Albania’s investment climate improving, but flaws remain

Albania’s investment climate improving, but flaws remain
The Prime Ministry building in Tirana.
By Andrew MacDowall in Tirana April 4, 2016

It is forecast to be one of the fastest-growing economies in Europe this year, and was one of very few to escape recession in 2009, when the continent was hit hard by the global financial crisis, from which it has still fully to recover. And it is aiming to start its EU membership talks later this year. So is Albania, hobbled by decades of eccentric Stalinism and a near-disastrous post-communist transition, finally set to become a new investment darling in Southeast Europe?

The figures certainly look good, and the Albanian government, led by the dashing artist Edi Rama, talks a good talk. But underlying weaknesses continue to hamper the country. Despite some gleaming new motorways, infrastructure remains patchy; property rights present a minefield for investors and ordinary Albanians; the plunging oil price threatens both a once-thriving industry and the budget; and, most of all, corruption is endemic.

On March 22, the IMF released a statement following a staff visit to review its 36-month €331mn Extended-Fund Facility (EFF) deal with Tirana that was sealed in February 2014. It forecasts 3.4% growth in 2016, “driven mainly by large energy-related foreign direct investment and gradually rising consumer demand”. This despite low oil prices, which, the IMF said, could imperil the 2016 budget’s target of a surplus of 0.3% of GDP. The statement praised Albania’s “strong implementation of structural reforms”, while noting that there were delays in some areas.

The 2014 deal was seen as an early statement of intent by the incoming Socialist-led government of Prime Minister Rama, elected in September 2013. The deal was not strictly necessary, with Albania’s finances not under pressure, but was adopted to promote fiscal consolidation and structural reform, with the IMF’s support.

“Albania is an attractive, growing market with a reasonable stable economy, as well as a liberalised economic framework and good conditions for doing business,” Xhet Hushi, an associate of regional law firm Wolf Theiss in Tirana, which advises foreign investors on the country, tells bne IntelliNews. “Since it was elected in September 2013, the government undertook a wide range of structural reforms to strengthen the rule of law and to create an internationally competitive business environment.”

Christoph Denk, head of the Tirana office of the European Bank for Reconstruction and Development (EBRD), says the government had taken a range of measures to improve the investment climate. These include clearing substantial sovereign arrears; “bold” reforms to the power sector, including enforcing electricity bills; a new law on strategic investment that provides fast-track approval for investors meeting certain requirements; a campaign against the informal economy; and an Investment Council that provides a platform for consultation with the private sector on the investment environment.

Nonetheless, as Hushi points out, foreign direct investment (FDI) has fallen in the last two years; he cites taxation, corruption, and problems with the judicial system as the three major factors. In the World Bank’s “Doing Business 2016” rankings, Albania fell a remarkable 35 places to 97th in the world, just above Zambia. With competition for investment in the region fierce, Albania, already a laggard, can ill-afford to languish.

The country’s newly-appointed economy and trade minister, the appropriately-named Milva Ekonomi, has vowed to tackle the backsliding with a range of specific measures. These include shortening the time period and lowering the costs of starting businesses, transferring property and obtaining construction permits; and improving procedures for connecting to the electric grid. Meanwhile, Ekonomi’s predecessor, Arben Ahmetaj, now finance minister, has called for interest rate cuts to boost growth, a policy supported by the IMF.

Arben Malaj, a Socialist former minister of the finance and economy portfolios who is credited with stabilising the economy after the country neared anarchy in 1997, tells bne IntelliNews that he believes the country is taking a new economic track, emphasising private sector growth and export-led development.

Best laid plans

Fine plans are one thing, of course. Delivering good legislation is another – and implementation quite another. Across the region, there have been problems in translating government actions into concrete change and improvements in the real economy, and real incomes. As Denk puts it: “the government's reform drive remains strong, [but] weak administrative capacity and certain vested interests make implementation sometimes difficult”.

But most people bne IntelliNews met in Tirana share the belief that Albania has substantial potential, and that the current government is serious in developing it, despite some unsavoury elements. Hushi, like Denk, acknowledges multiple areas of concrete progress over the past few years, which bode well for the future. Albania’s competitive advantages include its location, low costs, a young labour force, and natural resources (aside from oil, Albania has significant reserves of mineral and metals including chrome and copper).

The plunging oil price has already had an impact on the Albanian economy, with some drilling halted and costs cut, and the outlook is uncertain. The country’s proven reserves are 200mn barrels of oil equivalent, according to the US Energy Information Administration, one of the highest in Southeast Europe, and some in Albania talk excitedly about potential reserves of several billion barrels. But upgrading the current field infrastructure and further exploration and development will be very capital intensive, and the global industry currently has little appetite for this.

