Document of The WorldBank FOROFFICIAL USEONLY Report No: 35480-AL PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFEURO4.4 MILLION (US5.6 MILLIONEQUIVALENT) AND A PROPOSEDCREDIT INTHEAMOUNT OF SDR2.5 MILLION (US3.7 MILLIONEQUIVALENT) TO ALBANIA FORA BUSINESS ENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENINGPROJECT September 18,2006 Private and Finance Development Sector Unit Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective: August 31,2006) CurrencyUnit = Euro 1SDR = US$1.4862 1Euro US$1.28065 FISCAL YEAR January1 - December31 ABBREVIATIONS AND ACRONYMS ARCS Administrative and Regulatory Cost Survey BERIS Business Environment Reform and Institutional Strengthening CARDS Community Assistance for Reconstruction, Developmentand Stabilization C A Competition Authority CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CPU Competition Policy Unit DA Directorate o f Accreditation D P L Development Policy Loan DMP Department o f Market Policies of the Ministryo f Economy, Trade and Energy DPS General Directorate o f Standardization EC European Commission EMP EnvironmentalManagement Plan EP European Partnership EU European Union FIAS Foreign Investor Advisory Service FDI ForeignDirect Investment FY FiscalYear GDMC General Directorate o f Metrology and Calibration GDP Gross Domestic Product GTZ Gesellschaft fur Technische Zusammenarbeit IBRD International Bank for Reconstruction and Development IDA International Development Association IFR Interimun-audited Financial Report IMF International Monetary Fund I S 0 International Organizationfor Standardization M&E Monitoringand Evaluation METE Ministryo fEconomy, Trade and Energy MSTQ Metrology, Standards, Testing and Quality OED Operations Evaluation Department P M Prime Minister PPPS Public-Private Partnerships RIA Regulatory Impact Assessment SaU State-aid Unit TF Task Force for Regulatory Reforms USAID United States Agency for International Development WEF World Economic Forum WTO World Trade Organization . Vice President: Shigeo Katsu Country Director: Orsalia Kalantzopoulos Sector Director: Fernando Montes-Negret Sector Manager: Gerard0 Corrochano Task Team Leader: Silvia Minotti ALBANIA BUSINESSENVIRONMENTREFORMAND INSTITUTIONAL STRENGTHENING CONTENTS Page A . STRATEGICCONTEXTAND RATIONALE ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 5 3. Higherlevel objectives to which the project contributes .................................................... 5 B PROJECTDESCRIPTION . ................................................................................................. 6 1. Lendinginstrument............................................................................................................. 6 2. Project development objective andkey indicators.............................................................. 6 3. Project components ............................................................................................................. 6 4. Lessons learned and reflected inthe project design............................................................ 9 5. Alternatives considered and reasons for rejection ............................................................ 10 C IMPLEMENTATION . ........................................................................................................ 11 1. Possible Partnerships and Co-financing............................................................................ 11 2. Institutional and implementation arrangements................................................................ 11 3. Monitoringand evaluation o f outcomes/results................................................................ 13 4. Sustainability..................................................................................................................... . . . 14 5. Critical risks andpossible controversial aspects............................................................... 14 6. Loan conditions and covenants ......................................................................................... 16 D APPRAISALSUMMARY . ................................................................................................. 17 1. Economic and financial analyses ...................................................................................... 17 2. Technical........................................................................................................................... 17 3. Fiduciary ........................................................................................................................... 18 4. Social................................................................................................................................. 19 5. Environment...................................................................................................................... 19 6. Safeguard policies............................................................................................................. 20 7. Policy Exceptions and Readiness...................................................................................... 20 8. Governance Filter.............................................................................................................. 20 Annex 1:CountryandSector Background .............................................................................. 21 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies .................33 Annex 3: ResultsFrameworkandMonitoring ........................................................................ 34 Annex 4: DetailedProjectDescription ...................................................................................... 36 Annex 5: ProjectCosts ............................................................................................................... 43 Annex 6: ImplementationArrangements ................................................................................. 44 Annex 7: FinancialManagementandDisbursementArrangements ..................................... 48 Annex 8: ProcurementArrangements ...................................................................................... 55 Annex 9: EconomicandFinancialAnalysis ............................................................................. 63 Annex 10: SafeguardPolicyIssues ............................................................................................ 64 Annex 11: GovernanceFilter ..................................................................................................... 65 Annex 12: ProjectPreparationandSupervision ..................................................................... 69 Annex `13: Documentsinthe ProjectFile ................................................................................. 70 Annex 14: Statementof LoansandCredits .............................................................................. 71 Annex 15: Country at a Glance ................................................................................................ 72 Map (IBRD 33359R) ................................................................................................................... 74 ALBANIA BUSINESS ENVIRONMENTREFORMAND INSTITUTIONALSTRENGTHENING EUROPEAND CENTRAL ASIA ECSPF Date: September 18,2006 Team Leader: Silvia Minotti Country Director: OrsaliaKalantzopoulos Sectors: Other domestic andinternational Sector Managermirector: FernandoMontes- trade (40%); Centralgovernment Negret administration (30%); Generalpublic Project ID: PO96643 administration sector (30%); Lending Instrument: Specific Investment Themes: Export development and Loadcredit competitiveness(P); Infrastructureservices for private sector development(P); Regulation and competitionpolicy (P); Other accountability/anti-corruption (S) Source Local Foreign Total BORROWERRECIPIENT 0.30 0.20 0.50 INTERNATIONALBANKFOR 0.20 5.40 5.60 RECONSTRUCTIONAND DEVELOPMENT INTERNATIONALDEVELOPMENT 0.39 3.32 3.70 ASSOCIATION Total: 0.89 8.91 9.80 Borrower: Albania Tirana Albania Responsible Agency: Ministryof Economy, Trade and Energy(METE) Tirana Albania Project implementationperiod: December 31,2006 End: January 15,201 1 Expected effectiveness date: December 31,2006 Expected closing date: January 15,201 1 Does the project depart from the CAS incontent or other significant respects? Ref: PAD A.3 No Does the project require any exceptions from Bankpolicies? Ref: PAD D.7 [ ]Yes [XINO Have these been approvedby Bank management? [ ]Yes [ IN0 I s approval for any policy exception sought from the Board? [ ]Yes [ ]No Does the project include any critical risks rated"substantial" or "high"? Ref: PAD C.5 [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? -Ref: PAD D..7 [XIYes No -- - .-- - Project development objective Re$ PAD B.2, TechnicalAnnex 3 The overall objective o fthe BERIS is to assist the Government to: (i) facilitate business entry and operations inthe formal economy; and (ii) strengthen the enterprise sector's capability to increase exports towards region and EUmarkets. Project description Re$ PAD B.3.a, TechnicalAnnex 4 The project consists o fthe following components: (i) Facilitating business entry and operations by improving quality of business regulations, including their potential impact on market competition; (ii) Strengthening the enterprise sector's capability to export to regional and EUmarkets by developing hrther the Metrology, Standards, Testing and Quality (MSTQ) system; and (iii) coordinationsupportcomponent. Project Which safeguard policies are triggered, if any? Ref: PAD 0.6, TechnicalAnnex 10 Preparation o f a basic environment management plan for the metrology laboratory Significant, non-standard conditions, if any, for: Ref: PAD C.7 Boardpresentation: None Loadcredit effectiveness: Cross-effectiveness condition for Loan and Financing Agreement. Covenants applicable to project implementation: 0 The Borrower shall carry out its obligations in accordance with the Environmental Management Plan Retroactive financing o f up to SDR 425,000 for expenditures incurred after April 18,2006 for consultants' services to: 0 Preparea comprehensive medium-term strategy for the integrated development o f the MSTQ system, including national metrology; 0 Designthe metrology laboratory; 0 Advise the General Directorate o f Metrology and Calibration (GDMC) on the design and constructiono f the metrology laboratory; 0 Support the Department of Market Policies (DMP) on World Bank procurement and financial management requirements; and 0 Support on regulatory streamlining. Dated covenants: The GDMC to prepare and adopt a national metrology strategy, including an action plan for the consolidation of provincial and district metrology laboratories, acceptable to the Bank,by March 31,2007 and implement it thereafter. 0 The METE to prepare and adopt a comprehensive medium-term strategy for the integrated development o fthe MSTQ system acceptable to the Bank, by March 31,2007 andimplement it thereafter. 0 The METE to strengthen the staff o f the Department o f Market Policies within the METE andprovide it with adequate resourcesbyMarch31,2007. 0 The METEto commence the integratedpublicity campaign for the MSTQ component by December 31,2007. 0 The METE to launch two ARCSs not later than March 31, 2008, and March 31, 2010, respectively. A. STRATEGIC CONTEXT AND RATIONALE 1. Country andsector issues Albania's macroeconomic indicators and medium-to-long term outlook for economic growth convey a clear message: the high economic growth rates experienced in the past decade are unlikelyto be sustained inthe absence o fdeeper reforms to attract investment andfoster exports. Remittances and informal activities - which have represented the most dynamic drivers o f economic growth in recent years - do not constitute the type o f growth that would enable Albania's sustainable development. Concerns also exist about Albania's ability to finance its current account. Inflows o f foreign direct investment (FDI) have increased in recent years, reaching 5% o f GDP in 2004, with the privatization o f the last state-owned bank. However, the sustainability o f FDI trends remains to be seen, and in the eyes o f foreign investors, other countries, especially those that joined the European Union (EU) in2004, are perceived as much more attractive than Albania. TABLE1:ALBANIA:MAJOR ECONOMICTRENDS million) Current Account Balance I -7.6 I -6.6 I -5.8 I -10.0 I -8.1 I -5.5 I -7 I Several constraints affect the business sector's ability to efficiently perform and grow inAlbania. As indicated by the 2005 Administrative and Regulatory Cost Survey (ARCS), the most significant constraint to business development is the unfair competition faced from those businesses that do not comply with the legal and regulatory framework or/and are favored by politicians'. Unfair practices arise to a large extent from the significant size o f the informal with regard to the competitiveness o f the economy, in 2005 Albania ranked only looth among sector which a variety o f estimates place at 40 to 45 percent o f official GDP. Not surprisingly, 116countries, lagging behind all Europeancountries2(See Table 2). ' Informal activities generally occur in manufacturing, trade, transport construction, retailing and other business services; all activities dominated by small and micro businesses. See, OECD, Investment Compact for South East Europe, Report for the Ministryo f Economy o f Albania, Tackling the Policy Challenge of Dealing with the Informal Economy in Albania, 2004. Competitiveness indexes developed by the World Economic Forum (WEF). The WEF defines "competitiveness" as the collection o f factors, policies and institutions which determine the level o f productivity o f a country which influences the level o f prosperity that can be attained by an economy. At the same time, productivity i s also the key driver o f the rates o f return o n investment, which, in turn, determine the aggregate growth rates o f the economy. Thus, a competitive economy is one that is likely to grow faster over the medium to long term. 1 TABLE:2005 SELECTEDBUSINESSENVIRONMENT COMPETITIVENESSINDICATORS 2 AND Albania Bosnia- Serbia and Croatia Slovenia Herzegovina Montenegro Growth Competitiveness Index* 1001116 951116 801116 621116 321116 Business Competitiveness Index* 1121116 941116 861116 631116 321116 Quality o fNational Business 1131116 91/116 861116 611116 351116 Environment Index* Source: World Economic Forum; Doing Business Survey. The export-led growth that Albania requires for sustainable development seems also hard to realize. Imports continue to increase, while exports are particularly low, resulting in a widening trade deficit, which reached a record level o f US$1.9 billion at the end o f 2005. While Albania joined the World Trade Organization (WTO)3in2000 and has been granted a preferential access to EU markets, the enterprise sector continues to face difficulty in acquiring market share in domestic as well as foreign traditional markets, and is unable to penetrate new markets. Public sector policies and institutions, and regulatory practices have not been successful in shaping a business environment able to facilitate business entry (see Table 3) and operations4and to strengthen the enterprise sector's capability to increase export to the regional and EUmarkets. TABLE 2005 SELECTED BUSINESSENTRY 3: INDICATORS Albania Bosnia- Serbia and Croatia Slovenia Region OECD Herzegovina Montenegro Starting a business Procedures (number) 11 12 10 12 9 9.6 6.5 Time (days) 41 54 15 49 60 36.4 19.5 Cost ("XI o f income 31 41 6 13 10 13 7 per capita) Min.capital (%of 40 57 9.5 23 17 49 41 income per capita) Dealing with licenses Procedures (number) 22 17 21 28 14 21 14 Time (days) 344 476 212 278 207 251 147 Cost (% of income 227 8,735 2,195 1,236 129 669 75 per capita) Source: Doing Business Survey. Barriers to Business Entw and Operations The 2005 ARCS provides indications on the constraints affecting business entry and operations and their severity. The most problematic ones are: anti-competitive practices (79%), electricity Although the status o f an economy intransition allows for longer transitional periods for full implementation of all the multilateral disciplines embodied in GATTIWTO agreements, Albania's commitments have already been quite extensive. With regard to exit mechanisms, with the support from the Bank, Albania has introduced a modem bankruptcy framework. However, inefficiencies and corruption in the judiciary together with unclear property titles increase considerably average time (4 years) and cost (38% o fthe estate) requiredto resolve bankruptcies. 2 (70%), tax rates (72%), corruption (69%), macroeconomic instability (68%), economic and regulatory policy uncertainty (59%), and information on laws and regulations (53%). Unfair practices are the result o f a number o f factors. These would include: the inability o f the public sector to facilitate entry and operations o f businesses in the formal economy (through business-fkiendly regulations able to reduce compliance cost for formal businesses and increase attractiveness o f the formal economy5) as well as ineffectiveness o f public sector policies and institutions to create a level playing field for investment and combat informal/illegal activities. Unnecessary administrative rules and procedures create obstacles to entry into markets and discourage growth o f foreign investors and local entrepreneurs. The business licensing regime offers - among many - a clear example o f difficulties affecting business entry. InAlbania about 30 institutions are involved in the issuance and administration o f over 120 licenses, permits, authorizations, certificates or consents which are regulated under different laws, decrees, guidelines, regulations and instructions issued by different ministries and government entities. Such a complex legal and regulatory framework together with poor access o f business to information represents a significant barrier to entry. It: (i) creates confusion and uncertainty for businesses trying to determine the specific requirements for each sector of activity; (ii) significantly increases their compliance costs, thus opening opportunities for corruption; (iii) determines inconsistent and discretionary application o f the rule o f law by the government officials (favored by the business sector's poor access to information); (iv) creates incentives for informality; and ultimately, (v) results in the competitive disadvantage that businesses face versus informal/illegal/not-compliant businesses. Frequent changes o f laws and uncertainty o f economic and regulatory policies (59%) also represent significant barriers to operate a business inAlbania. Business access to information on regulations is difficult, and a large proportion o fbusinesses (53%) find the information available on regulations inadequate and o f poor quality, while changes o f regulations are not timely communicated to the public. Inthis context, arbitrary behavior and abuse o f law by government officials find fertile ground. Changes o f laws and uncertainty o fregulatory policies are the result o f a Government's approach to regulatory reforms characterized by fiagmented interventions, in a context o f weak planning and implementation capacity, inadequate inter-ministerial coordination and poor dialogue with the business community. Like in many countries, in Albania regulatory reforms have been ad-hoc without a clear strategicAonger-term vision, and have materialized in isolated changes in legislation in the areas o f competency o f single ministries without taking into account the impact o f any regulatory change on the business sector andultimately onmedium-term public finance. Albania's institutional capacity to identify and properly address barriers to entry and to promote healthy market competition inthe formal economy is also weak. Despite the establishment o f a Competition Authority (CA), and the enactment o f a EU-oriented competition legislation, Albania still lacks a competition culture at all the levels o f the economy, including the policy makers, the general public, and business community. The lack o f competition culture - which i s For example, being "formal" is a pre-requisite to access bank financing. According to the 2005 ARCS, access to finance represents a major constraint for business development for one quarter o fthe respondents. 3 considered the most pervasive competition problem inthe region6 - negatively affects the ability o f relevant authorities to enforce legislation on competition and advocate for regulatory, and, more ingeneral, economic reforms, based on competition principles. Enterprises Poor Capabilitv to Export Although the ARCS does not report any particular constraints affecting specifically sound export growth (such as poor public sector infrastructure to control quality o f imported inputs or domestically produced goods), the Government is fully aware that the longer term growth o f a small economy like Albania's requires a stable macroeconomic framework and a business environment able to encourage a muchneeded export-led private sector growth. InAlbania the process oftrade liberalizationhasnotbeensupported byaparallel development of public sector institutions able to facilitate domestic enterprises in competing more efficiently in domestic and international markets. Thus, while Albania benefits from a preferential access to EUmarkets, the Albanian Metrology, Standards, Testing, Quality accreditation (MSTQ) system is still far from being in line with EU standards and unable to support competitiveness of the business sector indomestic and foreign markets. Tests to verify conformity o f traded goods with technical regulations are not properly done and do not meet recognized standards. Thus, the market is flooded with low quality and unsafe goods, imports cannot be checked, and fees charged for technical inspections are considered as an additional national tax. Standards are outdated and not in line with EU norms; the vast majority o f state-owned laboratory facilities are obsolete and unable to meet the industry's demand for metrology and testing services. Consequently, enterprises do not have appropriate means to control the quality o f imported goods or to certify that the quality o f their exported goods meet EU standards. In addition, in the absence o f a functioning certification system, the enterprise sector has few incentives and opportunities to improve the quality o f products both for the domestic and foreign markets. Furthermore, the role and functions o fthe MSTQ institutions7 are poorly known by both consumers and the industry, and each institution operates independentlywithout a clear vision for the medium term development o f the MSTQ system and without taking into considerationneeds o f the Albania's economyhndustry. The new Government - which took office in September 2005 - has shown a strong commitment to attract investments and foster exports, and strengthen policy design and program planning. Building on the results o f the 2005 ARCS, the 2005-2009 Government program aims at addressing major constraints to business development, including problems in the energy sector, and tax administration, as well as corruption. With support from the donor community and the Bank, several programs are underway or are planned to improve functioning o f the energy market, tax administration and to fight corruption. The Government has been and remains committed to address unfair practices and regulatory policy uncertainty, and improve access to information on business regulations. Over the past few years, the Government has increasingly recognized the need to further strengthen the regulatory capacity over the (formal) market, 6Stability Pact, SouthEast Europe Compact for Reform, Investment, Integrity and Growth: "Competition Law and Policy inSouth East Europe", OECD progress reports. 'In Albania the MSTQ institutions comprise: the General Directorate of Metrology and Calibration, the General Directorate of Standardization and the Directorate ofAccreditation. 