 5: Public procurement

In the area of award of public contracts, guidelines on public procurement procedures for social care services were adopted in September 2013. A Council of Ministers decision on conducting the bidding procedures for concessions and public/private partnerships electronically and additional clarifications to the guidelines on small-value procurement procedures were adopted in March. The Law on Concessions and Public-Private Partnerships was amended in July to exclude from its scope public works concessions on construction and maintenance of road infrastructure of particular importance, taking it farther away from the acquis. In July, a working group was established to promote public-private partnerships. The budget, public finance management system and public procurement system are not sufficiently integrated and the award of multi-year contracts has only taken place in specific sectors, such as infrastructure.

Public procurement activities dropped in 2013 by almost 23 % to 5 120 contracts signed, compared with 2012. The number of unpublished negotiated procedures continued to increase in 2013, accounting for 33.6 % of all procedures and 19 % of the total value of tenders. In the first half of 2014, they increased by 12.9 % comparing to the same period last year. The number of disciplinary measures for public procurement infringements taken by the Public Procurement Agency against contracting authorities fell from 55 in 2012 to 40 in 2013; the number of fines fell from 29 to 12, while reprimands rose from 15 to 26. In the first half of 2014, the administrative penalties increased by 27 % as compared to the same period last year. The e-procurement system continued to function well and the number of users increased five times in 2013, reaching 13 248.

Financial loss from the state budget from public procurement and concessions decreased by 20 % from 2012 to 2013, falling to € 2.5 million according to the Supreme State Audit Institution. Substantial work is needed to increase transparency in public procurement procedures, including those for small-value purchases, in order to reduce corruption risks and improve competition. The new government cancelled 13 concessions in the energy sector in 2013 (see Chapter 15 — Energy). The legislative framework adopted in the first half of 2013 needs to be properly implemented.

The Public Procurement Agency has begun monitoring the selection process for unpublished negotiated procedures, but it has to enhance its policy coordination and regulatory role. Substantially more staff needs to be assigned to public procurement in the contracting authorities at both central and local government level. The effectiveness of the Concession Treatment Agency remains limited and coordination between procurement and concessions systems should be improved. Expertise and monitoring has to be ensured.

In the field of remedies, the Public Procurement Commission received 561 complaints in 2013, of which 93 % related to public procurement, 3 % to concessions and mining permissions, and the rest to auction procedures, with an upward trend in the first half of 2014. The complaints constitute 13.5 % of total procedures. Further action is needed to improve the transparency, quality and scope of its review decisions, inconsistencies, the high number of appeals and lengthy procedures. To that end the undertaking in 2013 of the second instance review by the administrative courts is encouraging. The commission’s independence has to be ensured and its role as the main review body to be fulfilled.

Conclusion

There has been little progress in the area of public procurement, in extending the e-procurement system to concession contracts and public private partnerships. Substantial work is needed to develop qualified human resources, better integrate procurement and concessions systems, further decrease financial losses to the state and increase transparency in this area. The increasing use of unpublished and opaque procurement procedures and exceptions from the law on concessions and public private partnerships are issues of concern. Overall, preparations in the field of public procurement are moderately advanced.

4.6. Chapter 6: Company law

In the area of company law, amendments to the 2008 Law on Entrepreneurs and Companies, including provisions governing reporting and documentation requirements for mergers and divisions, remain to be adopted. A private e-certification service provider for e-signatures was licensed and started testing the issuance of certificates to businesses. Authentication certificates that can be used via the chip on the national ID card are not yet operational.

In the area of corporate accounting, new national accounting standards, to be implemented as from January 2015, were adopted in July. The National Accounting Council continued efforts to increase its capacity and adopted a manual of operating procedures and methodologies for transposing international accounting standards at national level, as well as its medium-term strategy. The Council continued to publish translated updates of international accounting standards on its website. However, its inspection role remains limited and its cooperation with the other state reporting institutions, in particular the National Registration Centre, should be strengthened. Further efforts are needed regarding public access to companies’ annual financial statements.

In the field of auditing, the Public Audit Oversight Body conducted reviews and inspections to check the quality of the Institute of Authorised Chartered Auditors’ audits of banks, insurance companies, state-owned companies, utility companies and telecommunications companies. Further effort is needed to increase the Public Audit Oversight Body’s own capacity to allow it become a truly independent body. A working group has been set up for revising the Law on Audit and further aligning it with the acquis.

