An overview of Albania’s business environment
Leaving Tirana by car and heading for the coast gives the impression of a country undergoing rapid and uncontrolled development. In fact, you are driving through Albania’s main development area, both in demographic and economic terms. With a highway bypassing the recently modernised international airport, this axis connects Albania’s two major cities, Tirana and Durrës. In no way is this region comparable to the more mountainous and backward areas in the east and far north. Although macro-indicators of growth clearly point out that Albania is speeding up its economic development, for now growth is only visible in a few core regions. Several challenges lie ahead for efforts to sustain this growth and to distribute it countrywide; (i) connecting the country, (ii) securing energy supply, (iii) tackling the informal economy, (iv) providing transparent institutions and (v) reducing inequality and poverty. Reforms in these areas have started in the last decades and an acceleration of advancements will in the end profit the entire country and set the conditions for attracting and sustaining foreign investments and capital.

Connecting the country
Producing for the international market while located alongside Albania’s main development axis may not face major problems related to transport and infrastructure. Though roads in Tirana and Durrës are bumpy and severely pot-holed, the region also hosts Albania’s major connections with Europe and the rest of the World. A few years ago the international airport opened a new international terminal under an agreement with Tirana Airport Partners, a German-US consortium, which will manage the airport for 20 years. At the same time, a new road connecting the Tirana-Durrës highway with the airport has been completed. The port of Durrës – Albania’s main harbour gateway - has the largest capacity in the country and is constantly being upgraded. Due to the privatisation of the Durrës Port Authority, the processing of goods has improved significantly recently.
Producing in Albania’s remote areas or transporting products by road seems to take place in a totally different world. Albania’s road network as a whole is far below European or even post-communist standards, which is mainly a consequence of Hoxha’s ban on private car ownership in the communist era – Albania’s road system in the early 1990s was basically unchanged since the Italians built the main roads in the 1920s and 30s. Security had priority over the infrastructure network, and thousands of defensive bunkers were built in communist times and they still dominate the Albanian landscape. The reality is that nowadays only around 35% of the road network is paved, and especially in less populated and mountainous areas roads are in a hazardous state, making it hard for villagers to transport their basic agricultural products to proximate urban centres.
With governmental investment and international support, parts of two new corridors have been completed. The current priority is the east-west corridor that will connect the port of Durrës with the eastern city of Kukës and on to the border with Kosovo near Prizren, and a brand new highway through the mountains was finished in 2009. Together with a project called Corridor 8, a north-south corridor that is referred to as the Adriatic-Ionian highway will offer relatively fast connections with neighbouring Montenegro and Greece and on to Bulgaria, and will at the same time link the cities of Skhodra and Vlora. These two projects were scheduled for completion in 2010. According to the Albanian government, improved connections with neighbouring countries will boost tourism, trade and economic development along the main corridors. What is more, with the country aspiring to membership of the European Union, becoming an integral part of Europe’s corridors is essential. Hence, the upgrade of Albania’s infrastructure is a priority and the evidence along the roads proves they mean it.
Steady progress is lacking in the case of Albania’s communication infrastructure. Its national landline operator – Albtelecom – was only privatised in 2007, after five years of delays. With an outdated network and limited revenues, Albtelecom has problems to provide adequate services especially in rurual areas.
Coverage and quality of the mobile telephony sector is much better. However, currently only three operators are active: AMC, privatised in 2001 and owned by Cosmote (Greece), Vodafone and Eagle. Unfortunately,mobile phone tariffs are still among the highest in the region.
Internet services have increased exponentially over the last years, although the internet penetration in Albania remains low compared with other European countries. Most operators provide dial-up services and in 2005 Albtelecom began offering ADSL services. Yet, the tariffs of these services are still too high to make them accessible to a broad group of Albanians.