4 remove administrative barriers and fight informal activities. Furthermore, it has recognized that systemic improvements to business entry and operations regulation are needed to go beyond the results achieved so far, and that a more institutionalized approach to regulatory reforms together with stronger capacities is crucial for sustainability o f any reform efforts. In this regard, following the Foreign Investment Advisory Service (FIAS) recommendations, the Government has taken a range o f steps to establish a better institutional infrastructure to support regulatory reform. By Order o f the Council o f Minister (number 170, 31 October 2005), the Government established a Regulatory Reform Task Force chaired by the Prime Minister for the formulation and monitoring o f regulatory reform plans. The Prime Minister (PM) has given the Minister o f Economy, Trade and Energy the mandate to implement these regulatory reforms. Indoing this, the Ministry o f Economy, Trade and Energy (METE) will be supported by the existing Department o f Market Policies (DMP) o f the METE - which will be further strengthened by additional staff working full-time on regulatory reforms. The Task Force has also re-established seven technical working groups originally established by the previous government in follow-up to FIASNorld Bank Group Administrative Barriers Project. With contributions from each o f the Working Groups, the Task Force has developed a Regulatory Reform Action Plan, now endorsed bythe Council o fMinisters, to guide implementation o freform actions inthe next three years. 2. Rationale for Bankinvolvement Through the careful combination o f complementary investment and policy-based operations, the Bank is well-placed to provide a comprehensive program to support improvements in the business environment. The proposed Business Environment Reform and Institutional Strengthening (BERIS) project would assist the Government in attracting investment and fostering exports. It will be supported by a paralleloperation, the three-year Development Policy Loan (DPL) planned for FY078 to support medium-term policy and structural reforms to strengthen governance, sustain private sector-led growth and improve public service delivery. The BERIS will also be part of a package o f closely linked operations, such as for land management and accountinglauditing work, aimed at fostering a business environment conducive for private sector growth. The Bank's involvement in the sector will help mobilize the support o f the donor community, and contribute to better policy decision-making, institutional capacity and implementation processes. Finally, the Bank's experience in other countries will help the Government indesigning a coherent reform program. 3. Higher level objectives to which the project contributes The BERIS will support the Government's efforts to strengthen the public sector capacity to improve the business environment so as to attract investments and stimulate exports. In doing this, the project will also assist the Government inimplementing selected parts o f the European Partnership (EP)' signed between the European Commission (EC) and the Government in December 2005, by addressing many o f the priority areas identified by the EP. Project objectives are fully consistent with the Country Assistance Strategy (CAS), dated January 10, 2006, which outlines a holistic approach to sustainable economic growth, based on enhanced investment androbust exports. 8The expected Board date o f the DPL 1is inDecember 2006. The EP defines short and medium-term priorities for Albania's preparation for further integration into the EU. Progress inimplementing the EP i s regularly monitored by the EC. Negotiations for a Stabilization and Association Agreement were officially opened on January, 31,2003, and were completed inFebruary 2006. 5 B. PROJECTDESCRIPTION 1. Lendinginstrument The BERIS would be financed by a Specific Investment Loadcredit, consisting o f a blend of IDA and IBRDresources for an amount o f SDR 2.5 million (equivalent to US$3.7 million) and Euro 4.4 million (equivalent to US$5.6 million), respectively. This instrument was chosen given the need to have flexibility inmakinginvestment ininstitution building,financing equipment and civil works, and humanresources development. 2. Projectdevelopmentobjective and key indicators The overall objective o f the BERIS is to assist the Government in: (i) facilitating business entry andoperations inthe formal economy; and (ii) strengthening the enterprise sector's capability to increase exports towards regional and EU markets. Expected project outcomes would include reduced costs, time and steps for businesses to comply with regulations affecting business entry andoperations. Key results indicators are: (i)number o f regulatory regimes reviewed and streamlined; (ii) reduced time and costs on meeting regulatory requirements (as measured by ARCSIDoing Business); (iii) number o f officials trained in RIA and other regulatory quality techniques; (iv) number o f workshops organized by the Government to discuss business environment reforms with relevant stakeholders; and(v) number o fcalibration services provided (See Annex 3). 3. Projectcomponents The project consists o fthe following three components: (i)Facilitating business entry and operations. This component aims at addressing the Government's weak capacity to establish and implement business friendly and pro-competitive regulatory regimes. The overall objective o f the component is to remove administrative and regulatory barriers to entry and operations. This objective will be achieved through the following sub-components: (a) Improving quality o f regulations affecting business entry and operations. This sub-component - -which has beendesigned with FIAS support -will assist instrengthening the institutional framework and capacities necessary to improve in a systematic manner the quality o f regulations affecting business activity. This will be done by: (a) building regulatory capacities and a regulatory management system in line-ministry and at the central level; (b) developing the capacit to improve the quality o f new regulations, through the Regulatory Impact Assessment (RIA)IC7,public consultation and complementary methods; (c) upgrading the quality o f existing regulations. Partially via targeted reviews o f regulation in selected areashndustries, and partially via improving the access to business-related laws and regulations inAlbania; and; (d) developing and implementing a monitoring and evaluation (M&E) system for regulatory reforms. Finally, the sub-component will support small business surveys and two ARCSs which will be used to assess outcomes o fthe sub-component. 10RIA is a tool now usedinmost developed countries to improve the understanding of economic and social welfare impacts o f regulation. RIA allows policy makers to assess trade-offs, consider new ways to regulate and identify the most suitable alternatives to regulation. For more details, See Box 2, Annex 1"What i s the RIA?" 6 (b) Strengthening,the institutional capacity to draft business regulations enablinghealthy market competition. This sub-component aims at addressing the lack o f healthy market competition by strengthening Albania's capacity to draft and implement business regulations without any major distortionary effect on market competition. This will be done by strengthening the capacity o f the Competition Policy Unit (CPU) o f the METE to assess impact o f regulations on market competition. (ii)Strengtheningthe enterprisesector's capabilityto export to regionalandEUmarkets: Strengthening the MSTQ system. This component aims at addressing the enterprise sector's difficulties in competing in domestic and foreign markets related to poor national MSTQ infrastructure and services. The overall objective o f this component is to strengthen the enterprise sector ability to export towards EU markets by strengthening the capacity o f the national MSTQ system to deliver EU-compatible services. This will be achieved through: (a) assisting in drafting and implementing a comprehensive medium-term strategy, including reviewing the institutional and legislative framework, to bring each o f the MSTQ institutions closer to EU requirements and to meet industry's needs; (b) increasing the business sector awareness o f the challenges and opportunities o f competing inEUmarkets; (c) strengthening the capacity o f the General Directorate of Metrology and Calibration (GDMC), including modernizing the metrology infrastructure and, in particular, construction o f a modem metrology laboratory, to perform basic measurements and calibrations services; (d) strengthening the capacity o f the General Directorate o f Standardization (DPS), including improving standards system through the translation and adoption o f most frequently used EU standards; and (e) strengthening the capacity ofthe Directorate o f Accreditation (DA). (iii)Project Coordination Support. This component aims at ensuringproperimplementation and coordination of the project activities, including support for financial management, procurement, M&E requirements. It will also support organization o f periodic business surveys, integrated public information campaigns for the MSTQ system and competition policy, and buildingo f a more effective public-private sector dialogue on reforms. The component will also assist in the dissemination o f progress made by the Government in improving the business environment among the business community, policy makers and other relevant stakeholders. Key project beneficiaries would be public sector institutions involved indrafting business sector- related and in the delivery o f public services (MSTQ institutions, CPU, DMP, etc.) for businesses and regulations as well as domestic and foreign businesses. Consumer protection and business associations - although non-direct project beneficiaries - will continue to be involved duringproject implementation. 7 TABLE4. BEMSCOMPONENTSAT A GLANCE: TARGET GROUPS. OUTCOMES KEY INPUTSAND OUTPUTS Principal Mainoutcomefor Key inputs Key outputs target group the target group Selected Government has well- Expertise, Strengthening METE'Scapacity government functioning training, IT and to implement regulatory reforms entities and mechanisms and office equipment, officials policies inplace for study tours, small Re-establishmendstrengthening involved in systematically business o fprivate sector representation drafting assessing and surveysIARCS, business improving the workshops and Streamlining o f regulatory regulations business environment, public requirements inselected including for applying consultations areastsectors Business RIA and other community complementary Government officials trained in and mechanisms to Expert assistance, RIA and other methods representative business sector training, study organizations regulations tours, specialized Establishment of a RIA system advice, The CPUhas conferences, IT Improved access to and developed the and other office transparency o fbusiness capacity to assess equipment regulation impact o fregulations on market competition Well-functioning M&E system for regulatoryreforms Stakeholder awareness o f benefits and Government progress inregulatoryreforms MSTQ The GDMC, DPS, and Civil works, Strategy for the development o f institutions DA have acquired the measurement and the MSTQ system ability to deliver testing equipment, MSTQ services to TA, training, stud) Delivered stakeholder awareness meet business sector tours, public campaigns o f MSTQ services needs awareness campaigns Trained staff Well-functioning metrology laboratory Adoption o f EU-compatible standards All the above The METEhas Training; Fulfillment o f fiduciary and METE acquired the capacity expertise, office obligations, M&E, public to monitor and equipment, awareness o f progress in evaluate progress in workshops reforming business environment, improvingthe increasedpublic-private sector business environment consultations inreform and implement programs, ARCShusiness effective consultation surveys with business sector 8 4. Lessonslearnedandreflectedinthe projectdesign The BERIS design reflects the following lessons: Reforms must be championed at the highest level of government in order to achieve effective implementation in different parts of government. In close cooperation with FIAS, the BERIS assists in strengthening the institutional framework and capacities for systematically improving business sector-related regulations. The project supports the PM's recent decision to establish a high-level Regulatory Reform Task Force (chaired by the PM), which will guide and lead the implementation o f the Government's Regulatory Reform Action Plan. In particular, the BERIS will help buildthe institutional capacity within the DMP o f the METE and other line-ministries to assure the quality o f new regulation and to streamline regulatory requirements inhigh impact areas such as licensing and inspections by using properly adapted regulatory tools such as the RIA (See Chart 1,Annex 4). Sustainable reforms require an institutionalized and adequately resourced framework. The failure o f previous attempts to improve the regulatory environment resulted in part from weak inter-ministerial coordination, lack o f a clear mandate for the METE to implement the regulatory reform agenda, ineffective consultation mechanisms with the business community, and poor implementation capacity. The BERIS supports the strengthening o f the DMP charged with cross-ministerial coordination o f regulatory reform and regulatory quality enhancement. Related to this, BERIS also supports the adoption and implementation o f transparent regulatory governance rules to oversee regulatory reforms, ensure proper inter-ministerial coordination and participation from relevant local government entities, transparent consultation with the business sector and consistency and continuity o fthe Government's reform program. A well-informed civil society can be a major "driver" for change. Programs to generate stakeholder awareness and private sector participation should be replicated widely. The BERIS emphasizes stakeholder participation and extensive consultations with private sector players. The project would help institutionalize involvement o f business community in the design and implementation o f reforms by developing mechanisms for public-private consultations, both at the highest level as well as the regular day-to-day interactions between key ministries/institutions and business community. It also stresses the importance o f increased public information disclosure for all public institutions. Successful reforms require a comprehensive, gradual and continued approach. The BERIS i s designed to assist the Government in building the capacity for business environment reforms able to prioritize and sequence reform interventions, and to achieve sustainable results. M&E system and flexibility are crucial for successful project implementation. The BERIS stresses the importance o f the M&E system in increasing transparency in the use o f public resources and Government's accountability for reforms, and improving the public-private sector dialogue on reforms. The M&E system and flexibility built inthe BERIS will help focus on key priorities, realign project activities to adapt to emerging needs or changing priorities as necessary. 9 Poor governance of public sector institutions delays implementation of reforms, reduces sustainability of outcomes and weakens enforcement capacity. By addressing the four principles o f the Governance Filter introduced by the recently approved CAS, the BERIS emphasizes importance o f devoting continued attention to governance issues in project design and implementation. Implementation of investment operations benefts j?om clear links and complementarities with other Bank-financed operations, including policy-based lending. The BERIS creates synergies with other Bank-fundedprojects (e.g., landmanagement project, accounting and auditing work), the proposed DPL and FIAS activities. Conditionality under the proposedDPL will contribute to the successful implementation o f several BERIS activities, as highlighted in Box 1. At the same time, the BERIS will ensure that adequate resources are available to help implement some policy conditionality and reforms, thus enhancing the chance of success o fthe policy-based operation. BOX 1.SYNERGIESBETWEENTHE BEMSAND DPLS The Bank is currently preparinga series of three DPLs (starting in FY07) for Albania in support of the two CAS pillars that focus on sustaining growth through private sector development, and improving delivery of social services. It is envisagedthat the proposedDPLs and the BERIS will be strongly synergistic, with the DPLs providing policy support to the private sector agenda, and the BERISprovidingtechnical assistance and detailed implementationsupport. While the processingofthe DPLs is still at an early stage, and the agenda is by no means final, there are some indications as to the specific private sector growth agenda that they may support. A tentative list of suchpolicy areas for the DPL program includes: Adoption and implementationof a regulatory management system for improving quality ofnew and existing regulations; and Strengthening of the existing DMP of METE by the provision of adequate resources to undertakeregulatory reforms on a sound and sustainablebase. Any weakness in the legal framework for competition and the MSTQ system could also be supported by DPLs, if needed. During the mid-term review of the BERIS, an assessment of the success of the existing institutional framework in supportingregulatory reforms will be undertaken. Depending on its results, the DPL 3 could be designedto support elevation and/or legalization of a more sustainableinstitutional framework for regulatory reforms. Apart from the direct linkage with the BERIS, the DPLs will also support other aspects of the private sector agenda, such as development of a functioning land market and security of property rights, promulgation of a new and transparent concessions law, and improving the governanceof the financial sector. 5. Alternatives considered and reasons for rejection Several areas need to be addressed to foster export development and attract investments for sustainable private sector growth. To avoid an overly complex operation and increase 10 sustainability o f expected outcomes, the project would adopt a selective approach along the lines indicated above. Weaknesses in tax administration are also significant impediments to robust private sector growth. The project does not provide any direct assistance to address tax administration issues for the following reasons: (i) already significant donor presence inthe area (EU, DFID, USAID, and IMF); (ii) other instruments than technical assistance operations are considered to be more effective in addressing policy issues; and (iii) existence o f other important business environment areas requiring improvement andconsequent expected limited impact o f any project component. The team also considered some assistance in the area o f concessions and Public-Private Partnerships (PPPs). This option was rejected because o f the significant donor presence in the area (KfW is about to start implementation o f a new program designed with the Bank's support), and the well-advanced Bank's dialogue and assistance to the Government for introducing a more transparent legal framework for concessions' '. C. IMPLEMENTATION 1. PossiblePartnershipsandCo-financing The design o f the BERIS reflects close coordination with other parts o f the World Bank Group (e.g., FIAS) as well as major donors (e.g., EUCARDS, SECO, USAID, GTZ, KfW).Parallel to its continued advice and technical assistance to the Government's Regulatory Reform Action Plan, FIAS has supported the design of the business regulation sub-component o f the BERIS. As a consequence, the structure and main contents o f this sub-component are hlly in line with the Government's Regulatory Reform Action Plan. FIAS expects to continue the support to the Government inthe implementation and coordination ofthe Regulatory ReformAction Plan. The team i s also assisting the Government in seeking donor parallel financing for the project. In this regard, several donors (e.g., SECO and the EC) have expressed interest in supporting project-relatedactivities, including implementation o f the Government's Action Plan. 2. Institutionalandimplementationarrangements The majority o f the direct beneficiaries of the BERIS are public institutions under the umbrella o f the METE. Thus, the Minister has overall responsibility for the project. (See Chart 2 "Implementation and Institutional Arrangements", Annex 6). With a letter dated February 24, 2006, the Minister has indicated that the Department o f Market Policies (DMP) o f the METE will handle project management, coordination and administration, including overseeing the implementation o f various components by the beneficiary entities. In particular, this Department will be assigned with the overall responsibility o f the project and will provide a link between the beneficiary entities and the Bank. The director o f DPM will be assisted by other civil servants working at the METE in order to fulfill all the project fiduciary obligations in line with World Bank requirements. The BERIS will also finance assistance to "IFCisassisting the Governmentinthepreparationofanewconcessionlawandbuildingthecapacityto design and implement sound concessionary agreements. In addition, through the Public Private Infrastructure Advisory Facility the Bank is assisting the Ministry o f Public Work, Transport and Telecommunication, specifically in relation to concessions/PPPs in highways, and water supply and sanitation. Albania has also been included as a target country in a Bank's study planned for this FY - aimed at identifying a "ready to use" framework for - preparation and implementation o f policies to better manage unsolicited proposals. 11 buildthe capacity o fthe DMP inproject M&E. Responsibilities o f the DMP would include: (i) project disbursements, financial reporting, audit, and procurement; (ii) monitoring, evaluation and dissemination o f the progress made by the Government in business environment reforms supported by the BERIS, including assessment o f outcomes o f capacity building activities for each project component; (iii)assisting in organizing project-financed public awareness campaigns and periodic business surveys, including the ARCSs; (iv) assisting in organizing private sector participation to reforms and public-private consultation initiatives; (vi) contracting external skills inprocurement, financial management support, and M&E, if necessary; and (vii) coordinating assistance for inter-institutional activities foreseen under the MSTQ component (e.g., preparation and implementation o f a strategy for the integrated development o f the MSTQ system). Each beneficiary entity will be responsible for the technical aspects o f the procurement process o f the activities foreseen under its specific component. The DPM will be supported by an experienced procurement expert and a financial management consultant, financed under the project, who will work closely with the staff o f the METE andthe project beneficiary entities for at least the first 12 months and 6 months o f project implementation, respectively. For the first part ofproject implementation, the BERIS will also finance expertise to design andbuild a sound project M&E system. These experts will assist the DMP in insuringproper implementation and coordination o f the project activities. Some contingency funds will be allocated for additional procurement, financial reporting andM&E support. Retroactive financing o f up to SDR 425,000 would be available to cover eligible expenditures, as indicated inother parts o f this document (See C.6). With regard to the business regulation component, the project supports the design and implementation o f regulatory reforms under the institutional framework recently adopted by the Government (See Chart 1, Annex 4). While the Task Force, the Working Coordination Group, andTechnical Working Groups have been already formed andmet on a regular basis to work on the Regulatory Reform Action Plan, the existing DMP o f METEhas not beenprovided yet with the necessary resources to implement and coordinate regulatory reforms. In addition, the envisaged Business Advisory Group has not beenre-established yet. The project will also assist to identify and implement proper mechanisms for consultation with private sector. During the mid-term review, an assessment o f the success o f the existing institutional framework in supporting regulatory reforms will be carried out. Depending on its results, the DPL 3 could be designed to support elevation and/or legalization o f a more sustainable institutional framework for regulatory reforms. The mid-term review will also assess progress in other reform areas supported by the BERIS. Consideration will be given to address any identified weaknesses through the DPL3 and/or restructure the project, ifneeded. The proposedimplementation arrangements: 0 are aimed at enhancing sustainability o f the Government's reform efforts and results; 0 are intended to maximize direct involvement and accountability o f the beneficiary agencies inthe technical aspects o f procurement; 12 0 incorporate and reflect the recommendations arising from the FY06 Country Fiduciary Assessment (August2006); 0 are fully consistent with the Bank's approach to increase potential impact o f projects on institutional development and sustainability; and address the risk o f the potential weak capacity o f the METE inWorld Bank procurement and financial reporting. 