Tim Gosling in Tirana -

With just 3m or so people, the Albanian market is simply too small to attract huge amounts of investment. So Albanian officials hope to leverage recent reforms to become the investment base for a micro-region boasting 10m potential consumers.

Albania's foreign direct investment (FDI) hit $1bn for the first time in 2010. "Four years ago, the country launched a series of aggressive structural reforms," points out Majlind Lazimi, chief of staff at the economy ministry. "Those have helped us to do very well in global indicators such as the World Bank rankings."

Indeed, a raft of reforms in 2007-08 propelled the country from 135th place to 86th in 2009 in the World Bank's "Doing Business" annual survey. And officials boast that alongside geographic and cultural advantages, recent reforms such as slashing income tax to a flat 10% and cutting red tape for starting a business makes Albania one of the most attractive investment destinations in the region. Business people and foreign officials working in the country agree that significant progress has been made, but stress more needs to be done. A long-delayed administrative court to help protect investors is a particular concern, for example, and that's reflected in the World Bank ranking, with Albania failing to advance since that last big jump.

Albanian officials also point to the country securing visa-free travel with the Schengen zone in 2010. "Alongside joining Nato and clamping down on human trafficking by banning speed boats, that has transformed the country's image in the last five years," claims Aldo Bumci, the minister for tourism.

Neighbourhood problems

All of which is raising interest from a greater array of investors, pushing the country over the $1bn mark for annual FDI. That's not just good news, but vital given the problems in Greece and Italy. With that pair Albania's largest investment and trade partners by far, Tirana has added incentive to spread its net wider to find FDI.

Lazimi says that interest is growing among investors from other EU markets as well as the US and China. "Albanian business has seen the second crisis coming, and the flexibility of our economy is allowing them to look to new markets for both trade and investment," he says, adding that the country being a developing economy creates opportunities for foreign investors.

"Energy is the top priority in Albania's economic policy," Lazimi states frankly, and the power sector is one of the strongest success stories in Albanian FDI since legislation in 2006 created concessions to operate Albania's hydroelectric power plants. The official adds that despite 102 concessions having been awarded, only 40-50% of hydroelectric reserves are being utilised.

While poor rains in 2011 saw Albania and other countries in the region forced to import electricity at costs far above domestic prices, that only illustrates the opportunities. In 2010, Albania exported €100m worth of electricity from hydropower, Lazimi points out, adding that export lines into neighbouring countries are being built, and infrastructure and legislation for other renewables such as wind and solar are being preparated.

At the same time, Albania doesn't want for ambition on a grander stage, and is also looking to leverage its geographic position to join the global geopolitical race to feed the growing appetite for gas in Southern Europe.

The Trans-Adriatic Pipeline project hopes to carry gas from Azerbaijan's giant Shah Deniz field to Italy. Surveying off the Albanian coast began in February. Lazimi also claims that Qatari investors are interested in plans to build liquefied natural gas (LNG) terminals on the coast, although a concrete project has yet to be started despite plans going back years. Lazimi points out that either of these plans would allow the government to begin gasification of the country should they happen.

Regional ambition

Closer to home, Albania hopes to use energy as a way into the surrounding region. "We want to develop regional energy projects, and to do that we need a European approach," he says. "That will also offer the advantage of expanding relations in the micro-region - and the ethnic Albanians spread across it can play a part there - and boost trade and investment."

That's a reference to Albanian ambitions to increase its chances of attracting larger investors by effectively swelling its domestic market to 10m potential consumers. The ambition involves becoming the investment base to serve the micro-region, which includes Montenegro, Kosovo, and Macedonia - all of which have large ethnic Albanian populations. "The legal basis for accelerated cooperation is there," says Lazimi, "via the latest CEFTA [Central Europe Free Trade Agreement - essentially a Central and Southeast European common market of countries preparing for EU membership] agreements. We're looking for other energy projects to get involved in - coal in Kosovo for example can be complementary to our hydro."

While serving the region with power is a serious ambition in itself, expansion of trade ties and infrastructure should help expand the profile of investors in Albania, according to the plan. As a government report admitted in 2010, for instance, "manufacturing accounts for a relatively low share of FDI."

Eneida Guria, head of Albania's new foreign investment agency, laments that the trend continues. "We see no major manufacturing coming," she says, "but we are going to go out to start talking to potential investors in that segment."

It's clearly a tough sell, however. In Tirana, for instance, recently elected Mayor Lulzim Basha is ready to offer stunning tax breaks to major investors. "For every 50 new employees, we'll waive local taxes for four years," he explains, before announcing proudly that for any investor creating "over 10,000, the city will reimburse their state taxes for five years." The city coffers are likely safe for now, with Basha admitting there is no company in Albania that current employs over 10,000 people.

Instead, says Guria, despite high "initial interest" from investors, her agency's two successes in attracting major projects since it was established at the start of 2011 are two tourist resorts worth €500m and €1.2bn respectively. "The initial approvals are in and they should hopefully kick off in 2012," she says.

Agriculture is another sector with huge potential, and "the sector deserves more attention from investors," she says.

The Economy Ministry is setting up development funds to help knock the sector into shape, but Lazimi says the government "now needs the banks to step up - and right now they're not very willing."

The elusive EU boost

While Guria admits that some of the reforms - especially those that aim to reduce the powers of certain ministries in licensing businesses and other bureaucratic functions - are not progressing quite as swiftly as her political colleagues might suggest, she generally praises the processes and says they have helped make her job easier.

One of the biggest boosts, however, would be progress in Albania's route towards EU membership. In late 2011, Brussels declined to offer Albania candidate status for the second year in a row, citing the political deadlock in the country, which has since been partially cleared. Guria says there's no way to quantify how much the stalled process has cost Albania in terms of investment. Clive Rumbold, deputy head of the EU mission in Tirana, stresses that: "FDI follows the perception of future EU membership. It's a guarantee of European standards in issues such as investor protection."

At the same time, Tirana's EU ambitions should go some way toward calming fears that all this talk of "leading the micro-region" is just another phrase for creating a "Greater Albania." The recent announcement by Prime Minister Sali Berisha that he will make Albanian citizenship open for all ethnic Albanians, as well as any foreign citizen investing €100,000 in the country, keeps these worries bubbling below the surface.