The situation has led to a reshuffle in the sector, as some companies who have felt the squeeze pull out of Albania, while others move in, sensing opportunity. On March 20, Canada-based Bankers Petroleum, the leading oil company in Albania and one of the biggest investors in the country, announced its acquisition by affiliates of Chinese oil and gas exploration company Geo-Jade Petroleum Corporation in a deal worth around CAD575mn (€393mn). In February, Petromanas, another Canadian company, announced that it had struck a deal to sell its Albanian assets to Shell. TransAtlantic Petroleum has also announced plans to sell its Albanian operations.

“Despite the fall in oil prices, there remains some investor interest in the sector in Albania,” says Denk. “Whether and how this will translate into actual investment will largely depend on how ongoing tax disputes with existing investors are being resolved and how future production sharing agreements will look like.”

Sources with knowledge of the sector tell bne IntelliNews that corruption is a particularly serious issue in the oil industry.

After the oil industry, tourism is perhaps the most oft-cited as offering potential for Albania, including by the government, which considers the sector “strategic” and approved a new tourism law focusing on promotion and investment in 2015. The country could capitalise on its long Adriatic and Ionian coast, stunning mountains, Greco-Roman ruins, and attractive small cities. The World Tourism and Travel Council estimates that tourism contributes 5.9% of Albania’s GDP directly, and an astonishing 21% overall, and expects the sector to grow at a healthy clip of 4% over the next decade. However, Albania’s complex tangle of property rights presents a major area of uncertainty.

Less trumpeted but promising sectors include textiles, agribusiness and IT. The clothing sector is in fact already thriving, particularly so-called “prontomoda” short-notice orders from Italian buyers; Albania’s proximity to Western Europe putting it at a district advantage to cheaper Asian rivals when shelves need filling within days.

The government and the EBRD are helping boost funding for agriculture, including developing infrastructure and the sector knowledge base. IT investors, meanwhile, can benefit from the government’s efforts to upgrade public sector systems, as well as a pool of bright, multilingual graduates – though there is a sense that other countries in the region like Romania have rather stolen a march in developing their high-tech industries.

Hushi points out further opportunities stemming from one of Albania’s biggest weaknesses – its infrastructure. “In general, the quality of Albanian infrastructure is very poor,” he tells bne IntelliNews. “It needs immediate modernization, so Albania has the possibility to develop many huge projects, such as, ports, airports, railways, and highways.” He notes that the government lacks the huge funds required by these sorts of projects; there could therefore be scope for public-private partnerships, as well as financing from international financial institutions.

Taxing times

Other than improving infrastructure, Albania would do well further to simplify its tax system, build better links with capital markets, and push forward the digitalisation of the land registry, “which would help investors know where to target capital and avoid ownership disputes”, says Mark Crawford, president of the American Chamber of Commerce in Tirana.

These are largely technical issues, however. Addressing corruption is not. “The major obstacle to investment in Albania is of course corruption,” says Hushi. “Corruption has been present almost in every stage of business, from its incorporation, to the obtainment of the necessary licenses and also on the continuance of the activity. Combating corruption is still one of the biggest challenges for Albania.”

Hushi says that corruption has long been “part of everyday life” for Albanians, making it particularly difficult to eliminate – a sentiment that applies to many countries in the region. Diplomats in Tirana complain that even though many of the public-facing ministers in government are competent and dynamic, other figures are more cynical – and nefarious.

The British organisation Crown Agents, hired by the Albanian government to support customs services, last year reported widespread corruption and fraud, which bne IntelliNews understands has been abetted by senior officials. And the EU has repeatedly raised corruption as a problem in this candidate country.

The hottest political topic in Albania at the moment is the government’s judicial reform programme, which, it is promised, will help bolster anti-corruption efforts as well as improving the judiciary’s independence and efficiency, strengthening a weak plank in the business environment. The reform package been crafted with the support of the European Council’s Venice Commission, and in an early March visit to Tirana, EU foreign policy chief Federica Mogherini praised Albania’s efforts, saying that “deep reform” was a prerequisite for the opening of EU accession negotiations. Albanian officials have said they hope accession talks with the EU can be started later this year, once parliament adopts this package of EU-mandated judicial reforms.

The opposition, however, claims the reform programme as it stands will merely increase the current government’s grip over the system, and sceptics say that it is part of a regular cycle of judicial changes that destabilise the legal environment without tackling root issues.

Therein lies one of Albania’s problems, in the views of the more sceptical: a gap between impressive numbers and reform packages, and a rather more complex and less attractive reality.