3. Monitoring and evaluation of outcomes/results Each beneficiary entity will establish a M&E system enabling the assessment o f outcomes and results under each specific project component along the lines indicated inTable 5 (Annex 6). To that end, the project will allocate the necessary resources. For the DMP, the implementation of an appropriate M&Esystem will be one o fthe project outputs. The BERIS will include a small component to build the M&E capacity o f the DMP to monitor and assess regulatory impediments to business sector development and public sector capacity to carry out regulatory reforms. The DMP will be responsible for collecting and analyzing data from project beneficiary entities, and preparing semi-annual progress reports for the METE, the TF chairedby the PrimeMinister,other policymakers, and the Bank, reflecting a comprehensive assessment o f the outcome o f capacity buildingactivities. The DMP will integrate project progress reports received by the project-supported institutions with governmental (e.g., Statistical Office, self-assessment procedure templates, progress reports on the implementation o f the Regulatory Reform Action Plan, etc.) and non-governmental sources (such as project-financed business surveys and ARCS updates, and non-project financed reports like annual Doing Business surveys, Global Competitiveness Reports, FIAS/OECD reports, E C progress reports, etc.). Based on the collected information, the DMP will prepare annual reports on Government progress in improving the business environment and enhancing competitiveness o f the business sector. Annual reports will - inter alia - describe how Albania's performance inbusiness environment reforms compares with that o f other countries o f the region and inthe previous period, and- at a later stage - how ministries rank interm o f quantitative and qualitative indicators o f compliance with the government's regulatory policy (e.g., the quality o f U s , consultations with the business communities, etc.). These reports will be published on the Government's web-site, and widely disseminated among relevant stakeholders. Informed by international experiences, the project will encourage publication and (Web-based) dissemination o f ministries' comparative reform performance, e.g. in the form o f scoreboards reflecting timely andsatisfactory completion o freformmilestoneswithin their respective portfolios. Every year, the DMP will organize a workshop for the presentation o f the annual report to business and donor communities, consumers, policy makers, and other relevant stakeholders. The first workshop for the 2007 annual report is expected to be organized inMarcWApril2008. One o f the underlying goals o fthe M&E support would also be to ensure gradual development o f local capacities to design and administer representative business surveys and prepare analytical reports on the measures needed to improve the business environment. M&E activities should engage local policy think-tanks, business associations and other NGOs in the design and oversight o f surveys, possibly inthe form o f an expert supervisorybody. 13 4. Sustainability Critical factors for the sustainability o fthe BERIS objectives include: 0 Strengthening o f the institutional framework and processes at the Central Government level to drive and oversee regulatory reforms, allow implementation o f a properly adapted RIA system and complementary methodologies, and institutionalize consultation mechanisms between the government andbusiness community; The functioning o f effective M&E systems to strengthen voice o f the business community and civil society and accountability o f the Government institutions in implementation o freforms; and Strong links with the private sector growth pillar o f the proposed DPL. Sustainability o f the BERIS's achievements will be enhanced by the Government's commitment to improve Albania's business environment as well as desire for further EU integration. However, identifying and removing barriers to business entry and operations is an ongoing process, both indeveloped and developing countries. Thus, additional efforts will be required to fbrther strengthen the technical, regulatory and administrative environment for enhanced investment and exports following completion o f the BERIS. Implementation o f the new regulatory regimes in the context o f decentralization will also require specific attention and resources. The project-financed strategy for the integrated development o f the MSTQ system is expected to help the relevant authorities consolidate and take reforms beyond the project's expected achievements. 5. Criticalrisks and Dossiblecontroversial asDects RiskRating Risks RiskMitigation Measures with Mitigation TO PROJECTDEVELOPMENTOBJECTIVE Government's preference for The BERIS is designedto assistthe Government focus S activitiedmeasures addressing the symptoms on structural reforms andprovide tools for their o f a problemrather than structural reforms implementation. addressing its underlying causes (i.e. short- term "vision"). Linkage with the proposedDPL (See Box 1on "Synergies between the BERIS and the DPLs"). Close cooperatiodcoordination with FIAS that expects to continue the advice and support to the Government implementation o fthe Regulatory ReformAction Plan. The M&Esystem will ensure wide dissemination o f project implementation progress, and enhance Government accountability and the voice o f the business community. 14 Reluctance, due to fear o f losingpower and Risks are mitigatedby Albania's desire to stimulate H illegal revenues, o f government institutions sound private sector growth and to further integrate to actively participate and contribute to with the EU. The BERIS will assist the Government in remove barriers to entry and operations and implementing selected areas o fthe Government strengthenthe enterprise sector capability to programfor 2005-2009 and medium-termpriorities o f export. the EP. The BERIS includes specific measures and indicators to promote and monitor accountability andpublic informationdisclosure o fproject beneficiary entities. Albania's vulnerability to domestic and T h ~ risk i s mitigatedby Albania's desire to join the s S regional instability as well as political EU. infighting couldnegatively affect achevement o f development objectives and delay project implementation. TO COMPONENTRESULTS FACILITATINGBUSINESSENTRYANDOPERATIONS Business Regulation Weak andor discontinuous The Government is finalizing the establishment o fan S OwnershipAeadership o f the regulatory institutional framework andprocesses for reformprogram could weaken commitment implementation o fregulatory reforms, with the DMP - and support from relevant ministries. within the METE- incharge o f the day-to-day implementation o freform actions. Linkage with the proposed DPL (See Box 1on "Synergies between the BERIS and the DPLs"). Inthe framework o fthe DPLpreparation, the METE Opposition to, or boycott of, proposed requested the inclusioninthe DPL o fthe following changesby other centralbodies or actions: (i) Adoption and implementation o f a government employees could undermine the regulatory management system for improving quality mandate o fthe new structure. o f new and existing regulations; and (ii) Strengthening o f the DMP (with adequatebudgetandresources). Success o fthe existing institutional framework in supportingregulatory reforms will be assessedduring the mid-termreview. Depending on the results, the DPL 3 couldbe designedto support elevation andor legalization o f a more sustainable institutional framework for regulatory reforms. Inadequate staffiig inline ministries and o f Resources, including training and upgrading o f skills H the DMP that should respectively carry out for implementing RIA and complementary methods, and review the RIAs. will be providedunder the project. Linkage with the proposedDPL. (See Box 1on "Synergies between the BERIS and the DPLs" for the proposed inclusion inthe D P L o f a condition requiring the DMP to be strengthened and adequately staffed and budgeted). The provisiono ffull-time dedicated staff for the DMP i s a loan dated covenant. 15 STRENGTHENINGENTERPRISECAPABILITYTO EXPORT MSTQ System I I Political appointments and/or dismissalo f This issue will continue to be at the center o fthe policy S the directors o f the MSTQ institutions (i.e., dialogue with the Authorities during project directors do not meet the technical and implementation. managerial qualifications to fulfill the institutional mandate) may delay implementation o f reforms and/or reduce sustainability o freformefforts. Weaknessesinthe legal and institutional The BERISwill support the review andrevisiono fthe S framework for the MSTQ systemcould legal framework to bringit closer to EUpractices as hamper the sound development o fthe well as assist the government inthe preparationo f a national system. development strategy for the MSTQ systeminthe early part o fproject implementation. Linkage with the proposed DPL (See Box 1on "Synergies between the BERIS and the DPLs"). PROJECT COORDINATION SUPPORT Weak project implementation capacity o f the Fundshavebeenallocatedto mobilizetraining and S DMP and METEcould delay project external support ifneeded. implementation PROJECT PROCUREMENT Inadequate capacity and lack o fknowledge Corrective and riskmitigations measuresare identified S o fBank's procurement guidelines and inAnnex 8, paragraph8. procedures Overall Risk Rating S There are no particularly controversial issues that could pose reputational risks for the Bank. 6. Loanconditionsand covenants Covenants applicable to project implementation: The Borrower shall carry out its obligations in accordance with the Environmental Management Plan Retroactive financing, o f up to SDR 425,000 for expenditures incurred after April 18, 2006 for consultants' services to: 0 Prepare a comprehensive medium-term strategy for the integrated development o f the MSTQ system, including national metrology; Designthe metrology laboratory; 0 Advise the General Directorate o f Metrology and Calibration (GDMC) on the design and construction o f the metrology laboratory; 0 Support the Department o f Market Policies (DMP) on World Bankprocurement and financial management requirements; and 16 Support on regulatory streamlining. Datedcovenants: The GDMC to prepare and adopt a national metrology strategy, including an action plan for the consolidation o fprovincial and district metrology laboratories, acceptable to the Bank,by March 31,2007 and implement it thereafter. The METE to prepare and adopt a comprehensive medium-term strategy for the integrated development o f the MSTQ system acceptable to the Bank, by March 31,2007 and implement it thereafter. The METE to strengthen the staff o f the Department o f Market Policies within the METE andprovide it with adequate resources byMarch31,2007. The METE to commence the integrated publicity campaign for the MSTQ component by December 31,2007. 0 The METE to launch two ARCSs not later than March 31, 2008, and March 31, 2010, respectively. Financial Covenants The borrower will maintain a financial management system acceptable to the Bank. The project financial statements, (including Summary Reports and Designated Accounts) will be audited by independent auditors acceptable to the Bank and on terms o f reference acceptable to the Bank. The annual audited statements and audit report will be provided to the Bank within six months of the end o f each fiscal year. D. APPRAISAL SUMMARY 1. Economic and financial analyses Strengthened capacity o f the relevant public institutions to reduce barriers to entry and operations and to stimulate competitiveness o f the enterprise sector in domestic and foreign markets will help attracting investment and foster exports. It would also reduce the size o f the grey economy and ultimately contribute to better public finances (i.e. higher tax revenues and more efficient Government spending) and increased transparency and accountability o f government institutions. 2. Technical The BERIS seeks to address the causes negatively affecting Albania's business environment rather than dealing with their symptoms. In this spirit, the BERIS aims at strengthening the Government's capacity to facilitate business entry and operations and foster exports towards regional and EUmarkets. This is expected to increase sustainability o f the expected outcomes. The BERIS will help strengthen the institutional framework and capacity to systematically remove regulatory and administrative barriers to business entry and operations. This would contribute to a broader process o f better governance through more consultative and accountable procedures and better regulation policy making. The consultation with business and civil society that is inherent inRIA helps to build legitimacy inlaw makingandpromote equity and fairness. For business environment areas where substantial acquis communautaire exist (e.g., MSTQ system), the BERIS activities have - inter alia - been designed to increase Albania's compliance with the acquis. For those areas where there is no specific acquis (e.g., business regulation), the 17 components have been designed to bringAlbania closer to EUbest practices. Such an approach is expected to support boththe country's private sector growth andits integration with the EU. For each component, results indicators and targets are designed - inter alia - to increase accountability o f the project beneficiary entities as well as public information disclosure of the results achieved by these institutions incarrying out their institutional mandate. Progress will be closely monitored duringproject implementation (See Annex 3). 3. Fiduciary Procurement A procurement capacity assessment was conducted in April 2006. This assessment ranked the project as "significant risk" due to lack o f previous experience o f the implementing agency in Bank procurement procedures as well as lack o f Ministry staff knowledgeable in Bank procurement procedures. The management o f procurement activities under the BERIS would be under the responsibility o f the DMP o f the METE. To mitigate this significant risk in procurement, the Ministry will need to recruit a local procurement consultant for the first 12 months of the project, who will be selected on a competitive basis and will have relevant qualifications and experience in Bank-financed projects. Such an arrangement will help the effective and timely implementation o f procurement activities. It would also help build procurement capacity within the METE. Financial Management The METE has assigned the DMP with the day-to-day project management and coordination, including financial management. An assessment o f the financial management arrangements for the project was undertaken. The financial management arrangements o f the project are acceptable to the Bank. The overall FM risk for the project is moderate to substantial. As o f the date o f this report, the implementing agency does not have any overdue audits. The annual audited project financial statements will be provided to the Bank within six months of the end o f each fiscal year and also at the closing o fthe project. The latest draft Country Fiduciary Assessment (CFA-August 2006); draft Public Expenditure and Institutional Review (PER - July 2006) and draft Public Expenditure and Financial Accountability (PEFA - July 2006) confirm that improvement i s required to increase efficiency and accountability in public spending by improving the planning, budgeting, and execution of public investment projects; strengthening lines of accountability, including enabling better access to information by all stakeholders; building stronger monitoring and evaluation systems; and establishing competitive and transparent frameworks for government purchases. The assessment o f the country financial management arrangements concluded that the public financial management has improved significantly during the last few years in areas such as budgeting, internal control, internal and external audit., though from a relatively weak base. The fiduciary area will benefit from the ongoing improvements o f the treasury system (especially an improved financial reporting enabling follow-up o f programmatic budgeting as well as giving more analytical information down to the level of individual service units) through the 18 implementation o f a new computerized treasury information system which is expected to be ready by January 2007. The proposed project will utilize these improvements by using the treasury system for the payment and reporting functions. Internal audit is currently being fully developed to improve the government's internal control environment and the internal audit should also be utilized to monitor the implementation o f the project. A Public Internal Financial Control framework based on EUprinciples is being implemented. The supreme audit institution i s also being strengthened through EU support. 4. Social The BERIS does not entail any social risk or risk o f adverse social impact. On the contrary, by increasing accountability o f the government institutions dealing with the business sector, and improving transparency and efficiency of the government-to-businessha1 consumer relationship, the BERIS is expected to contribute to improved public perception o f the government institutions. The business community and the consumer association - which have also played a significant role in identifying the areas o f the business environment requiring project attention - will continue to be involved inproject implementation. The overall project impact on the business community and final consumers will be monitored by the DMP o f the METE. In particular, as mentioned in other parts o f this document, this Department will prepare and disseminate reports on project and Government's progress in improving business environment. These activities will contribute to improving public understanding o f the reforms undertaken by the government and increase the degree o f businesses and final consumers' voice ingovernance. 5. Environment The Environmental Category is "B". Under the MSTQ system component, the BERIS will also finance: (i)metrology equipment; and (ii)the civil works for the construction o f a new metrology laboratory for the GDMC. This metrology equipment is expected to have no adverse environmental impact; it i s considered "clean", with no potential air or water emissions or waste products. In fact, proposed equipment makes measurement in a passive way which has no negative environmental impact. The project will finance the construction o f a modem metrology facility which will be provided with modem environmental control devices. In compliance with Bank requirements, the GDMC has prepared and disclosed a basic Environmental Management Plan (EMP) describing the standards to be followed for the construction o f the metrology laboratory. The EMP- which was disclosed on March 31, 2006 - indicates: (i)the scope o f investments in laboratory as part o f the loan with regards to potential air or water emissions and waste products; and (ii) the nature o f construction with associated potential impacts. The project will not finance any land acquisition. N o land expropriation is envisaged. The METEhas identified a landparcel -about 4000 square meters -which would be usedto construct a metrology laboratory o f about 1500 square meters. The Ministry has provided the Bank with confirmation o f the State ownership o f the property. Building on this land would require demolishing the existing old buildings. Proof o f land ownership by the Government was provided prior to Negotiations. 19 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI E l Natural Habitats (OP/BP 4.04) [I [XI PestManagement (OP 4.09) [ I [XI Cultural Property (OPN 11.03, being revised as OP4.11) [ I [XI Involuntary Resettlement (OP/BP 4.12) 11 [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ I [XI Forests (OP/BP 4.36) [ I [XI Safety ofDams (OP/BP 4.37) [I [XI Projects inDisputed Areas (OP/BP/GP 7.60)* [ I [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [ I [XI 7. PolicyExceptions and Readiness The project complies with all applicable Bank policies. The retroactive financing envisaged i s in line with World Bank policy. 8. Governance Filter Inline withthe CAS, the BERIS gives explicit attentionto governance issues inthe design ofthe components and activities, selection o f the project beneficiaries and definition o f implementation arrangements and o f M&E systems. The BERIS is also designed to: (i)support increased autonomy and de-politicization of public sector institutions as well as strengthening accountability frameworks; (ii) rationalize and improve public sector spending; (iii) improve transparency o f reform processes and private-public dialogue in reform; and (iv) strengthen the voice o f civil society, including non-governmental stakeholders. Finally, implementation of the BERIS is expected to improve governance o f all the institutions supported. See Annex 11 for a more detailed analysis o f the Governance Filter for the BERIS. * By supporting theproposed project, the Bank does not intend to prejudice thefinal determination of the parties' claims on the disputedareas 20 Annex 1:CountryandSectorBackground ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENINGPROJECT InAlbania, significant regulatoryandinstitutional weaknesses inthe business environment affect the private sector ability to perform efficiently and grow free from undue governmental interventions. Furthermore, the business environment offers few incentives and opportunities for enterprises to increase the quality o f their goods, and enhance their competitiveness in the domestic and foreign markets. A. Barriersto BusinessEntry and Operations (a) Business Remlation and Government Approach to Regulatory Reforms In Albania the administrative and regulatory framework for business entry and operations is characterized by poor quality regulations and weak implementation capacity. This translates into highcompliance costs for businesses and strong incentives for businesses to remain inthe grey economy. It also negatively affects Albania's attractiveness for investors. The 2005 ARCS survey indicated that most o f the respondents consider tax rates (72%), corruption in the public sector (69%), and instability o f laws and regulations (59%), as major problems impacting the business environment. A large proportion o f businesses (53%) find the information available on laws and regulations to be inadequate and o f poor quality, and that changes o f regulations are not timely communicated to the public (about 70%). TABL LTIONS )miem 1 5 - Mnor 900% Problems'freauencies 80 0% 700% 60 0% 50 0% 40 0% 30 0% 20 0% 100% 0 0% Source: 2005 ARCS. 21 Government approach to regulatory reforms Despite the formal strong commitment to remove administrative and regulatory barriers, Albania's initial reform efforts have not produced the expected results. The approach to reforms suffered from fragmented government interventions, in a context o f weak implementation capacity, and poor consultation with the business community. It was based on an item-by-item agenda without a clear strategic vision, andmaterialized inmainly isolated changes inlegislation in the areas of competency of single ministries without taking into account the impact of any legislative change on the business sector andultimately on medium-term public finance. Over the past months, following FIAS's recommendations, the Government has taken a range of steps to establish a better institutional infrastructure to support regulatory reform. By Order of the Council o f Minister (nr. 170, 31 October 2005), the Government established a Regulatory Reform Task Force chaired by the Prime Minister for the formulation and monitoring o f regulatory reform plans. The PM has given the Minister o f Economy, Trade and Energy the mandate to implement these regulatory reforms. The existing Department o f Market Policies (DMP) within METE will be supported by additional staff working on a full-time basis on regulatory reforms. The Task Force has also re-established seven technical working groups