Conclusion

Some progress was made in the field of company law, through the adoption of new national accounting standards. Substantial work is needed to increase capacity in the National Accounting Council and the Public Audit Oversight Body. The latter’s independence must be ensured. Albania will need to focus on enforcing accounting and auditing standards, and further increasing its inspection capacity as part of its work on building sound economic governance. Legislation must be further aligned with the acquis, in particular on auditing. Overall, preparations in this area are moderately advanced.

4.7. Chapter 7: Intellectual property law

Regarding copyright and neighbouring rights, the new copyright law has still not been adopted.

In the field of industrial property rights, the amendments to the Law on Industrial Property were approved in May, and legislation on protecting topographies of integrated circuits was adopted in June.

In the area of enforcement, the Copyright Office has continued its inspections and issued fines for infringements of the Copyright Law. The rate of collection of fines remains low. A legal amnesty that was promulgated by the President in March, allowed for the pardon of those sentenced to pay fines before the end of December 2013. The human and financial resources of the Albanian Copyright Office remained insufficient and its overall capacity needs to be increased. As a result of awareness-raising activities, the number of companies registering their trademarks with the General Directorate of Patents and Trademarks increased (697 since October as opposed to 617 in the previous year). The administrative capacity of the General Directorate of Patents and Trademarks needs to be reinforced.

The General Directorate of Customs continued its work on identifying and seizing counterfeit products at customs posts. The clear upward trend seen in 2013 of requests for action to protect trademarks continued during the first quarter of 2014. The General Directorate continued to face difficulties in getting reactions from right holders in relation to seized counterfeit products. The State Police made 47 arrests for offences related to intellectual property in 2013, which represents a 21.5 % increase compared to the previous year. It also conducted, during December 2013 — January 2014, inspections on 36 broadcasting entities. As a result, 21 entities were prosecuted for infringements. Amendments to the Code of Criminal Procedure were made to allow for greater State Police involvement in investigating cases relating to intellectual property rights infringements. The market surveillance inspectorate has yet to be established and counterfeit products are still widespread in the market. Further action is needed to increase the capacity of the courts and to raise awareness, including among judges. The implementation of the national strategy on intellectual and industrial property rights, which has been assessed in June, remains a priority issue, and institutional coordination and cooperation need to be improved.

Conclusion

There was little progress regarding intellectual property rights. Albania has not met its commitments under Article 73 of the Stabilisation and Association Agreement. Urgent and determined action is required to adopt the new copyright law, strengthen inspection capabilities by, inter alia, establishing the market surveillance inspectorate, improve the collective management system and apply effective sanctions for infringements. On industrial property, the legislative framework was improved but administrative capacity should be increased. Further awareness-raising of intellectual property rights is key. Overall, preparations are not very advanced in this area.

4.8. Chapter 8: Competition policy

In the area of anti-trust and mergers, in November, the Albanian Competition Authority adopted a decision providing guidance on the assessment of horizontal agreements. The authority received 34 complaints, compared with 19 in the same period last year, which led to the opening of investigations in the areas of insurance, public transport services, the hydrocarbon sector and the maritime transport market. It also initiated and concluded investigations in the telephony, tobacco markets and the private security services. It issued five decisions on anti-competitive agreements, one decision on abuses of dominant market positions, and four decisions authorising mergers. The authority also issued three decisions on assessment of complaints and exempted one restrictive agreement. It adopted three legal acts, issued five recommendations and initiated nine administrative procedures. No fines were imposed in 2013, compared with seven in 2012. In June, the authority imposed a fine to a company for procedural delays. It also issued recommendations to the regulator for telecommunications, the Authority for Electronic and Mail Services, the Financial Supervisory Authority and to the government for two concessions. As regards court cases, the Competition Authority lost one case before a first instance court, on which it submitted an appeal. It won two out of three appeal cases. Most of the fines imposed by the authority in the past have not yet been collected, as many court appeal decisions are pending. Its new structure has yet to be approved by parliament. Training for judges in competition policy needs to be further improved.

In the area of state aid, the government approved the new composition of the State Aid Commission in February. In April, the government adopted four state aid schemes aimed at promoting employment. The government continued to issue guarantees to second tier banks on behalf of the state-owned power generation company KESH, due to the latter’s ongoing financial difficulties. State aid reached € 143.8 million in 2013, 6 % less than in 2012, mainly comprised of subsidies, grants and tax relief. The number of state aid notifications by the government remains low and there were none by local authorities. The staff of the State Aid Sector was reduced to two officials.