Securing energy supply
Although Albanians can be typified as energetic, the provision of their power is certainly not. In fact, Albania’s energy sector is often unable to meet demands and power shortages are one of the major impediments for attracting large amounts of foreign investments. KESH – the state-owned energy company - relies completely on hydro-electric dams, and droughts have limited the generation of power over the last years. Despite imports of neighbouring countries, Albania periodically suffered from severe energy shortages disrupting business activities and affecting the country’s economic growth. Over the past few years power cuts occurred very frequently in Tirana and could take several hours to restore. Since the closure of a nuclear power plant in Bulgaria which was one of Albania’s major suppliers, shortages have been even more severe. Although some major investors may be able to afford off-grid generators, developments in priority sectors like agriculture and manufacturing are highly dependent on stable and constant energy supply.
The challenge of meeting Albania’s future electricity needs may be relieved by two major developments. The first one is the construction of a new thermal power plant near the southern coast city of Vlora by an Italian consortium. The construction aims to diversify Albania’s supply both in terms of sources and geographically. Besides this, major steps have been taken towards setting conditions for further foreign investments in the sector. In the future this may result in the privatisation of the distribution and hydro arms of KESH. Improving this authority’s efficiency and restricting power loss is highly necessary to restore reliable power supplies.

Tackling the informal economy
Whereas the informal sector is a major contributor to employment and production, it also holds back tax revenues, brings unfair competition and does not provide any kind of security for its employees. It is estimated that Albania’s informal economy comprises 30 to 60% of GDP – agriculture included - and that it far exceeds formal activity in the realm of small and medium enterprises. Hence, working in the shadows of Albania’s economy does not only include traditional black activities as drug trafficking and street sales but also activities that are deeply entrenched in Albania’s growth sectors.
With roots going back to the first years after the fall of communism, grey economic activities are now a structural feature of the economy that will not prove to be easy to tackle. The major rationale for going underground is a relative high overall tax and social security burden combined with weak tax collection and an environment of bribery and corruption. This does not mean that there is a strict line between informal and formal activities. “The informal sector is mostly made up of registered companies which file regular tax returns which are accepted with few questions from the local tax office, often with the help of a small under the table payment” says a recent OECD report. Albania collects less in tax revenue and social security although its VAT rates are among the highest in the region.
However, the situation is not as dark as it appears at first sight. Authorities have introduced a number of measures aiming at reducing tax evasion of large tax payers and the enforcements of these laws has brought some improvements. The challenge is to obtain the same results in the small and medium sized sector without affecting the sector’s growth and without leaving thousands of households without jobs and income. Experiences in other developing countries show that this is best reached by providing platforms for society wide dialogues and by developing a more trustful relation between the government and the private sector. With major help from the European Union and IMF improvements are underway.

Providing a transparent rule of law
Civil servants filling their pockets with money from major public works projects, border authorities turning a blind eye to smuggling, officials getting payments under the table and gleaming towers in Tirana built by dodgy or unknown investors. The perception that corruption is pervasive in Albania is a major reason why foreign investments lags the rest of Southeastern Europe. Yet, perceptions are no longer fully supported by facts. Recently Albania leaped another 30 positions on the worldwide Corruption Index of Transparency International, and its ranking is now in line with other countries in the SEE region.
Although over the last decade Albania’s political leaders have shown a general lack of will to advance with structural reforms and many agencies and institutions simply do not have procedures and systems in place to make reforms meaningful, the current government has made the fighting of corruption a priority project. It remains to be seen whether real progress is sustainable or simply political paperwork.With the European Union continuously monitoring the situation, further induced institutionalisation can at least bring more transparency.

Reducing poverty and inequality
In December 2000, the Albanian government adopted the Millennium Development Goals as the framework to eradicate poverty and achieve pro-poor growth. Although efforts to reduce poverty and inequality are bearing some fruits in Albania according to the Millennium Development Goals progress report, 18% of the population still lives below the poverty line and it is estimated that society wide inequality has risen sharply over the last years.
“Recent income divergences calls for policies that combines social goals as well as the more traditional definitions of economic growth and private sector development” says a recent UNDP report. Decentralisation may be a solution too. Economic growth is mainly generated in the country’s capital city and along Albania’s main development axis. The mountainous areas in the north and east suffer from high unemployment levels, absence of foreign investments, traditional societal structures and migration to the coastal plains. A major social challenge is therefore to decrease the gap between rich and poor areas and at the same time try to resolve the problems that urban poverty brings.

Common problems, specific solutions
Albania is not unique in its impediments to growth. Its development problems resemble the world of post-communist Eastern Europe and the world of fast developing countries in general. Still, Albania has to come from far and some of its problems are stubborn. The near future will prove whether Albania’s recent advancements provide a solid base that ensures further catching up with and integration into the European market. The hope is that this will be realized with the participation of citizens and civil society in order to ensure that economic development will be cohesive and relatively equal.

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