originally established by the previous government in follow-up to FIAS/World Bank Group Administrative Barriers Project. With contributions from each o f the Working Groups, the Task Force has developed a Regulatory Reform Action Plan, now endorsed by the Council o f Ministers. Based on input and advise from FIAS, the Action Plan i s based on four mutually supportive pillars: (i)Developing a regulatory management system (institutions, procedures); (ii) Improving the quality o f existing regulations (administrative and regulatory barriers reduction); (iii)Improving the quality o f new regulation (RIA, etc.); and (iv) Establishinga framework for systematic monitoring and evaluation o f reforms. Many activities under BERIS' business regulation sub-component are aligned with planned activities under the Government's Regulatory Reform Action Plan. 22 Box 2: What is a Regulatory ImpactAssessment? Regulatory Impact Assessment (RIA) i s a tool now used inmost developed countries to improve the understanding o f economic and social welfare impacts o f regulation. It i s widely recognized as an important mechanism which can contribute to improving the business environment, and to promote regulatory efficiency and effectiveness. RLpi allows policy makers to assess trade-offs, consider new ways to regulate and identifythe most suitable alternatives to regulation. Inessence, it i s a method of: 0 Systematically and consistently examining the positive and negative impacts arising from proposed government actions; and 0 Communicating the informationto decisionmakers and other stakeholders. RIA comes inmany forms that reflect various policy agendas of governments. Its specific objectives, design, and role in administrative processes differ among countries. The applied technical methods to assess regulatory impacts also vary. Some use full-fledged benefit-cost analysis, whereas most countries apply a mix of qualitative and easy-made quantitative models and methodologies. The legal underpinning of regulators' RIA requirements also differ from Parliamentary law to internal government processrequirements. Inpractical terms, a RIA system comes inthe form of guidelines and requirements for regulators to follow throughout the regulatory process, including consultation, intra-governmental coordination, and quantification and analysis o f expected regulatory impacts. The output of the RIA process i s usually a document attached to draft regulations when presented to cabinet for decision. Based on a "checklist template" the RIA document usually summarizes expected regulatory impacts, distributional effects, and results of consultations with stakeholders. RIA requirements usually also include an obligation to present several policy-options, includingno action. Over the recent few years RIA, has expanded beyond OECD countries. There i s currently little data available on the results o f RIA dissemination to transition and developing countries, but the general case for applying RIA seems to be a good one. Most developing countries and transition economies would gain significant economic benefits from better assessment o f the need and cost of regulation before new rules are adopted. RIA provides a framework for policy analysis. The adoption of a RIA template i s likely to improve the chances that key impacts will be identified and considered, particularly where policy skills are low. RIA has the potential to form an integrating framework within government to improveregulatory design and implementation. Source: Improving Business Environments through Regulatory Impact Analysis - Opportunities and challenges for developing countries. Paper preparedby PeterLadegaardfor the InternationalConference onReformingthe Business Environment.Cairo, Egypt, 29 November to 1December2005. International practices for the legal underpinning o f better regulation strategies vary between countries. Some countries have specific acts o f Parliament specifying the institutional infrastructure for business regulation (e.g. laws setting up a business advisory committee, regulatory reform units, RIA procedures, regulatory registries and the reporting relations between various actors). Others countries use Government decrees or issue regulatory policies. A firm legalbasis could be essential inkeepingreforms on track, inparticular incontexts o f fading political attention or a change o f government. On the other hand, detailed and legally based specifications o f institutional mechanisms may constrain the need to gradually adapt and develop 23 practices. This may be particularly important in the first 1-2 years o f regulatory capacity building. Inthe caseofAlbania, with ahighdegree ofpolitical commitment to regulatoryreform andthe basic institutional infrastructure almost in place, there is probably no short-term urgency to specify in law the establishment and function o f important regulatory institutions and processes. Experiences gathered throughout the project will be instrumental for defining better and clearer options for key design issues such as: Inwhich ministry should the unit in charge for the day-to- day implementation o fregulatory reforms be located? What kinds o f (business) regulation should be targeted by RIA? What powers should be vested in the Business Advisory Council? At this stage, the most critical factor for successful implementation o f better regulation strategies i s the allocation o f sufficient resources to the DMP within METE. The BERIS will assist in building the Government's capacity to systematically remove administrative barriers to entry and operations by providing assistance to the DMP and government experts inselected line-ministries to improve the quality o fbusiness regulations. Inspections. The Albanian inspection system is implemented by a number o f government entitiesI2, which are part o f the central administration and are not specialized or independent structures. A poor regulatory and administrative framework together with weak implementation capacity and a general lack o f coordination and information exchange among the various inspectorates ultimately result in government entities with similar mandates carrying out inspections on the same businesses, with evident duplication o f costs for both the government entities and businesses. Inspectorates have the authority to issue procedures governing inspections under their mandate. However, the absence o f proper mechanisms to timely and adequately inform businesses about the changes in regulations or the regulations in force encourages unethical behavior on the side o f inspectors. Also, inspectorates do not keep adequate records o f the businesses inspected and inspections performed and do not coordinate their inspections with other government entities. The vast majority o f inspections are carried out with a very short notice or without any notification to the business. As a result, it is not uncommon for the same business to be inspectedby different inspectorates within a short period o f time. According to the 2005 ARCS, 496 out o f the 500 businesses surveyed had been inspected inthe previous 12 months compared to 488 in 2002. Every business was inspected - on average - each month (13.8 times per year) with an average duration o f 4.2 days. Businesses operating inTirana are the most inspected and paying the highest fines and bribes. Joint-stock companies are the least inspected businesses, but are those paying the highest fines. The opposite applies for sole proprietorships. Like in 2003, fiscal inspections are the most problematic ones, and remain the most frequent and longest. Compared to 2003, there has been a slight decrease in the number o f businesses inspected by the fiscal authority (from 97.6 to 95.2%), but an increase inthe average duration o f each fiscal inspection (from 2.2 to 4.2 days). One out o f three businesses inspected paid fines for an average amount o f about USD 4,300. The total amount o f fines collected in 2004 was almost five times bigger than the amount collected in2003. l2These include: road police, labor inspectorates, construction police, customs controls, tax administration, fire department, electrical corporation, sanitary inspectorate, licensing agencies, environmental agency, Standards agency, social insurance institute and municipal authorities. 24 Box 3. LessonsLearnedinReformingInspections Fundamental changes to the approaches used (ideological shift) - the overall approach is that enforcement resources should be aimed at both achieving compliance through strategies such as education and encouragement and at reacting to non-compliance ina more targeted andrisk-based manner: o Inspection reforms aimed at changing the focus and approach in achieving compliance - from strict controls to creation o f incentives for those inclined to comply. This was based on the general acceptance by policy makers (in a number o f countries) that regulation was failing more often than previously thought, and that incentives couldproduce better results than controls (an ideological shift). o Transition to performance based regulation as opposed to the strictly and purely prescriptive regulation. o Transition to more risk based selection o f inspection targets inorder to allocate inspection resources more efficiently for achieving the set goals. o Understandingthat providing advice on how to comply or an informationcampaign to alert persons to their regulatory responsibilities can be more effective in raising compliance rates than imposing sanctions. Focus on implementation: o Where reforms appear to be effective, the focus has been on actual detailed implementation issues organizational, management and specific techniques usedby inspectorates as opposed to reliance on - - purelegal changes (not denying their role as well). Use o f targeted legal reform via adoption o f Laws on Inspections: o Where laws providing for general regulation o f inspections have been adopted, the key features o f these laws are: they are not substantive, but procedural in nature -they aim to establish key procedural guarantees for private sector operators 0 these are typically not comprehensive, but focus on the context specific problems faced inthe country. o Successful inspections reformneeds a programto review and reform underlyinglaws and regulations to ensure removal o f those norms no longer necessary in a market economy, as well as to ensure gradual transition to performance based regulation as opposed to the strictly and purely prescriptive regulation. Attention to publicity o fthe reform, dissemination o fthe intentions o f the reform and changes introduced: o In some cases, where new inspection laws were adopted it is even difficult to say what has played more o f a role in achieving improvement - the law itself or the publicity surrounding its adoption and emergence o f discussion and articles inpress about the basic legal rights stemming from constitution, which are rephrased more specifically inrelation to inspections inthe Inspection Law. Attention to institutional set-up o f reform effort: o A clear cross-cutting framework -support at the highest levels, adoption o f a national goal, ministerial and parliamentary oversight, and active support from the business community - i s key to success. o Institutional capacities for monitoringand assisting inreformimprove the chances o f success. o Empiricaltools (such as surveys) to measure the burdenand changes inthe burden support inspections reforms at initial and implementation stages. o Inspections reforms are more effective if the inspectorates are at arms-length from the policy bodies and from local governments. Source: "Review o f International Practice in Inspections Reform" by Sanda Putnina, IFC, April 2005, posted on BEENet 25 Business Licenses. The business licensing regime offers an example o fpoor quality regulations, weak institutions and poor policies. About 30 institutions are involved in the issuance and administration o f over 120 licenses, .permits, authorizations, certificates or consents which are regulated under different laws, decrees, guidelines, regulations and instructions issued by different ministries and government entities. Such a variety o f terminology and a complex legal and regulatory framework create confusion for businesses trying to determine the specific requirements for each sector o f activity. It also results in inconsistent and discretionary application o fthe rule o f law by the government officials. Good governance practices suggest that uniform criteria and procedures for issuing licenses and permits are important to regulating business entry in a transparent and objective manner. Therefore, to reduce opportunities for corruption and increase transparency, such processes should be standardized, clearly indicate the authorized licensing institution, and ensure the requirements for licensing such as fees, procedures, appeal options, etc., are made available to the public. Technology can bring significant improvements to the efficiency and transparency of the administrative process. Electronic processing o f applications would reduce many o f the face- to-face interactions between government officials and entrepreneurs. Internet-based technology would also allow more detailed information delivery and submission and assist inthe orderly and timely processing o f all business applications. (b) Business Regulations andRelatedImpact on Market Competition Competition Policy Unit (CPU). To avoid threats to effective competition by state actions, which requires that the processes of entry and exit are uninhibited by undue regulatory and administrative burden that limits entrepreneurial activity, it is important that state regulations are assessedinterms o f their potential impact inrestricting competitive pressures inthe markets, and their implementation becomes contingent on such assessments. The Competition Policy Unit (CPU) o f the DPM has been assigned the role o f providing such assessments on a regular basis as its primary objective. It should undertake such assessments both for existing and new regulatory measures. In this respect, the CPUwould complement the role o f the C A which is also empowered to provide recommendations on potentially distortionary state regulations, but whose primary objective remains the control of monopolistic practices. Emphasis must be placed in achieving the closest possible coordination o f the CPU with the C A so as to maximize the effectiveness o fpolicy inensuringa healthy competition environment. With regard to competition policy, Albania has made some progress in setting up a legal and institutional framework for competition policy in line with the acquis. The institutional system currently consists o f the CA, the regulators for the energy and telecom sectors, the State-aid Unit and the Competition Policy Unit o f the METE. Various aspects o f the business environment affecting competition have been also improving, but generally at a slow pace. Though the process o f privatization has proceeded, the State still retains the ownership and control o f substantial elements o f some sectors such as energy, transport and telecommunications. Several donor-funded programs are underway to further strengthen the competition policy regime. The section below provides some information on the institutions in charge for implementation o f competition policy. 26 Competition Authority (CA). In July 2003 the Parliament approved the Law on Competition Protection covering anti-trust (Le., agreements and abuse o f dominance) and concentrations (mergers) which were prepared with support from the EC. In accordance with the Law, a Competition Authority (CA) was established in 2004. The C A is a public institution, independent inperforming its duties and composed o f the Competition Commission, a 5-member decision making body, and a Se~retariat'~,which acts as an investigative support unit. The C A has the power to conduct investigations on its own initiative, on the basis o f notification or complaint by market participants, upon the request o f the Albanian Parliament, or upon the request o f regulatory entities. When it observes violations o f the Law, the C A has the right to impose fines. The Law also gives the C A important advocacy duties including submitting recommendations on competition related issues to parliamentary commissions and central and local public administration and regulatory entities. Specifically, Article 70 foresees the "Role o f the Authority with regard to regulation and regulatory reform", and states that: (i)The Authority, in applying the Law in regulated sectors, cooperates with regulatory entities and other regulatory institutions; and (ii)Regulatory barriers to competition incorporated in the economic and administrative regulation, for general-interest reasons, should be assessed by the Authority. In this case, the Authority makes relevantrecommendation. So far, the activities o f the C A have mainly focused providing recommendations to the Telecom Regulator for the interconnection agreements and, more recently, to the Government in relation to regulating the oil sector. The C A has been involved also in an enquiry on illegal agreements in the cement industry and in drafting necessary secondary legislation. In dealing effectively with its functions, it faces major problems from lack and bad quality o f information, inadequately trained staff in its Secretariat and in other regulatory bodies, lack o f proper coordinationwith them and government departments, and corruption. Coordination between the CA, sectoral regulators, the SaU and Consumers' Organizations is expected to improve over time andbenefit from ongoing capacity buildingprograms. 13Currently the CA's Secretariat is composed o f 7 staff. 27 Box 4: ConsumerProtectioninAlbania: Enhancingthe Role of the CompetitionAuthority In2004 the Albanian Association for Consumers Protection-which has representatives in 12regionsand 36 districts for a total o f about 60,000 members - received over 23,000 complaints by consumers. Complaints covered different areas: from the energy sector (e.g., excessive prices and lack of a connection between prices charged and actual consumption), to the telecom sector (e.g., nontransparent phone charges and bills, charges for phone directories), and the water sector (e.g., contamination of drinking water). Because of lack o f resources, the Association investigated only few complaints for which a legal action was taken. In all these cases, the Association obtained a positive decision by the court and the sentence was executed. Experience from other countries shows that strong Competition Authorities can play a very significant role, incoordination with sector regulators, to protect the interests o f consumers and to enhance consumer welfare. They can do so by controlling monopolistic practices of local monopolies, fighting collusive behavior in oligopolistic markets and preventing further increases in concentration in already concentrated sectors. Further, Competition Authorities can protect consumers' interests by advocating the removal o f government regulations that distort competition and thus lead to higher prices, restriction of choice and lower quality. However, Albania i s still far from this. While the relevant legislation i s now in place poor resources available to the Competition Authority together with lack of awareness and respect among the local stakeholders for its potential role prevent the implementation o f a rigorous enforcement that could play a critical role in the protection o f Albanian consumers' interest. An immediate doubling o f the human capital currently available to the Authority (7 persons at present) and financial independence inthe longer runwould bevery importantsteps inthe direction ofestablishing a CA that would play this role. The long-run effectiveness o f the implementation process will be limited for as long as the C A does not become financially inde~endent'~.Financial independence could be guaranteed by changing the law to introduce mechanisms that would allow the C A to cover its budgeted needs without central budgetr up port'^. Ex-ante Sectoral Regulatorsfor the Utility Sectors. As part o f the steps undertaken for the integration process in the EU, Albania has established regulatory institutions in a number o f utility sectors. The main functions o f these institutions are: (i) regulation ensuring non- access discriminatory access to necessary inputs, especially network infrastructures; (ii)controlling monopoly pricing in areas where competition cannot be developed (and, for reasons o f cost efficiency, it is not desirable to develop); and (iii) technical regulation, setting and monitoring standards so as to assure compatibility and to address privacy, safety, and consumer and/or environmental protection concerns. The regulatory institutions exercise these functions on the basis o f relevant laws regulating specific sectors. They are also usually given the responsibility o f promoting competition on the l4To avoid conflicts of interest, fines should not be used as a source of income. l5See Table on Critical Risks. 28 basis o f transparency and non-discrimination principles during the market liberalization process. Their primary objective i s to create a transparent and non-discriminatory regulatory environment which contributes to investments and free competition development. However, their capacity to effectively enforce the competition regime is still not inplace inAlbania. Donors are assisting in this area. Stute-aid Unit. A state-aid unit was established within the METE in 2004 with the mandate to prepare a legal framework for state-aid monitoring in compliance with EU guidelines. With donor support the legislation has been drafted. However, in light o f delays in drafting relevant implementing regulations, it is unlikely that an adequate monitoring state-aid system would be fully operationalby the end o f 2006. At the moment, the SaU is trying to establish an inventory o f state aid through subsidies from the year 2000 onwards 16. (ii)BarrierstoExportDevelopment The MSTQ system Albania has been unable to successfully benefit from WTO membership and preferential treatment inEUmarkets. Inline with WTO requirements, quotas and similar restrictions are no longer the tool for controlling the flow o f goods through the borders. The guiding force o f international trade is the conformity o f the traded goods to technical specifications and regulations. Therefore, the international reco ition o f the tests done in a country is a sine qua non condition for sound export development` This requires a country to have the capacity to perform these tests both for its exports and imports. Inthe case o fAlbania, since the required tests are not properly done or do not meet recognized standards, the market is flooded with low qualityhnsafe goods, imports cannot be checked, and fees charged for technical inspections become an additional national tax. While Albania has started the adoption o f European and international standards, the industry is still unfamiliarwith them. Laboratory facilities are obsolete and unable to meet the industry's most basic demand for metrology and testing services. In this context, Albanian enterprises do not have appropriate means to control the quality o f imported goods or to certify that the quality o f their exported goods meet European standards. In addition, in the absence o f an internationally recognized certification system, the enterprise sector has few incentives and opportunities to improve the quality o fproducts both for the domestic andthe foreign markets. These are major problems for the Albanian economy, since lack o f an internationally recognized MSTQ system hampers efforts to increase exports and the quality o f locally produced goods, and l6A State aid Commission has also beenestablished by Law inMarch 2006 butis not yet operational. "International agreements,includingWTO accords such as the Technical Barriers inTradeAgreement, require that: (i) product be tested according to the requirements o f the country it is marketed in; and that (ii) tests a the performed by the producer be recognized by the purchaser. Ifone o f these conditions i s not met (i.e., the producing country can not perform the required tests, or the purchasing country does not recognize the tests made by the producer), then there are still two options. One is to require tests be done in another country (generally in the country the product i s marketed). However, such alternative increases the cost o f the goods, thereby reducing the competitiveness o f the product. The second option is to find markets that do not require testing or recognize the tests done by the producing country. This option is not considered attractive under normal conditions because these markets generally require low cost products. 