Conclusion

Some progress was made in the area of competition policy, mainly in anti-trust and mergers, where the Competition Authority continued to build its enforcement record. Overall, preparations in the area of anti-trust and mergers are satisfactory. Further action is needed to strengthen the administrative capacity and operational independence of the state aid institutions. State aid rules have to be effectively implemented and legislation must be further aligned with the EU acquis. Overall, preparations in the area of state aid remain at an early stage.

4.9. Chapter 9: Financial services

In the field of banks and financial conglomerates, in February, the Bank of Albania adopted in a new supervisory policy, aiming to align this with the EU risk assessment system and a new risk assessment manual. It also adopted amendments to the regulation on credit risk administration that provides for some requirements for banks relating to the write-off process for non-performing loans, a new regulation on risk management of banks’ large exposures to risk and a mandatory guideline on recovery plans, as well as regulations on the functioning of an analytical tool to improve the administration of foreign currency reserves and on the minimum compulsory reserves for the second tier banks. Albania continued to implement the Basel II principles in accordance with the relevant action plan. Preparations for Basel III are at an early stage. The bank has taken some initial steps to strengthen security and cash management systems after € 5.1 million were lost from the stock reserves of the bank. Eight of the fifty posts in the bank’s supervisory department are currently vacant.

With regard to the non-banking area, amendments to the Law on the Albanian Financial Supervisory Authority, aimed at increasing its financial and operational independence, were adopted in May. These included the exclusion of the authority’s employees from the Civil Service Law. The number of non-banking institutions and the number of staff at the authority remained the same.

In the field of insurances and occupational pensions, the Law on Insurance and Reinsurance was adopted in May, with a view to further alignment with the EU acquis. The non-banking sector is dominated by 11 insurance companies, while the insurance market remains small, accounting for 1.6 % of GDP. Non-life insurance continued to dominate the insurance market. The bonus-malus system for motor insurance became operational in August. The ratio of paid claims to written premiums remained almost at the same level (31.7 %) in 2013. About 81.5 % of the total paid claims (€ 15.7 million) were on motor insurance. The Financial Supervisory Authority issued regulations on tariffs for the prospectus’ approval and on determining the rules for the monetary reserve of claims covered by compulsory insurance premiums in the transport sector. Following price fluctuations in the non-life insurance market observed in February, the Albanian Competition Authority issued in July recommendations on the regulation of competition in the non-life insurance market.

In the area of financial market infrastructure, implementation of the Law on Payment Systems is ongoing.

As regards the securities markets and investment services, Albania’s securities market is concentrated in the transaction of treasury bills. The investment fund continues to be operational and about 93 % of total assets are in government securities. The number of licenced operators in the securities market remained the same. In the first quarter of 2014, the Financial Supervisory Authority approved prospects for four issues of bonds with private placement by two companies. It continued to closely monitor the financing of the Compensation Fund by insurance companies.

Conclusion

There has been some progress in the field of financial services, mainly regarding the legislative framework on the supervision of the banking and non-banking sectors. Preparations in the fields of securities markets and insurances remain at an early stage. Further work is needed to secure money stock reserves and to align legislation with the acquis. Overall, preparations in this area are moderately advanced.

4.10. Chapter 10: Information society and media

In the area of electronic communications and information and communications technologies, some steps have been taken towards legislative alignment with the acquis through the adoption of competitive safeguards that reduce mobile termination rates along a ‘glide path’ from April onwards. The award-procedure for the granting of the fourth UMTS/3G licence was re-launched following a legal action initiated by one of the current mobile operators. The frequency use plan, approved by the Agency for Electronic and Postal Communications (AKEP) in February, has only been partially implemented due to the pending completion of the digital switchover process. The administrative capacity and resources of AKEP have improved, but remain limited. Concerns remain about its operational independence. The new law on territorial planning, comprising certain provisions on the granting of rights-of-way under the public easement framework, was adopted in July. Albania should ensure that any measure requiring the storage of traffic data, such as International Mobile Equipment Identity numbers, is in accordance with the principles of EU law. The emergency number 112 is still not operational.

Mobile usage remains high with subscription penetration at 130 % in 2013 and 3G and mobile broadband usage is growing strongly, while fixed broadband penetration remains low at 5.7 %.

In the field of information society services, the number of services for citizens and businesses increased and now inc