29 prevents proper monitoring o f the domestic market. The quality o f the goods and services produced i s one o f the major factors that affect the volume o f exports. Infact, MSTQ systems are essential for the competitiveness o f the products, so that exports are increased especially towards high-value markets, and domestic markets are protected by improved technical inspections and by blocking low qualityhnsafe goods that do not comply with the technical standards and regulations. The Government is aware o f this problem, andhas decided to take some actions. Inthe past few years, Albania has passed new laws on Standards, Accreditation, Metrology and Calibration, and Food Safety. As a result, the General Directorate o f Metrology and Calibration, the General Directorate o f Standardization, and the Directorate o f Accreditation were established as a result o f splittingthe old department which included all these functions. Their activities are supported by a number o f other government entities providing complementary services, such as the Institute o f Veterinary Research, the FoodResearch Institute and district level laboratories. With support from EUCARDS programs, Albania has undertaken some steps to modernize the MSTQ system. However, the institutional capacity remains weak, and, despite some recent improvements, there is little awareness among the consumers and the industry o f quality and standards matters. As the industry realizes more and more the need to improve its performance inorder to compete inthe domestic market, especially with imports, an inthe Europeanmarkets, efforts to improve the quality andinnovation infrastructure are critical. Given the public good nature o f MSTQ services, some investment in standardization, accreditation, metrology and in some key calibration and testing laboratories should be done by the public sector. In addition to the core public investment, the private sector should invest in certification, secondary calibration and testing laboratories, quality systems, etc. Some o f the required investments already exist inAlbania, but far from satisfying international requirements. Furthermore, there is the need to develop a detailed strategy for the privatization and consolidation o f public laboratories. A good option would be to carry out this program inphases starting with the privatization o f the Food Research Institute and a few district laboratories (such Dunes, Vlora, Skodra) as well as closing some outdated laboratories in some districts. Ultimately, the system should retain about 6-8 well-functioning (and accredited) laboratories. Not only would the privatization (and closure o f some) o f these laboratories save government scarce resources, it would also release much needed capacity to service the private industry which today is denied such opportunity given that most o f the public labs focus on inspections and do not provide any meaningful service to the industry. 30 I BOX 5: PRIVATIZATIONAND CONSOLIDATION OF PUBLICLABORATORIES I Institute of Veterinary Research is designated as a "center o f reference" under the Food and Animal Safety Law. It does not do much research, but performs the functions proper o f an institute of Food Safety and Animal Health and should be designated as such. It has an important public good role to play and should remain in the public sector but focus on animal health and safety issues. It needs to get accreditation for which it will requirehelp to improve its training, quality management system, processes, documentation and other relevant areas. Food ResearchInstitute is also designated as a "center o f reference" under the Law. While it has focused on routine testing and some services to industry, it does not do any meaningful research nor has the capacity or demand to do research. It should be a strong candidate for privatization as it can focus on market needs and provide much needed testing and other services to the industry and become financially self-sustainable without any burden on public budget. District Food and VeterinaryLaboratories. There is a large number (over 100) o f labs o f various kinds (food, veterinary, and others) in districts all over Albania. Except for a few (Durres and Vlora), most of them suffer from inadequate capacity, limited staff and skills, poor facilities and outdated equipment. Furthermore, these labs often do not operate in a transparent manner and focus mostly in the name of legal requirements. All such labs should be privatized (and many closed) and managed by business associations/private sector, on as neededbasis. General Directorate of Metrology and Calibration (GDMC). According to the 2003 Metrology and Calibration Law, the GDMC is an independent organization reporting to the METE. Its mandate is to provide metrology and calibration services to the industry, as well as, to be responsible for the legal metrology services of the country. In addition to its main facility in Tirana, the GDMC relies upon a network o f regional and district offices. Inreality, the GDMC focuses primarily on legal metrology and provides few services to industry. This is not surprising, given its highly outdated laboratory equipment, limited staff with adequate technical skills and the current poor demand for metrology and calibration services from the enterprise sector. It also proposes metrological standards to the Government. At the same time it is responsible for enforcement o f the metrology standards. This i s a clear conflict o f interest. There i s a need to review the role and metrology functions o f GDMC and bringthem inline with EU norms and Albanian needs. Such a review should properly reflect the limited size and relatively low level o f sophistication o f the Albanian industry. It would not be cost effective for Albania to undertake a major upgrading o f its metrology facilities with huge investments given the expected limiteddemandof services from the industry andthe limitedresources available. Cost effective investment should be made in the metrology infrastructure in proportion to expected demand for metrology services and with efforts focused on training and skills development. Given the current setting, primary sophisticated metrology services could be provided by metrology organizations inneighboring countries. Inparticular, the GDMC should focus on the simpler types o f primary industrial metrology and not on the sophisticated types o f secondary level metrology and calibration services to industry. Private laboratories in Albania should be the main providers o f the majority o f secondary metrology services. With its limited resources, the GDMC should focus on certain key areas which are important for the local 31 industry such as electrical, textiles, agro- and food sectors. Inorder to provide these services in an efficient and meaningfulmanner, the GDMC will need to build quality laboratory facilities, including a modem buildingto house the metrological laboratories. It will also be important to reorganize GDMC's staff by hiring and training new employees and downsizing in areas with declining demand. Finally, the current structure o f provincial and district metrology laboratories should be consolidated into a few regional offices. This would require the privatization or closure o f most o f them since they have neither adequate laboratory facilities nor skills, nor enough demand for their services. General Directorate of Standardization (DPS). The DPS is an independent organization reporting to the METE. It is responsible for the coordination o f the standards regime inAlbania. It also issues national standards under the overall supervision o f a Standards Technical Committee, as well as provides translated EU standards to the Albanian industry. It has developed good liaison with its European counterparts and is familiar with EU and international requirements for standards. Following European practices, the DPS has decided to move away from mandatory standards and since 1999 it has adopted a voluntary framework o f standards. However, there is still a substantial disconnect between the new legal and regulatory framework and the practices on the ground. Old practices continue to prevail and various ministries and other bodies continue to issue their own (mandatory) requirements andtechnical regulations, incontradiction with the EU framework which calls for voluntary standards. The DPS is a fairly well-organized institution. With international support, it has translated some 200 EU standards into Albanian. Additional efforts are needed to harmonize with EU requirements. While there are about 12,000 standards inforce inthe EU, Albania would needto adopt some 3,000-7,000 in the short to medium term. Currently, the DPS lacks adequate resources for providing EU standards in Albanian language, training enterprises, and promoting the use o fthe standards by the industryand takingpart inthe European standardization work. Directorate of Accreditation (DA). This Agency was created in 2004 as an independent body, reporting to the METEby separating this function from the DPS. Currently it has some 15 staff. Its main function i s to provide accreditation services for Albanian laboratories. However, its skills capacity is limited and the Agency itself is recognized neither within the country nor with European bodies. Therefore, DA's first priority should be to build adequate skills capacity and obtain proper certification or so-called "Accreditation" for its own function from relevant European organizations. Obtaining international recognition is particularly important because any accreditation subsequently provided by this body should be recognized by the industry and trade sector within and outside o f Albania. Also, in the medium term, the DA should become fully independent from the Government and convert itself into a non-governmental-institution with a strong public-private partnership. This would help the DA buildcredibility inthe market. It would also make it a financially self-sustainable organization. With regard to human resources, the DA should rely upon a limitednumber o f in-house staff. The actual assessment for accreditation should be carried out by outside experts, hired on an as-needed basis from Albania and EUmarkets. 32 Annex 2: Major RelatedProjectsFinancedby the Bank and/or otherAgencies ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENINGPROJECT Major related projects: Ongoing and :ompleted Bank-funded projects ( FY01-06) Project Name Status Sector issues addressed I I OED Ratings ratings LandManagement and Urban Lending Real estate cadastre and II NA NA Development Project (FY07) registration DPL Lending Regulatory and NA NA (FY07) administrative constraints to investment Trade andTransport Closed FY05 Strengthenandmodernize Moderately Satisfactory Facilitation inSouth East the customsadministrations satisfactory Europe andother border control agencies to: (i)reducenon- tariff coststo trade and transport; and (ii)reduce smugglingand corruptionat Satisfactory Project (FY06) of law by improving the functioning ofkey legaland M a j o r related rojects: ongoing and completed donor-funded projects (FYO1-06) Donor and Project Sector issues addressed Name CARDS Weak institutional framework for MSTQ system. Assistance to establish and organize MSTQ institutes according to EUrequirements and upgrade o f metrology equipment. CARDS/GTZ Competition and state-aid legislation not harmonized with the acquis Competition and communautaire. Assistance for E Uharmonization and kick start implementation state-aid legislation o f the new laws. Status: ongoing. Expected closing date: upcoming months. (EUintegration) US AID-Millennium Corruption andpoor businessenvironment. Assistance inreform tax Challenge administration, public procurement and business registration. (Status: under Corporation preparation. Expectedimplementationperiod: 24 months- USS13.85 million). USAID Enterprise Poor competitiveness o f domestic products. Assistance to businesses operating Development & inmeat processing, herbs, tourism, and leatherkhoesproduction infindingnew Export Market markets inthe region. (Status: ongoing. Expected closing date: 2008) Services 33 Annex 3: ResultsFramework andMonitoring ALBANIA: BUSINESSENVIRONMENTREFORM& INSTITUTIONAL STRENGTHENINGPROJECT ResultsFramework I PDO OutcomeIndicators Use of OutcomeInformation The overall objective o f the BERIS Reducedcost, time and steps for Orient Government efforts to further is to: (i) facilitate business entry and businesses to comply with business improve business environment inan operations; and (ii) strengthen the regulations affecting business entry EU-oriented context enterprise sector's capability to and operations (as measured by increase exports towards the region ARCSIDoing Business Surveys) and EUmarkets. IntermediateResults ResultsIndicatorsfor Each Use ofResultsMonitoring Oneper Component Component BusinessEntry and Operations BusinessEntry and Operations BusinessEntry and Operations Component: Component: Component: Government has well-functioning Number o fprocedures for starting a Results monitoring canbe used to mechanisms andpolicies inplace for business guide possible adjustments systematically assessing and including: (i) change scopelcontent improving the business environment, Time (days) requiredto open a o f the training o n RIA and including for applying the RIA and business complementary methodologies; (ii) other complementary mechanisms review o f the institutional to business sector regulations Costs o f opening a business (YOof framework for regulatory reforms; income per capita) (iii)(stronger) legal underpinning o f the institutional infrastructure for Number o f government officials business regulation, including RIA, trained inRIAs and other regulatory consultation and the Business The CPU has strengthened its review techniques Advisory Council. capacity to assess impact o f regulatory measures on competition Number o f regulatory regimes reviewed and streamlined Export CapabilityComponent: ExportCapabilityComponent: ExportCapability Component: The GDMC, DPS, and DA have Number o f labs (food, veterinary Internal statistics are used to: (i) acquired the ability to deliver and other) accredited guide the implementation and update MSTQ services to meet business o f the development strategy o f each sector needs Number o f calibration services MSTQ institution; and (ii) adjust provided service delivery, procurement plans for new equipment, and scope and Number o f accreditation assessors content o f training programs. trained Project CoordinationSupport Project CoordinationSupport Project CoordinationSupport Component: Component: Component: The METEhas acquired the capacity Number o f workshops organized by Vehicle to discuss progress towards to monitor and evaluate progress in the DMP to discuss Government's development objective, and indicate improving the business environment progress inbusiness environment steps to be taken for timely and implement effective consultation reforms with relevant stakeholders achievement o f the objective withbusiness sector (including progress made inBERIS- supported reforms) 34 L h t t P - h c o g *N N g m h t E: zg N - z n th z m W m 0 m m N z * h t I I 0 : o 0 * e0 a3 3 0 * E 5u Annex 4: DetailedProjectDescription ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENINGPROJECT The overall objective o f the BERIS is to: (i) business entry and operations inthe formal facilitate economy; and (ii)strengthen the enterprise sector's capability to increase exports towards regional and EU markets. In doing this, the BERIS will also strengthen the Government's capacity to implement selected parts o f the European Partnershipbetween the E C and Albania. The BERIS consists o fthe following components to be implementedover four years. COMPONENT 1. FACILITATINGBUSINESSENTRY OPERATIONSAND 1A. Improvingqualityofbusinessregulation(TotalCost: Euro1.43 million) This sub-component aims at improving the Government's capacity to remove administrative and regulatory barriers to business entry and operations. The overall objective o f the component is to improve in a systematic manner the quality o f regulations affecting business activity by strengthening the institutional framework and capacities necessary to develop and implement sustainable regulatory reforms. This component - which has been designed with FIAS support - will assist in: (a) buildingregulatory capacities and a regulatory management system in line-ministry and at the central level; (b) developing the capacity to improve the quality o f new regulations, through RIA, public consultation and complementary methods; (c) upgrading the quality o f existing regulations. Partially via targeted reviews o f regulation in selected areas/industries, and partially via improving the access to regulation by establishing an registry o f all business-related laws and regulations inAlbania; and (d) developing andimplementing a monitoring and evaluation system for regulatory reforms. As part o f this, this component will support small business surveys and two ARCSs which will be usedto assess outcomes An integral part o f the above activities is the design and development o fmechanisms for public- private consultations, both at the highest level as well as regular day-to-day interactions between regulating ministrieshstitutions and the business community. Although recent improvement are promising, the public-private dialogue in Albania i s mostly ad-hoc and with little active participation o f the private sector in the regulatory process. Experience from past project involving business sector representatives (e.g. in the implementation o f FIAS's Administrative Barriers Report) suggests that the quality o f private sector participation can be significantly improved. BEFUS will focus on the integration o f the private sector in the design and implementation o f reform as a key factor for the reforms' success and sustainability. Full participation will also serve to build capacities in the private sector for how better to participate inandinformthe regulatoryprocess. 36 The sections below describes in further detail the proposed four pillars, the cross-cutting technical assistanceand capacity-building required, and raises the question about a stronger legal underpinning of the suggestedreform institutions andprocesses. A. Building regulatory institutions This component will finance assistanceto develop and strengthen the institutionalframework for regulatory reform, inparticular the capacities and expertise o f the existing Departmento f Market Policies (DMP) withinthe METE. It will also support a network of legal and economic officials in selected line ministries, as well as private sector representatives engaged in formulating regulatory reformproposals. Chart 1 illustrates the current institutional framework for regulatory reform in Albania. This framework is already partially functional following the Prime Minister's establishment of the Regulatory Reform Task Force in October 2005. However, essential capacity problems remain and the formalization of the relations betweenthe various actors must be hrther clarified and formalized. Chart 1: Institutional Framework for Regulatory Reforms Task Force for _-- BusinessAdvisory DepartmentofMarket PoliciesofMETE Composition 5-7 full-time dedicatedofficials in chargefor the day-to-day implementationof regulatory reforms TechnicalWorking TechnicalWorking Composition: Composition, Composition. Chair:RelevantDeputy Minister Chair: Relevant DeputyMinister Chair:Relevant DeputyMinister Members:Relevantgovernment Members: Relevant government Members:Relevant government officials involved inregulatory officials involved inregulatory officials involved inregulatory reforms, privatesector reforms, privatesector reforms,private sector representatives representatives representatives 37 The Task Force -for Regulatory Reforms (TF). The TF's role is to lead the design and implementation o f a comprehensive regulatory policy for attracting investment through the removal o f barriers to entry and operations. The TF's mandate i s to implement a strategic approach to regulatory reforms affecting the business sector and to improve Albania's attractiveness as a location for investment. Inaddition, the TF will provide a forum for resolving crowministerial issues affecting the business environment. The TF meets on a regular basis. TheDepartment of Market Policies (DMP)within METE. Supporting the Task Force, the role of the DMP will be further strengthened to implement and monitor the Government's Regulatory Reform Action Plan, as well as the measures supported by the BERIS. Specifically, the D M P will: (i)develop clear and transparent standards for regulatory quality and principles o f regulatory governance; (ii) coordinate reviews o f existing regulations in specifically targeted regimes - starting with pilot in selected sectordareas; (iii) develop better consultation practices and a sound regulatory impact assessment (RIA) system, and (iv) after the establishment o f a RIA system, review new regulations affecting the business environment for conformity to RIA quality standards. The responsibility for preparation o f the RIA for new regulations and policies will be with the relevant ministries, but with quality control carried out bythe DMP. The heado f the D M P will report to the Minister o f Economy, Trade and Energy, who will keep the Task Force informed about any development. The DMPwill coordinate the task o f reviewing existing regulation through the seven technical working groups already established. The DMP will also be responsible for monitoring and evaluation o f progress made by the Government in improving the business environment (including monitoring the pace and quality o f regulatory reform), and information dissemination among relevant stakeholders, including the business community and civil society. Business Advisow Council. Private Sector Representatives are increasingly consulted in the preparation of new laws and regulations, as well in the ongoing efforts under the Government's Regulatory Reform Action Plan. Interactionswith businesses are systematized and formalized in the form o f a Business Advisory Council that provides a link in the stakeholder consultation process by representing the business community. However, inputs for the TF's reform agenda are still weak. The Business Advisory Council includes representatives o f the Foreign Investors Association, Chamber of Commerce, think-tanks, etc. To the extent possible, all o f the Task Force's meeting should be conducted jointly with the Advisory Council. The TF should meet with the Business Advisory Council on a regularly quarterly basis. The project will support the transfer o f experiences from other countries' business advisory councils in actively providing quality input andparticipating ingovernments' regulatory reform. The Technical Working Groum: a Network of Legal and Economic Officials. The Technical Working Groups are comprised o f high level officials o f relevant line ministries. The Working Groups are currently charged with carrying out regulatory reviews in selected sectors and areas included in the Governments Regulatory Reform Action Plan. The review pilots supported by BERIS will complement these efforts. In due time, members o f the Working Groups should become the grouping o fkey legal and economic experts assisting ministers and senior officials in preparing policies andregulations, acting as key liaisons to the DMP. The Coordination Working Group i s a body established by the Government with a view to improve coordination and implementation o f the Regulatory Reform Action Plan. The 38 Coordination Group is composed o fthe head o f the DMP, heads o f the technical working groups, advisors to the PrimeMinister, and chaired by the Minister o f Economy, Trade and Energy. The Group ensures consistent and coherent reporting to the Task Force. It i s also a forum for technical, cross-cutting regulatory reform issues prior to discussions inthe Task Force. B. Improving the quality of new regulation Based on a review of Albanianpractices and informed by relevant international experiences, this sub-component will finance assistance to reforms and capacity building programs on the following dimensions: (i) design o f a customized, simple and operational RIA system; (ii) preparation o f simple and operational RIA guidelines and handbooks; (iii) piloting RIA on selected regulations; (iv) development o f a system for forward planning for new laws, regulations and amendments to ensure horizontal coordination within the government and communication o f legislative intentions to the general public; (v) improving systematic public consultation procedures with affected interests; and (vi) introducing mechanisms to monitor regulatory quality. The detailed design and implementation o f these and other activities will take into account and cooperate with localNGOs and other initiatives concerned with similar issues. C. Upgrading the quality of existing regulations and access to them. The sub-component will finance assistance to: (i)consolidate business-related laws and regulations inorder to establish with certainty the current body o fbusiness legislation inforce in Albania (at the national level); (ii) improve access to and transparency o f business regulations in force; (iii) the capacity of the DMP and relevant government officials inregulatory review build and simplification techniques such as the guillotine, scrap-and-build, and automatic review clauses; (iv) support the development o f a model for electronic one-stop-shops in government agencies; and (v) streamline and simplify regulatory regimes, such as those covered by the Government's Regulatory ReformAction Plan. Current approaches to regulatory interventions will be examined and assessed with the aim o f moving away from universal ex-ante authorization (acting as a barrier to entry) to regulatory alternatives based on notification and ex-post verification. Reviews and streamlining will be guided by general principles of regulatory quality establisheddeveloped under component "B" and apply relevant review tools and techniques introduced in training events and in on-going expert support. D.Monitoring andEvaluation The sub-component will finance the design and implementation o f a monitoi-ing system for regulatory reforms, including for the implementation o f the RIA system. In order to make an assessment on whether and to what extent the BERIS has had an impact in addressing regulatory and administrative barriers to investment, project hnds will be allocated for other ARCSs to be undertaken every two years (inYear 2 and Year 4) by a local private survey/polling company. It i s anticipated that the first ARCS will be launchedno later than March 3 1, 2008 while the second survey will be launched by March 31,2010. The results o f the second ARCS should be available before the closing date o f the project so that they can be used in assessing achievement o f the project component objectives. It is also expected that a business association or business school 39 will act as a watchdog. In addition, relatively small and well-focused annual surveys of stakeholders closely linked to business (e.g. businessmen themselves, academics, business media, etc.) will be undertaken under the auspices o f the BERIS. These surveys will be carried out by local independenthon-governmentalentities so as to strengthen the relevant stakeholders' perception about objectivity/independence/neutralityo f the results o f the surveys. This approach will also allow to gradually help build local capacity in monitoring business environment. Results o f these surveys will inform project implementatiodsupervision as well as provide indications for refocusing/adjustingproject activities duringimplementation as necessary. The capacity building efforts referred to above, and funded under the project, will include in- country workshops, seminars and study missions for key staff to good practice EU countries, training inprinciples o f good regulatory governance and techniques (e.g., RIAs), preparation o f training and guidance materials and implementation manuals; participation in regional FIAS/OECD training under the Investment Compact/Stability Pact. Private sector representatives should participatejointly inthe capacity buildingefforts together with public officials. The project mid-tern review will help assess options for the legal underpinning o f better regulation strategies, including which regulatory tools and institutions need clarification in law, andto which extent. COMPONENT1.B. STRENGTHENING THE INSTITUTIONAL CAPACITY TO DRAFTBUSINESS REGULATIONS ENABLING HEALTHY MARKET COMPETITION (Total Cost: Euro0.29 million) The overall objective o f sub-component is to strengthen the capacity o f the Competition Policy Unit(CPU) ofthe METEto assess impact ofregulations onmarket competition. To this end, the BERIS will provide support for: (i) education and training for the CPU staff, including in-house training on assessing the impact o f regulatory measures on competition and study tours to international bodies (such as OECD), to strengthen procedures to cany out investigations, improve the technical soundness o f assessments, and develop clear guidelines and criteria used for reaching decisions; (ii) specialized expert assistance in undertaking the assessment o f the impact o f state regulations on competition in 3 sectors o f the Albanian economy that will allow the CPU to develop a knowledge base that will facilitate handling on its own similar assessments in the future. The CPU's staff will also participate to relevant capacity building programs envisaged under sub-component 1.A. COMPONENT 2. STRENGTHENING THE ENTERPRISE SECTOR'S CAPABILITY TO EXPORT BY STRENGTHENING THE MsTQSYSTEM (Total Cost: Euro 5.66 million) The overall objective o f the component is to strengthen the capacity o f the MSTQ system to provide EU-compatible MSTQ services. The project would provide support for inter-institutional activities as well as support activities which are specific to each entity. Inter-institutional and government support will be provided to: Draft and implement a comprehensive medium-term strategy to bring each of the MSTQ institutions closer to EU requirements andpractices, and to meet industry 's needs. Key areas o f the strategy will include: (a) mandate; (b) legal framework; (c) organizational structure; (d) governance arrangements; (e) human resources development; (f) funding and investment policy, and (e) plan for obtaining international recognition. The strategy will also include an 40 implementation plan, reflecting sequencing and phasing o f the recommended reform activities with milestone/triggers for making additional investments. Support could also be provided to complete an assessment o f the metrology, standards and accreditation needs o f the country's most important exporting industries in terms o f GDP contribution (e.g., manufacturing, textile, and steel). Preparation o f the strategy would be one o f the first activities that the project will support under the MSTQ component. The project would also assist inimplementingthe strategy by strengthening public sector capacity to provide opportunities for increased competitiveness o f the business sector in EU and regional markets The DMP will assist the MSTQ system institutions inensuring proper coordination inpreparing andimplementing the strategy. Increase awareness of the challenges and opportunities of competing in the EU market. The project would assist the MSTQ institutions to organize and deliver information campaigns for the business sector, Government institutions, and other stakeholders. .These activities would ensure a clear alignment between the development program o f the national MSTQ system and business sector needs. The DMPwill assist the relevant entities inmobilizingthe necessary assistance. Assistance to each entity would comprise the following: (a) Strengthen the capacity of the General Directorate of Metrology and Calibration (GDMC). The BERIS will support the upgrading o f the national metrology infrastructure by financing selected metrology equipment, including mechanical, electrical, temperature, acoustic, chemical equipment, as well as reference measurement standards. The metrology equipment was selected by analyzing the basic production and foreign trade data and constitutes the core o f the Albanian metrology services. It would be used for the calibration o f most o f the measurement equipment used by domestic accredited calibration and testing laboratories (the conformity assessment bodies) and enterprises. This equipment will also help to monitor imported and exported goods and agriculture products. All the production sectors o f the country are expected to benefit from this investment, and almost all the future investments in metrology, testing and analysis will rely on this equipment for traceability to international measurement standards. This component will also finance the construction o f a modern metrology laboratory/facility with proper environmental devices. It will also assist in strengthening staff skills for headquarter and regional centers. Under this sub-component, support would also be provided for the following: (i)preparationofanationalmetrologystrategy, includinganactionplanfor consolidationof provincial and district metrology laboratories; (ii)preparation o f the technical specifications, tender documents, inspections o f the delivered equipment and assistance in familiarizing the GDMC with the operations o f the new equipment, as well as in the preparation and implementation o f an I S 0 17025 compliant quality system; and (iii) training programs in EU- based metrology services and requirements, including study tours for selected staff o f the GDMC to metrology institutes o f EU and accession countries. Support could also be provided for the GDMC's efforts to join selected EU organizations in the areas o f calibration laboratories and legal metrology, including verification and type o f approval such as EUROMET andWELMEC. (b) Strengthen the capacity of the General Directorate of Standardization (DPS). This sub- component will help the DPS establish and manage the pool o f EU standards and make them 41 electronically available to the users. This would include the provision o f the necessary specialized software to facilitate the use o f the relevant EUstandards by the industry. fl Strengthenthecapacity of theDirectorate of Accreditation (DA). This sub-component will assist inbuildingassessment capacity and develop a pool o f experts to carry out assessments o f laboratories andpersonnel. Support would also be provided for training programs inEU-based accreditation services and requirements, including study tours for selected staff o f the DA to accreditationinstitutes o f EUand accession countries. COMPONENT 3. PROJECTCOORDINATIONSUPPORT (TotalCost: Euro0.23 million) This component aims at ensuring proper implementation and coordination o f the project activities, including support for financial management, procurement, M&E requirements. It will also support organization o f periodic business surveys, integrated public information campaigns for the MSTQ system and competition policy, and building o f a more effective public-private sector dialogue on reforms. The component will also assist inthe dissemination o fprbgress made by the Government in improving the business environment among the business community, policy makers andother relevant stakeholders. As mentioned in other parts o f this document, the DMP o f the METE will handle project management, coordination and administration, including overseeing the implementation o f various components by the beneficiary entities. In particular, this Department will be assigned with the overall responsibility o f the project and will provide a link between the beneficiary entities and the Bank. The director o f DPM will be assisted by other civil servants working at the METE in order to fulfill all the project fiduciary obligations in line with World Bank requirements. The BERIS will also finance assistance to build the capacity o f the DMP in project M&E. Responsibilities o f the DMP would include: (i) disbursements, financial project reporting, audit, and procurement; (ii) monitoring, evaluation and dissemination o f the progress made by the Government in business environment reforms supported by the BERIS, including assessment o f outcomes o f capacity buildingactivities for each project component; (iii) assisting in organizing project-financed public awareness campaigns and periodic business surveys, including the ARCSs; (iv) assisting in organizing private sector participation to reforms and public-private consultation initiatives; (v) contracting external skills in procurement, financial management support, and M&E, if necessary; and (vi) contracting assistance for inter- institutional activities foreseen under the MSTQ component (e.g., preparation o f a strategy for the integrateddevelopment o fthe MSTQ system). Some IBRD funds (Euro 0.05 million) would remain unallocated to be reallocated to any activities for which more funds than anticipatedwould be needed. 42 Annex 5: ProjectCosts ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENING PROJECT Project Cost by Component (in Euro) Local Foreign Total Component 1: FacilitatingBusinessEntry and Operations 381,000 1,330,000 1,711,000 1. 1. Business Regulation 341,000 1,085,000 1,426,000 1. 2. CompetitionPolicy 40,000 245,000 285,000 Component2: StrengtheningEnterpriseSector's Capabilityto Export 78,750 5,586,250 5,665,000 2. 1. Metrology 40,000 5,020,000 5,060,000 2. 2. Standardization 0 150,000 150,000 2. 3. Accreditation 0 200,000 200,000 2.4. Inter-InstitutionalActivities 38,750 216,250 255,000 Component3: ProjectCoordinationSupport 135,000 100,000 235,000 Unallocated 50,000 50,000 Total Project Costs' 594,750 7,066,250 7,661,000 Front-end Fee 10,958 10,958 Total Financing Required 594,750 7,077,208 7,671,958 (') Identifiable taxes and duties are Euro 1.2 million, and the total project cost, net of taxes, is Euro 6.5 million. Therefore, the share ofproject cost net oftaxes i s 84%. 43 Annex 6: ImplementationArrangements ALBANIA: BUSINESSENVIRONMENTREFORM& INSTITUTIONAL STRENGTHENINGPROJECT The BERIS is expected to be implemented in four years, between FY2007 and FY2011, under the overall responsibility o f the Minister o f Economy, Trade andEnergy. The METE has assigned the DPM with the day-to-day project management and coordination. The head o f the Department will be the person responsible for the BERIS. Hehhe will be assisted by other staff o f the METE for financial management/accounting, procurement and M&E matters. TheDepartmentwill beresponsiblefor: financial management, including project accounts, payments, disbursements o f World Bankfunds andprojectbudgeting; procurement, and provision and/or mobilization o f additional procurement and/or financial management support, ifnecessary; ensuring a link betweenthe beneficiary entities and the Bank; monitoring o f project progress, evaluation o f results, preparation of progress reports, including assessment o f outcome of capacity building activities for each project component, and dissemination o f progress made by the Government in business reforms directly supported by the BERIS; assisting in the organization o f project-financed integrated public awareness campaigns (e.g., for the MSTQ system) and periodic business surveys such as the m c s s ; assisting in organizing consultation with business community and increased participation o fprivate sector players inreforms; and assisting in organizing the inter-institutional activities foreseen under the MSTQ component (such as preparation o f the strategy for the integrated development o f the MSTQ system). The Department will also assist the beneficiary entities in all aspects related to BERIS implementation. It will ensure that activities are carried out in accordance with agreed project objectives and performance targets, and that Bank's guidelines andprocedures are followed. Project beneficiary entities will be: the DMP, the GDMC, DAYDPS, and the CPU (see Chart 2). They will be responsible for implementation o f the activities o f their respective sub-components as well as monitoring and evaluation o fthe results achieved under the project. 44 Chart2. InstitutionalandImplementationArrangements Department o f MarketPolicies WORLD BANK and within METE _ . - -.- METE-. * hepartmeit'.. . ' . Policies .-ofMarket -.-.-.- --,-.' Accreditation Directorate of Standardization Monitoring and evaluation of outcomeshesults Each beneficiary entity will establish a M&E system enabling the assessment o f outcomes and results under each specific project component along the lines indicated in Table 5. To that end, the project will allocate the necessary resources. For the DMP, the implementation o f an appropriate M&E system will be one o fthe project outputs. The BERIS will include a small component to build the M&E capacity o f the DMP to monitor and assess regulatory impediments to business sector development and public sector capacity to carry out regulatory reforms. The DMP will be responsible for collecting and analyzing data from project beneficiary entities, and preparing semi-annual progress reports for the METE, the TF chairedby the Prime Minister, other policy makers, andthe Bank, reflecting a comprehensive assessment ofthe outcome o f capacity buildingactivities. The DMP will integrate project progress reports received by the project-supported institutions with governmental (e.g., Statistical Office, self-assessment procedure templates, progress reports on the implementation o f the Regulatory Reform Action Plan, etc.) and non-governmental sources (such as project-financed business surveys and ARCS updates, and non-project financed 45 reports like annual Doing Business surveys, Global Competitiveness Reports, FIAS/OECD reports, EC progress reports, etc.). Based on the collected information, the DMP will prepare annual reports on Government progress in improving the business environment and enhancing competitiveness o f the business sector. Annual reports will - inter alia - describe how Albania's performance inbusiness environment reforms compares with that of other countries of the region andinthe previousperiod, and-at a later stage - how ministries rank interm o fquantitative and qualitative indicators of compliance with the government's regulatory policy (e.g., the quality of U s , consultations with the business communities, etc.). These reports will be publishedon the Government's web-site, and widely disseminated among relevant stakeholders. Informed by international experiences, the project will encourage publication and (Web-based) dissemination o f ministries' comparative reform performance, e.g. inthe form o f scoreboards reflecting timely and satisfactory completion o freform milestoneswithin their respectiveportfolios. Every year, the DMP will organize a workshop for the presentation o f the annual report to business and donor communities, consumers, policy makers, and other relevant stakeholders. The first workshop for the 2007 annual report i s expected to be organized inMarcWApril2008. One o f the underlying goals o f the M&E support would also be to ensure gradual development o f local capacities to design and administer representative business surveys and prepare analytical reports on the measures needed to improve the business environment. M&E activities should engage local policy think-tanks, business associations and other NGOs in the design and oversight o f surveys, possibly inthe form o f an expert supervisory body. 46 TABLE5: Mc [TORINGANI EVALUATION OF PI IJECTOUTCOI ESAND R E S LTSINDICATORS Source of Source of Responsibility Needfor Policy maker and PROJECT primary supportingdata for data additional other relevant COMPONENT data collectionand capacity stakeholders [data analysis for data recipient of the production) production data DMP/CPU Doing Business DMP DMP DMP/METE,other Surveys,FIAS,ARCSs lineministries, BUSINESS Independent (2003, and2005), policymakers,business ENTRYAND business Global anddonor OPERATIONS surveys/ARCS Competitiveness communities, think- (financed Reports(WEF), EC tanks, etc. under the progressreports, BERIS) nationaleconomic surveysand statistics, etc. Consumer and CPU CPU BusinessAssociations, businesslawyers association,judges association, EC progressreports, etc. GDMC, DPS, Periodic client surveys DMP GDMC, DMPMETE,other EXPORT DA financed under the DPS, DA lineministries, CAPABILITY BERIS, ECprogress policymakers,business reports anddonor communities, think- tanks, etc. PROJECT Beneficiary All the above DMPfor All the above DMPMETE, other COORDINATIONentities, reforms lineministries, SUPPORT includingthe supportedunder policymakers,business DMP ofthe the BERISand anddonor METE for progress communities, think- madebythe tanks, etc. Governmentin improvingthe business environment 47 Annex 7: FinancialManagementandDisbursementArrangements ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENING PROJECT Country Issues. The latest draft Country Fiduciary Assessment (CFA-August 2006); draft Public Expenditure and Institutional Review (PEIR - July 2006) and draft Public Expenditure and Financial Accountability (PEFA - July 2006) confirm that improvement i s required to increase efficiency and accountability in public spending by'improving the planning, budgeting, and execution o f public investmentprojects; strengthening lines of accountability, including enabling better access to information by all stakeholders; building stronger monitoring and evaluation systems; and establishing competitive andtransparent frameworks for government purchases. The assessment o f the country financial management arrangements concluded that the public financial management has improved significantly during the last few years in areas such as budgeting,internal control, internal and external audit, though from a relatively weak base. The fiduciary area will benefit from the ongoing improvements o f the treasury system (especially an improved financial reporting enabling follow-up o f programmatic budgeting as well as giving more analytical information down to the level o f individual service units) through the implementation o f a expanded computerized treasury information system which is expected to be ready by January 2007. The proposed project will utilize these improvements by using the treasury system for the payment and reporting functions. Internal audit i s currently being fully developed to improve the government's internal control environment and the internal audit should also be utilized to monitor the implementation o f the project. A Public Internal Financial Control framework based on EUprinciples is being implemented. The supreme audit institution i s also being strengthened through EUsupport. Strengths and Weaknesses. The strengths that provide a basis o f reliance on the project financial management system include the assessed strengths o f the financial management o f GOA inthe control o f spending o f budget entities as well as the well-functioning treasury systemfor payments and reporting. The METEhas not previously implemented Bank financedprojects. Their capacity to implement financial management arrangements with the assistance o f local consultant, the suggested mitigating measures for strengthened internal control, and the use o f private auditor for the audit o fthe project accounts were found to be acceptable. Risk Analysis. The overall financial management risk, after incorporatingmitigation measures, for the project is moderate to substantial. Although the project will be implemented in an environment o f high perceived corruption, adequate mitigation measures are inplace to ensure that the residual risk is 48 acceptable. Table below summarizes the financial management assessment and risk ratings of this project: FinancialManagement RiskMitigation Measure Risk Rating Conditionsof InherentRisks with Boardor Mitigation Effectiveness Countryfinancial The EUis providing support to all these areas and the S NA management risk. The overall Bankwill support the continuation ofthe reforms riskinthepublic sector in throughanumber ofDevelopmentPolicy Loans.The Albania. Although internal audit will be carriedout by independentauditors audit and external audit acceptableto the Bank. Two designatedaccountswould institutionsare inplace, the be opened for this project- see fund flow below. An capacityis low. A expandedcomputerizedtreasury systemis being comprehensiveframework for finalized, and shouldbereadyby January 2007 which internalfinancial control is would be usedby the project after re-assessment by the lacking.Improvementsare Bank. needed inthe efficient useof resources. Programfinancial Pleasesee below M NA managementissues. Risks explained inthe controlrisk table below Bankingsector. Risk that The Bank ofAlbania i s well regardedandno additional M NA funds will be delayed or measuresare needed. diverted. Perceivedcorruption. High Bankprocurementrules andtransactionaldisbursement H NA levelof corruptionand state will be used. Inaddition, extensivesupervision ofFM capture accordingto anumber andprocurementarrangementsthroughoutthe of reports implementationof the projectwill be camedout bythe Bank.Inaddition, the detailedrisk mitigation measures are includedbelow, andthe governance filter inAnnex 11 provideadditional information on corruption mitigation measures for this project. Overall inherentrisk ControlRisk Budgeting N/A M NA Accounting The projectwill use the expandedcomputerized M NA treasury, to beready inJanuary2007, systemfor payments and reporting InternalControls Internalcontrolsof the existingtreasury systemare M NA acceptable. Funds flow Two designatedaccountswould be openedinthe Bank M NA of Albaniafromwhich the funds will betransferred to the SingleTreasury Account (STA) inlocal currency, but "earmarked" for the agreed project.Treasury will throughaccounting entries keeptrack o fthe funding goingto thisproject enablinga separatereportingon the sources anduses of the projectfunds andthe remaining balance ofthe funding from IDA and IBRD. FinancialReporting The projectwill use the expandedcomputerizedtreasury M NA system, to bereadyin January 2007, for paymentsand reporting Auditing The audit will be carriedout by independent auditors M NA acceotableto the Bank. Overall ControlRisk One local financial managementconsultant will be hired M NA to helpthe financialmanagementcapacitybuilding in the DMP. RESIDUALRISK RATING M ~~~ 49 According to the recent BEEPSreport and also inthe Transparency International (TI) report, the corruption in Albania remains a serious and widespread problem, and the corruption risk is considered high. Adequate mitigation measures are incorporated in the project, and Bank staff will closely monitor performance during implementation. These mitigation actions can be summarized as follows: (a) the project will establish a tight internal control framework; (b) the size o fprocurement packages andthe frequency o f the Bank`s prior review will be determined in a way that allows an appropriate level o f control while attempting to avoid unnecessary reviews which could cause delays; (c) the country's supreme audit institution performs external audits o f the METE, and may include any operational review as appropriate; (d) enhanced disclosure and transparency o f project-related information, including through a project website; and (e) appropriate complaints handling mechanism. All complaints from bidders, observers, or other parties should be promptly forwarded to Government and borrower for consideration and follow- up action. Implementing Entity. The BEFUS is expected to be implemented in four years, between FY2007 and FY2011,under the overall responsibility of the Minister o f Economy, Trade and Energy. The METE has assigned the DMP with the day-to-day project management and coordination. The head o f the Department will be the person responsible for the BERIS and also play a lead role in monitoring and evaluation progress. The Department will also assist the beneficiary entities in all aspects related to BEFUS implementation. It will ensure that activities are carried out in accordance with agreed project objectives and performance targets, and that Bank's guidelines and procedures are followed. All financial management activities will be carried out bythe METE. Funds Flow. The project funds will flow from the IDA and IBRD via two foreign currency-denominated designated accounts (previously called special accounts) inBank o f Albania (BOA) from which the funds will be transferred to the Single Treasury'Account (STA) in local currency, but "earmarked" for the agreed project. Treasury will through accounting entries keep track o f the funding going to this project enabling a separate reporting on the sources and uses o f the project funds and the remaining balance o f the funding from IDA and IBRD. The funding from GOA will be provided through the treasury system coded separately enabling the reporting to include the government contribution The DMP will report every three months on its use o f the funds in accordance with normal budget reporting procedures. 50 Staffing. The METE's finance and budget department has a staff o f four people. METE will assign one staff starting from the beginning o f the project to be responsible for financial management issues o f the program and foreign financing in general. One consultant will be locally hired (again starting from the beginning o f the project) for a period o f 6 months to help the assigned person. The Head o f the DMP will do the authorization and the controlling o f payments. The finance staff will do the processing o f such payments and produce withdrawal applications. Inaddition, the head o f the DMP will work closely with the finance staff and MOF to ensure that quarterly interim un-audited financial reports (previously called Financial Monitoring Reports, FMRs), annual financial statements andother progress reports are submitted timely to the Bank reflecting the implementationstatus o f the project. Accounting Policies and Procedures and internal controls. Currently, the treasury uses a manual system for its accounting books and records, which are done on a cash basis. The manualtreasury system i s also used for monthly and annual reports on cash expenditures, which are compared with the annual budgets approved by parliament. The assessment concluded that the current manual system will be able to report according to the agreed formats, although the ongoing computerization will result in fewer resources put into producing these reports for METEmost probably from 2007. As mentioned above the METE will utilize the reporting generated by the new computerized treasury system currently being implemented in all treasury offices. The Bank will review the reporting generated by the new treasury system prior to shifting from the manual system to ensure that the new system has the capability o f generating the agreed reporting. Basic government regulations for processing transactions and approving contracts exist but written guidelines, including detailed job descriptions, are generally lacking in the budget institutions. At the level o f the treasury, procedures for controls and release o f all types o f non- salary expenditure do exist and are followed. compliance with rules i s fairly high,but simplified procedures are usedoccasionally without adequatejustification. Commitment controls appear to be effective and the compliance with rules fairly high, but existing rules and procedures in some cases leadto inefficiencies inthe use o f funds. Internal Audit. METE's internal audit unit would audit the project activities as a normal part o f their work. As the capacity o f the internal audit is generally still low no specific reliance on the internal audit is planned for this project. External Audit. As o f the date o f this report, the METE does not have any overdue audits. The auditor, acceptable to the Bank, will be appointed by the Ministry o f Finance as part o f an overall agreement for the audit o f the non-revenue earning Bank-financed portfolio in Albania. Specific terms o f reference are used for the projects covered by this agreement. Despite the MOF's 51 arrangements, the METE i s responsible for delivering to the Bank, within six months o f the closing o f each fiscal year and also at the closing o f the project, the audited financial statements. The annual cost o f the audits will be covered by the GOAas part o f the portfolio audit. In addition the country's supreme audit institution performs ad hoc external audits o f the METE, and may include any operational review as appropriate. The following chart identifies the audit reports that will be required to be submitted by the project implementation agency together with the due date for submission. Audit Report Due Date Entityfinancial statements NIA Project financial statements (PFS), including SOEs and Within six months o f the end of Specialldesignated account. The PFSs include sources and each fiscal year and also at the uses o f funds by category, by components and by financing closing o f the project source; SOE statements, Statement o f designated account, notes to financial statements, and reconciliation statement. Reportingand Monitoring. The draft CFA-July 2006 indicates that the publicly available budget execution and fiscal reports appear to be reliable and frequently updated. All payments are made through the treasury system for all budget entities, including the METE and other institutions (11 in total) under the ministry's dependency. Currently, the treasury uses a manual system for its accounting books and records and on a cash basis. The manual treasury system is also used for monthly and annual reports on cash expenditures, which are compared with the annual budgets approved by parliament, Currently the METEreporting can be presented for the Ministry itself and each institution (11in total), according to economic classification (7 recurrent and 2 investment classes), according to spending unit (the institutional code), and according to source o f fund (divided inbudget funds, own resources, foreign financed, local cost, and VAT). Reports are systematically reconciled with treasury data. A computerized Treasury system was implemented in Tirana in 2005, the expansion o f the computerized treasury system to the other treasury offices is on-going and it is expected that the implementation o f computerized treasury system in all treasury offices would be completed by January 2007. The system will also enable the continued tracking o f the project and i s expected to be able to provide reliable reporting for the funding suggested for the project. Contract management reports can be provided by the system as well. The accounting for the project will be cash based with additional information provided on contractual commitments. The project accounting will be based on the reporting from the treasury system. Some o f the reports, such as Summary o f Sources, Components as per cost categories and Cost categories as per institutions will be directly generated by the treasury, and the remaining will be produced in Excel by the DMP based on the information received from treasury. 52 Project interim un-audited financial reports (IFRs) (previously known as Financial Monitoring Reports (FMRs)) will be used for project monitoring and supervision and are based on currently used reporting formats in the METE. Project financial statements will be presented in local currency, on a cash basis. DMP o f the METE will produce a full set o f IFRs every three months throughout the life o f the project. The IFRs include the following tables: (a) Summary o f Sources; (b) Project Sources and Uses o f Funds; (c) Components as per cost categories; (d) Cost categories as per institution; and (e) Procurement process monitoring. The IFR formats were agreed duringnegotiations and are included inthe financial manual. I nformation Systems. Currently, the treasury uses manual system for its accounting books and records, which are done on a cash basis. The manual treasury system is also used for monthly and annual reports on cash expenditures, which are comparedwith the annual budgets approvedbyparliament. AS mentioned above the METE will utilize the reporting generated by the new computerized treasury system currently being implemented in all treasury offices. It is expected that this system will contain adequate user access controls and will be capable o f generating financial reports for the program. The Bank will review the reporting generated by the new treasury system prior to relyingon this system. The Financial Management Manual sets out the financial management and internal controls policies and procedures and i s intended to guide staff and minimize the risk of errors and omissions, as well as delays in recording and reporting. These written standards also clarify responsibilities, including level o f authority, clear control over assets, cash, and bank accounts, andit ensurestimely and accurate financial reporting. Disbursement Arrangements. The transaction based disbursement method will be used for the Project. Once the Project becomes effective two foreign currency DesignatedAccounts will be opened inBank o f Albania, to which the funds from IDA and IBRD will be transferred. The funds will be transferred to the Treasury Single Account based on request from MOF. Full documentation in respect o f project expenditures will be kept by METE and in other implementing entities and verified by auditors on an annual basis. The Authorized Allocation for the IDA Designated Account would be EUR 250,000 and for IBRD Designated Account would be EUR 400,000. Applications for replenishment o f the Designated Accounts will be submitted on quarterly basis or when one-third o f the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow standard Bank procedures as described in the Disbursement Handbook. Monthly bank statements o fthe DesignatedAccounts, which have been reconciled, would accompany all replenishmentrequests. Counterpart-funding will be executed through treasury accounts. 53 To help facilitate early project start up, retroactive financing of up to SDR 425,000 may be required to support the project start-up. There is no plan to move to report based disbursement. Supervision Plan. Duringproject implementation, the Bankwill allocate appropriate resources ofupto three weeks . per year for the financial management supervision. The Bank will supervise the project's financial management arrangements in two main ways: (i) review the project's the quarterly interim un-audited financial reports as well as the project's annual audited financial statements and auditor's management letter; and (ii) the Bank's supervision missions, review the during project's financial management and disbursement arrangements (including a review of a sample o f SRs and movements on the Designated Account) to ensure compliance with the Bank's minimum requirements. As required, a Bank-accredited Financial Management Specialist will assist inthe supervision process. Re-assessment of treasury system The Bank will re-assess the expanded computerized treasury system before the project can rely on this system for payments and reporting. 54 Annex 8: ProcurementArrangements ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENINGPROJECT A. General Procurement for the proposedproject would be carried out inaccordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, and the provisions stipulated in the Financing Agreement. The various items under different expenditure categories are described ingeneral below. For each contract to be financed by the Loadcredit, the differentprocurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. Procurementof Works: Works procured under this project would include but not limited to: construction of a new building for the General Directorate o f Metrology and Calibration. The procurement will be done using the Bank's Standard BiddingDocuments (SBD) for all I C B and National SBD agreed with or satisfactory to the Bank. Works, estimated to cost 1,600,000 equivalent and more will be procured through TCB. Works estimated to cost less than 1,600,000 equivalent each and less than 80,000 equivalent each may beprocured through NCB and shopping procedures respectively. The national SBD will be prepared by the METE and will be reviewed and agreed with the Bank. This SBD will follow open tendering procedure o f LPP of Albania and as a minimum will comply with the conditions listed below (these apply to procurement of goods under N C B as well): (0 "Open Tendering" procedures as defined in Public Procurement Law o f Albania shall apply to all contracts; (ii) Foreignbiddersshallnotbeprecludedfrombiddingandnopreference ofany kind shall be given to national bidders in the bidding process. Government-owned enterprises in Albania shall be permitted to bid only if they are legally and financially autonomous and operate under commercial law o f the Borrower; (iii) Procuring entities shall use sample bidding documents approved by the Association; (iv) Incase ofhigher bidprices comparedto the official estimate, all bids shallnotbe rejectedwithout the prior concurrence o f the Association; (VI A single-envelope procedure shall be usedfor the submissiono fbids; 55 (vi) Post-qualification shall be conducted only on the lowest evaluated bidder; no bid shall be rejected at the time o fbidopening on qualification grounds; (vii) Bidders who contract as ajoint venture shall be heldjointly and severally liable; (viii) Contracts shall be awarded to the lowest evaluated, substantially responsive bidder who i s determined to be qualified to perform in accordance with pre-defined and pre-disclosed evaluation criteria; (ix) Post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidders; and (XI Contracts of long duration (more than 18 months) shall contain appropriate price adjustment provisions. Procurement of Goods: Goods procured under this project would include but it will not be limitedto: metrology equipment for the metrology lab and for the regional offices, furniture for the new constructed building of General Directorate o f Metrology and Calibration, goods for DPS, IT and office equipment for the DMP. Goods and equipment estimated to cost 400,000 equivalent and more will be procured through ICB. Goods and equipment estimated to cost more than 80,000 equivalent and less than 400,000 equivalent will be procured through National Competitive Biding. Goods estimated to cost less than 80,000 each may be procured through shopping on the basis o f a minimum o f three written quotations obtained. The procurement will be done usingthe Bank's SBD for all ICB and National SBD agreed with or satisfactory to the Bank.The national SBD willbepreparedbythe METEandwill bereviewed and agreedwith the Bank.This SBD will follow open tenderingprocedure o f LPP o fAlbania and as a minimumwill comply with the conditions listed above. Selection of Consultants: The consulting services to be procured through the project would include but not limited to: assistance to improve the quality o f the business regulations, hiring a pool o f consultants for business regulations, preparation o f a registry for business registration, consultancy (design, supervision and final acceptance) related to the new building o f GDMC, MSTQ strategy, consultancy to assists the DMP in carrying out fiduciary (procurement and financial management) and M&E under the project. Consulting services under the project will be procured in accordance with the Bank's Consultant Guidelines (May 2004) and by using the standardRFP and contract formats. Consultant's services would include Quality and Cost Based Selections (QCBS), Fixed Budget Selection (FBS), Consultant Qualifications (CQ), Least Cost Selection (LCS), and Individual Consultants (IC). Consultancy contracts estimated to cost 160,000 equivalent or more will be selected through QCBS. Consultancy contracts to be selected through QCBS estimated to cost over 80,000 would be advertised in UN Development Business on line version and in the Development's Gateway 's Market (dgMarket) and in local press (one newspaper o f national circulation) from which a short list o f six firms would be established. Contracts estimated at less than 160,000 would be procured following the CQ method. Individual consultants would be selected in accordance with Part V o f the Consultants Guidelines. 56 For contracts estimated to cost less than 80,000, short lists may be based solely on national firms unless qualified international firms expressed interest in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. Retroactivefinancingis foreseen for up to SDR 425,000 for expenditures under the IDA Credit incurred after April 18,2006, for: (i) training o f the staff o f the Department o f Market Policies o f the METEresponsible for the project implementation (including for civil servants responsible for project M&E); (ii) hiringo f a local procurement expert for the Department o f Market Policies; and (iii) consulting services for designing the building o f the metrology laboratory. However, these expenditures would be eligible for retroactive financing upon the condition that the employment o f consultants is carried out in accordance with World Bank Consultant Guidelines o f May 2004. Operating Costs: The Loan would finance the incremental operations costs o f the Department for Market Policies. These would be incurred in accordance to an annual budget that the DMP would prepare and submit to the Bank for its approval before any expenditure is incurred. Incremental operation costs are operating costs incurred by the DMP on account o f Project implementation, management and monitoring, including communication costs, courier and postage costs, translation and interpretation costs, bank charges, and other miscellaneous costs directly associated with the implementation o f Project activities as may be agreed with the Bank, but excluding salaries or honoraria o f officials and employees o f the Borrower, including, without limitations, salaries or honoraria o f officials and employees o f the DMP or any o f the Project Beneficiary Entities; B. Assessment of the agency's capacityto implementprocurement Procurement activities will be carried out by the DMP within the METE. This unit will handle project management, coordination and administration, including overseeing the implementation o f various components by the beneficiary entities. Inparticular, this Department will be assigned with the overall responsibility o f the project and will provide a link between the beneficiary entities and the Bank. The director o f the DMP who is a civil servant will be assisted by two existing METE staff (civil servants) one for procurement and one for the financial management (including two persons for project M &E ) in order to fulfill all the project fiduciary obligations in line with World Bank procurement guidelines. The procurement function is staffed by one procurement specialist who enjoys the status o f the civil servant. The procurement staff attended a four-day procurement training offered by the Regional Procurement Manager's office in Skopje. He got the basic knowledge on Bank procurement procedures An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by Belita Manka on April 4, 2006. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for procurement and the Ministry's relevant central unit for administration and finance The key issues and risks concerning procurement for implementation o f the project have been identified and are given below: 57 > Currently, the procurement section inthe METE is composedby one procurement specialist only. H e is familiar with public procurement law and is doing procurement for the last 4-5 years. But he has no experience in Bank procurement procedures. Furthermore, the procurement person in METE discharges alone all procurement fbnctions within the Ministry; > This existing staff does not have knowledge and experience in World Bank procurement; > This Ministry (METE) has never implemented a World Bank project before, so procurement rules andprocedures are not known to them; > The nature o f the project is quite complex and many complex contracts also (consultancy or civil works) will need to be procured and this requires experience and good control o f World Bank procedures inorder to carry out procurement without being an obstacle to viable implementation o fthe project. The corrective measures which have been agreed are as follows: > Hiring o f a local procurement expert for an initial period o f 12 months to assist the DMP to start the procurement under the project. This person should be hired immediately in > order to start procurement packages under retroactive financing; The METE procurement staff should take the lead in starting procurement process, > conducting evaluation certainly with the assistance o fthe local procurement expert; An international procurement advisor could be hired for a limited number o f days in a year to prepare and assist them inevaluation of big packages (consultancy and works) as > well as prepare a capacity buildingplanfor the METEprocurement staff; The procurement file containing up to date Bank procurement documents (guidelines, manuals, templates for procurement notices, standard biddingdocuments for procurement o f works and goods, standard request for proposal documents for consulting services, evaluation report formats, regional and simplified procurement documents, etc.) shall be > given to the METE for use; The METE i s recommended to visit the Bank's web-site frequently to ensure using the > most updated procurement documents; The METE procurement specialist is recommended to attend training organized in the > regionbythe Regional ProcurementManager's Office o fthe World Bank; Procurement analyst inthe Tirana World Bank Office will organize regular meetings and training with the METE procurement staff and will work closely with them to provide hands- on training. The overall project risk for procurement i s "Significant". C. ProcurementPlan At appraisal, the METE developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been discussed and agreed between the Borrower and the Project Team during the Project Negotiations on September 6, 2006. It will also be available in the project's database and in the Bank's external website. The 58 Procurement Plan will be updated inagreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurement planis appended at the end o f this annex. D. Frequencyof ProcurementSupervision In addition to the prior review, supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended at least two supervision missions to visit the field to carry out post review o f procurement actions. E. Detailsofthe ProcurementArrangementsInvolvingInternationalCompetition 1. Goods,Works, andNonConsultingServices 1 2 3 4 5 6 7 8 Ref. Contract Type Procurement P-Q Domestic Review Expected No Description of Method Preference byBank Bid- procurement (yesho) (PriorPost) Opening Date 1. Building ofa CW ICB d a d a Prior review November new metrology 2007 laboratory 2. Equipment for G ICB d a d a Prior review 2009-2011 metrologylab 3. Equipment for G Shopping d a d a Post review January metrologylab 2009 (multiple) (b) ICB contracts estimated to cost above 1.6 Million equivalent for civil works and above 400,000 equivalent per contract o f goods and all direct contracting will be subject to prior review bythe Bank. 59 2. ConsultingServices & (a) List o f consulting assignments with short-list o f international firms. 3 4 5 Description of Assignment Selection Review Expected Method by Bank Proposals (Prior I Submission Post) Date 1. Assistance to improve the quality o f the QCBS Prior February 2007 business regulations review 2. Consolidation o fbusiness laws CQ Prior April 2007 review 3. Establishment o f a registry o fbusiness CQ Prior June 2007 laws I review 4. Specialized assistanceinregulatory CQ I Post I2007 assessment review Design and Supervision of the civil QCBS IIPrior I December 2006 works for construction of Metrology Buildin Public Awareness Campaign FBS Prior April 2007 review (b) All single source selection and all Terms o f Reference shall be subject to Bank's prior review. (c) Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than 80,000 equivalent per contract may be composed entirely ofnational consultants inaccordance with the provisions o fparagraph2.7 o fthe Consultant Guidelines. (d) The first two contracts procuredwith CQ shall be subject to Bank's prior review. * Only first shoppingcontract for goods andfirst contract for works will be subject to prior review. 60 F) Scheduleof Procurement Expected Proposals Signing Contract (Prior / Post) Prior review April 2007 May 2007 May 2008 Prior review April 2007 May 2007 May 2008 CQ Post review April 2007 July 2007 November2007 PriorReview Post review Priorreview Postreview Postreview Post review IC Prior review Prior review Prior review Prior review Post review Prior review FinancialManagementexpert Prior review CS Prior review 61 P 1 1 6 1 8 71 Procurement Expected Expected Expected No Method Bid-Opening Contract Contract Date Signing Completion Shopping Prior review December January 2007-2008 2006 -1 ICB Prior review November December November 2007 -/2009 Shopping Postreview October 2008 December May 2009 ICB Prior review 2009-2011 Shopping Prior Review Shopping 1 Post review I 62 Annex 9: Economicand FinancialAnalysis ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENING PROJECT The BERIS activities support the Government in strengthening the capacity o f key public institutions to facilitate business entry and operations and strengthening the enterprise sector capability to export towards regional and EUmarkets. Therefore, much o f the return will be in the form o f a more-business-fiiendly regulatory environment and increased compliance o f Albanian goods and services with EUrequirements. This would ultimately result inbetter public finances (Le., more efficient Government spending and higher tax revenues). The project would also help improving governance o f public institutions, by increasing their accountability and transparency. Benefits will be measured through a wide range o f performance indicators, and will be monitored and evaluated on a regular basis. Results will also inform progress towards achieving the goals o f the private sector development pillar o f the proposedDPL. 63 Annex 10: SafeguardPolicy Issues ALBANIA: BUSINESSENVIRONMENTREFORM& INSTITUTIONAL STRENGTHENINGPROJECT The Environmental Category is "B". Under the MSTQ system component, the BERIS will also finance: (i)metrology equipment; and (ii)the civil works for the construction o f a new metrology laboratory for the GDMC. This metrology equipment is expected to have no adverse environmental impact; it is considered "clean", with no potential air or water emissions or waste products. In fact, proposed equipment makes measurement in a passive way which has no negative environmental impact. The project will finance the construction o f a modern metrology facility which will be provided with modem environmental control devices. In compliance with Bank requirements, the GDMC has prepared and disclosed a basic Environmental Management Plan (EMP) describing the standards to be followed for the construction o f the metrology laboratory. The EMP - which was disclosed on March 31, 2006 - indicates: (i) scope o f investments in laboratory as part o f the loan with regards to potential the air or water emissions and waste products; and (ii) the nature o f construction with associated potential impacts. The project will not finance any land acquisition. No land expropriation is envisaged. The METEhas identified a landparcel-about 4000 square meters -which would be used to construct a metrology laboratory o f about 1500 square meters. The Ministry has provided the Bank with confirmation o f the State ownership o f the property. Building on this land would require demolishing the existing old buildings. 64 Annex 11: Governance Filter ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENINGPROJECT The proposed BERIS gives explicit attention to governance issues in the design o f the components and activities, selection o f the project beneficiaries and definition o f implementation arrangements and o f monitoring and evaluation (M&E) systems'*. Specific measures have been incorporated in the design of the project and its components to address governance considerations inline withthe four principles ofthe Governance Filter as indicated inChart 3. Chart 3. Principlesofthe GovernanceFilter (CAS 2006) Increased transparency society and accountability de-politicization o fpublic o f public institutions GOVERNANCE sector institutions Increased roles o f local governments inpublic Proiect design and results indicators The BERIS is designed to: (i) support increased accountability o f public sector institutions; (ii) improve transparency o f reform plans and processes; and (iii)strengthen the voice o f civil society, including non-governmental stakeholders. Progress in these areas will be monitored through ad-hoc indicators (See Annex 3: Results Framework and Monitoring). : l8 The BERIS would stress the importance of M&E systems in: (i)increasing transparency in the use of public resources; (ii)increasing Government's accountability for reforms; (iii) monitoring on a regular basis time and cost for business to comply with regulations; and (iv) realigning project activities to adapt to emerging needs or changing priorities as necessary. As a well-informed civil society can be a major driver for change, the BERIS will also include programs to generate stakeholder awareness and participation. 65 Principle I: Seek greater transparency in the use ofpublic resources. At the project level: The procurement and financial management assessments have identified measures for increased transparency in the use o f project funds. The project also supports increased information disclosure towards the relevant public authorities and the public, including publication and dissemination o f regular reports indicating planned activities and achievements and correspondent resource allocation by relevant institutions. The project would also assist in improving access to information by all stakeholders. At the component level: Facilitating Business Entrvand Operations The component will assist the METE in designing and implementing sustuinuble regulatory practices and reforms. This would require - inter alia - the clear identification o f the cost implications and responsibility o f any reform actiodplan, thus contributing to greater transparency inthe use o f public funds. The component will also monitor fulfillment o f relevant reporting obligations by the DMP, including public information disclosure requirements. The proposed capacity building programs are also expected to improve financial planning o f the DMP. Small/well-focused surveys would be carried out to measure progress inthe achievement o f the project outcome indicators. They would also help to assess whether public resources have beenusedefficiently and effectively and to realign ongoing andplanned activities as needed. Enhancing the Enterprise Sector's Capability to Export to Regional and EUMarkets The component will support the MSTQ institutions in the definition o f a strategy for the integrated development o f the national MSTQ system. This strategy is expected - inter alia - to facilitate a transparent allocation o f the public resources in line with the industry's needs. Preparationo f this strategy would require close consultation with business community. Princiule 11: Support increased autonomy and de-politicization of key public sector counterpart organizations. At the project level: The Bank's involvement would help the project-supported institutions to develop professionally and implement transparent decision making processes. The Bank's support would also help these institutions to improve their reputation inthe market place as credible entities able to fulfill their mandate. The project will also assist in organizing private sector participation to reforms andpublic-private consultationinitiatives. At the component level: Facilitating Business Entrv and Operations The component will support activities aimed at improving access to and transparency o f business regulations. Improved access o f the business sector to information is expected to reduce opportunistic behavior o f government officials. Private sector participation to reforms will help reducing politicization o freforms andpublic institutions. Inaddition, it will also assist inranking line-ministries with regardto their performance inreforms andresults achieved. 66 Princivle 111: Analyze theformal (and likely future) roles of local governments, and work to develop capacity -- and local mechanisms of accountability -- toenable local governments to effectively take on these roles. At the project level: Inline with EUpractices, the institutional functions andthe delivery ofthe public services ofthe entities supported by the project are centralized. Except for regulatory reforms, no involvement o f the local government i s foreseen or desirable. Definition and implementation o f regulatory reforms will continue to require close consultation with and participation by the local government authorities. At the component level: Facilitating Business Entryand Operations The METE has already initiated consultations with the Association o f Municipalities for the removal o f administrative barriers to investment. The component will support continuation o f this process and increased participation o f relevant local government entities and officials in regulatory reforms. Selected project activities (i.e., training on principles o f good regulation, etc.) will also benefit relevant officials and entities o f the local government level Enhancing the Enterprise Sector's Capability to Export to Regional andEUMarkets A sound development o f the national MSTQ system is expected to result in increased demand from the private sector for MSTQ services as well as inincreased involvement ofprivate entities inthe deliveryofcertain services (accredited labs andtesting facilities, accreditationbodies, etc). PrincivleIV: Seek to strengthen mechanisms for advocacy and increased involvement of citizens (including nongovernmental stakeholders) to encourage improved performance of public service delivery andpolicy-making bodies. ` At the project level: The project will support activities aimed at strengthening advocacy and increased involvement of non-governmental stakeholders. This would include: business surveys conducted by independent organizations, workshops to discuss and disseminate progress reports and achievement o f outcome indicators for each project component, public information campaigns to increase awareness o f functions and duties o f public entities such as those delivering public services for private sector development (e.g., MSTQ institutions). At the component level: FacilitatingBusiness Entryand Operations A sound monitoring and evaluation system will be built within the Department o f Market Policies within METE. Business surveys such as ARCSs will be carried out on a regular basis by independent NGOs. Regular reports on progress made in regulatory reforms will be discussed and disseminated among relevant stakeholders. See Annex 6 for a more detailed explanation o f the features o f the M&E system. Advocacy i s a primary institutional function o f any regulator. The component would build the capacity o f the relevant Government institutions to consult with and involve more effectively business sector's representatives in the definition and implementation o f regulatory reforms and MSTQ strategy. It would also support information campaigns to increase awareness o f the 67 business community, civil society and government officials about the role and functions o f these entities. Enhancing the Enterprise Sector's Capability to Export to Regional and EUMarkets Small surveys will also be camed out to measure achievements o f the agreed outcome indicators and re-align project activities as needed. The introduction o f regular meetings with the beneficiaries o f MSTQ services is also expected to strengthen mechanisms for advocacy and encourage improved performance o f public service delivery. 68 Annex 12: ProjectPreparationand Supervision ALBANIA: BUSINESSENVIRONMENT REFORM& INSTITUTIONAL STRENGTHENING PROJECT Planned Actual PCNreview November 10,2005 November 10,2005 InitialPID to PIC November 28,2005 November 16,2006 Initial ISDS to PIC February24,2006 March 1,2006 Appraisal April 15,2006 April 14,2006 Negotiations May 3,2006 September6,2006 Board/RVP approval June 22,2006 October 24,3006 Planneddate of effectiveness December 31,2006 Planneddate ofmid-termreview December 2008 Plannedclosing date January 15,2011 Keyinstitutionsresponsible for preparationofthe BERIS: METE, GDMC, DPS, DA, andCPU. Bankstaff andconsultantswho worked onthe BERISincluded: Name Title Unit Silvia Minotti Team Leader ECSPF PaulaGenis OperationsOfficers ECSPF Vinod K.Goel MSTQ Expert ECSPF PeterLadegaard InvestmentOfficer FIAS/CICFA Yannis Katsoulakos Competition Policy Expert ECSPF RochelleHilton OperationsAdvisor ECSPF GretaMinxhozi Sr. Country Officer ECCAL IbrahimHackaj Sr. Operations Officer ECSSD Silvia Mauri Operations Expert ECCU4 Kirsten BurghardtPropst Country Lawyer LEGEC Nicholay Chistyakov Sr. Finance Officer LOAGl ElonaGjika FinancialManagementAnalyst ECSPS BelitaManka ProcurementAnalyst ECSPS Bankfunds expendedto date onBERISpreparation(inUS$): 1. Bankresources:280,000 2. Trust funds: 10,320 3. Total: FY06-FY07: 290,000 EstimatedApproval and Supervisioncosts (inUS$): 1. Remainingcoststo approval: 20,000 2. Estimatedannual supervisioncost: 100,000 69 Annex 13: Documentsinthe ProjectFile ALBANIA: BUSINESSENVIRONMENT REFORM & INSTITUTIONAL STRENGTHENINGPROJECT 0 Government Program (2005-2009) presented to the Albanian Parliament, September 9, 2005 0 Self-Assessment Report on Administrative Procedures for Doing Business in Albania, Ministry o fEconomy, 2005 Doing Business, years 2004 and2005 EUCARDS programs for standards, accreditation andmetrology 0Administrative and Regulatory Cost Survey,years 2003 and 2005 0 Regulatory Impact Assessment in Transitional Countries, Experience and Lessons, Colin Kirkpatrick, April 2005 0 EuropeanPartnership, December 2005 0 Competition Law, State-aid Law, andlaws establishing MSTQ systeminstitutions Environmental Management Plan and Environmental Impact Assessment Report, March 2006 Minutesofthe Quality EnhancementReview, March 16, 2006 Minutesofthe DecisionMeeting, April 6,2006 Report on the Assessment o f the Capacity o f the Proposed Implementing Agency to Conduct Procurement, World Bank, April 2006 70 " W 0 r3m m m N W d - m m m d O N N ~ d 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 a N N N N N N w N N N N N N N N a3 z s 2m s a 0 ,do? c r.oV)r(Dr .-Ua32 n P .-0a32 c n Annex 15: Countryat a Glance Albania at a dance 4l10106 Europe 8 Lower- POVERTYand SOCIAL Central middle- Albania Asia income l Developmentdiamond' 2005 Population, mid-year (millions) 3.2 473 2,442 GNI per capita (Atlas method, US$) 2,510 3,300 1,690 Life expectancy GNI (Atlas method, US$ billions) 8.1 1,557 4,116 - Average annual growth, 1999-05 i Population (%) 0.6 0.0 0.9 Laborforce (%) 1.1 0.5 1.4 GNI Gross per + primary Most recent estimate (latestyear available, 1999-05) capita enrollment Poverty(% of populationbelownationalpovedy line) 25 Urbanpopulation(% of totalpopulation) 45 64 50 ~ Life expectancyat birth(years) 74 69 71 I Infantmortality(per 1,000live births) 18 29 32 Childmalnutrition(% of children under5) 14 11 Access to improvedwater source Access to an improved water source (Om of population) 97 91 81 Literacy (% ofpopulation age 15+) 99 97 89 Gross primary enrollment (% of school-agepopulation) 104 102 112 -Albania Male 105 103 113 Lower-middle-incomegroup Female 102 101 111 KEY ECONOMIC RATIOS and LONG-TERMTRENDS 1985 1995 2004 2005 Economic ratlos' GDP (US$ billions) 2.4 7.4 8.4 Gross capitalformation/GDP 32.8 18.0 23.8 23.6 ExportsOf goods and serviceslGDP 16.2 12.5 21.5 21.7 Trade Gross domestic SavingslGDP 30.5 -4.0 2.1 1.o Gross nationalsavings/GDP 30.6 10.7 16.3 17.1 T Current account balancelGDP -0.5 -5.5 -6.5 Interest paymentslGDP Domestic Capital 0.4 0.3 0.3 Total debt/GDP 18.8 18.5 17.2 savings formation Total debt servicelexports 1.2 2.4 2.4 Present value of debtlGDP 16.1 14.4 Present valueof debvexports 42.5 37.6 Indebtedness 1985-95 1995-05 2004 2005 2005-09 (averageannualgrowth) GDP -3.6 5.8 5.9 5.5 5.8 -Albania GDP per capita 4 . 4 5.6 5.3 4.9 5.2 -Lower-middleincomeorou~ Exportsof goods and services .. 20.9 16.9 7.2 10.2 STRUCTUREof the ECONOMY 1985 1995 2004 2005 Growth of capital and GDP (%) (% of GDP) AgriCUltUre 34.6 55.8 23.5 22.8 Bo- I Industry 43.3 22.5 21.2 21.5 ManUfactUrhg i40\ Services 22.1 21.7 55.3 55.7 Householdfinal consumptionexpenditure 60.2 90.4 86.5 89.5 03 M 05 General gov't final consumptionexpenditure 9.3 13.6 9.5 9.5 Importsof goods and services 18.4 34.5 43.2 44.3 1985-95 1995-05 2004 2005 (averageannualgrowth) Growthof exports and Imports (%) Agriculture 3.1 2.1 3.6 2.6 lW T I Industry -11.4 8.0 8.2 6.6 Manufacturing 7.0 Services -2.9 9.2 6.3 8.0 40 20 I Household final consumptionexpenditure 2.0 5.1 7.0 6.9 0 General gov't final consumptionexpenditure -7.8 15.6 6.2 6.2 , W 01 02 03 04 Grosscapitalformation 13.5 12.1 3.0 4.3 -Exports &Imports Imports of goods and services .. 17.2 10.2 10.1 I O5 ~ ~~~ ~ ~ Note 2005 data are preliminaryestimates Group data are to 2004 The diamonds show four key indicators in the country (in bold)compared with its income-groupaverage Ifdata are missing,the diamond will be incomplete Albania PRICES and GOVERNMENT FINANCE II 1985 1995 2004 2005 Domesticprices Inflation(%) (%'change) S T Consumer prices 2.9 2.4 i 6 t A ImplicitGDP deflator 0.4 5.6 6.0 3.5 Governmentflnance (% of GDP, includescurrentgrants) Current revenue 50.6 22.5 24.1 23.7 00 01 02 03 04 05 Current budgetbalance 24.4 -2.2 0.1 0.3 Overallsurplusldeticit -10.7 -5.1 -3.3 I -GDP deflator +CPI TRADE I 1985 1995 2004 2005 (US$ millions) IExportand import levels(US$ mill.) Total exports (fob) 304 205 599 661 3,wo - Agricultureand food 35 117 116 Energy, mineralsand electricity 24 63 79 Manufactures 92 116 117 Total imports(cif) 344 660 2.146 2,486 Food 102 176 204 Fueland energy 80 88 129 I Capitalgoods 313 399 495 Export price index (2000=100) 121 130 W M) 01 02 03 04 I Import price index (2000=100) 127 135 ~xports lmpOrtS O5 Terms of trade (2000=100) 95 96 BALANCE of PAYMENTS 1985 1995 2004 2005 (US$ millions) Current account balance to GDP (%) Exports of goods and services 319 304 1.585 1.E22 Importsof goods and services 362 836 3,188 3,714 Resource balance -44 -532 -1,603 -1,892 Net income 1 44 174 153 Netcurrenttransfers 477 1,022 1,193 Current account balance -11 -407 -546 Financingitems (net) 32 644 595 Changesin net reserves 18 -21 -237 -49 Memo: Reservesincludinggold (US$ millions) 265 1,374 1,426 Conversion rate (DEC,local/US$) 92.7 103.8 99.9 I EXTERNAL DEBT and RESOURCEFLOWS 1985 1995 2004 2005 (US$ millions) Compositionof 2005 debt (US$ mill.) Total debt outstandingand disbursed 456 1,364 1,443 IBRD 0 0 0 IDA 109 743 743 F 62 72 Total debt service 10 66 76 IBRD 0 0 0 IDA 1 7 10 Compositionof net resourceflows Officialgrants 0 77 127 76 Officialcreditors 70 157 112 Privatecreditors 0 0 0 Foreigndirect investment(net inflows) 0 70 343 243 Portfolioequity (net inflows) 0 0 0 0 World Bank program Commitments 36 48 33 A - IBRD E . Bilateral Disbursements 43 66 71 B IDA - D -Other multilateral F Private ~ Principal repayments 0 3 4 C IMF G Short-term -- Net flows 43 63 67 Interestpayments 1 5 5 Net transfers 43 59 61 DevelopmentEconomics 4170106 73 IBRD 33359R 19°EM O N T E N E G R O 20°E 21°E S E R B I A Maja Jezercė (2693 m) ValbonValbona Valbona MALSI E MALSI ALBANIA North AlbaniaT n Alps R O P O J Ė To MADHE MADHE Podgorica Bajram Bajram Han i Hoti Han Hoti Curri Curri KoplikKoplik Drin Fierzė Fierzė H A S Lake S H K O D Ė R To Scutari Krumė Krumė Prizren Shkodėr Shkodėr P U K Ė (Scutari) (Scutari) Koman Koman PukėPukė Fush Fush Arrėz Arrėz KalimashKalimash Kukės Kukės 42°N K U K Ė S 42°N Bunė L E Z H Ė M I R D I T Ė Zall-Rec Zall-Rec Shėngjin Shėngjin Drinit Bay RubikRubik KurbneshiKurbneshi Lezhė Lezhė Rrėshen Rrėshen DriniZi Lake Peshkopi Peshkopi ShkopetShkopet Ulzės Fushė Kuge Fushė Kuge Laē Laē UlėzUlėz Rodonit Bay Burrel Burrel LAĒ LAĒ D I B R A Mamurasi Mamurasi M AT Krujė Krujė A d r i a t i c Lalėzit Bay K R U J Ė FYR Fushė Fushė Bulquizė Bulquizė DURRĖS DURRĖS Krujė Krujė MACEDONIA S e a BULQIZĖBULQIZĖ TIRANĖTIRANĖ Durrės Durrės Vorė VoVorėrė Shijak Shijak (TIRANA)(TIRANA) Durrėsit T I R A N Ė Bay Ibė Ibė Librazhd Librazhd To Kavajė Kavajė Krrabė Krrabė Struga LIBRAZHDLIBRAZHD KAVAJĖKA AJĖ PEQINPEQIN Elbasan Elbasan Lake Vidhės VidVidhėshės Perrenjas Perrenjas 41°N Peqin Peqin E L B A S A N Ohrid 41°N Karavastasė LUSHNJĖLUSHNJĖ Cėrrik Cėrrik Bay Lushnjė Lushnjė POGRADECPOGRADEC Kajan Kajan Lake Gramsh Gramsh Pogradec Pogradec Prespa KUĒOVĖKUĒOVĖ G R A M S H F I E R Kuēovė Kuēovė Little Fier Fier Marinzė Marinzė Berat Berat Lake Prespa Patos Patos Maliq Maliq B E R AT DEVOLLDEVOLL Kafaraj Kafaraj Ballsh Ballsh K O R Ē Ė Korēė Korēė Vjosė Bilisht Bilisht MALLA-MALLA- 0 10 20 30 40 Kilometers SKRAPARSKRAPAR KASTERKASTER Ēorovodė Ēorovodė Selenice Selenice 0 10 20 30 Miles Vlorės Vlorė Vlorė TEPELENĖTEPELENĖ Bay Krahės Krahės Ersekė Ersekė 19°E Mavrovė Mavrovė P Ė R M E T V L O R Ė KOLONJĖKOLONJĖ Tepelenė pelenė Kelcyrė Kelcyrė Pėrmet Pėrmet ALBANIA Vjosė GJIROKASTĖRGJIROKASTĖR SELECTED CITIES AND TOWNS P i n d u s GREECE Gjirokastėr Gjirokastėr M DISTRICT CAPITALS 40°N DELVINĖDELVINĖ 40°N NATIONAL CAPITAL Delvinė Delvinė RIVERS To Ioįnina Sarandė Sarandė MAIN ROADS Kakavija Kakavija o u n t a i n s RAILROADS GREECE SARANDĖSARANDĖ This map was produced by the Map Design Unit of The World Bank. DISTRICT BOUNDARIES The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank INTERNATIONAL BOUNDARIES Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 20°E 21°E JULY 2006