ALBANIA – Foreign Investment in an emerging market

Average (Refer to Table 1 in Appendix 4).

“Foreign firms obtaining credit” and “protecting investors” demonstrates that Albania is advanced in certain business investment areas – projected ranking 15th out of 183 country’s in both these facets in 2010, placing Albania in the top 10%. On the contrary, dealing with construction Permits (173rd in year 2010) and Employing workers (105th in year 2010) demonstrates that the foreign direct investment firms specialising in renewable energy and civil construction will need to take these important factors into consideration when investing and starting a Greenfield project. (The World Bank Group, 2009).

 The types of business ventures that are attractive for FDI are centred on construction infrastructure and energy. Albania’s energy crisis has been caused by the annual growth rate in the demand for power. The rate has been in excess of 8% and generation has struggled to keep pace. In a recent EU report it is acknowledged that Albania had undertaken some bold steps to restructure and liberalise the energy sector. The European Bank for Reconstruction and Development (EBRD) indicates that it will provide immense financing for new power generation. Therefore, renewable energy is also an extremely attractive foreign investment option. (GMB Publishing 2009).

Hydroelectricity generation has historically provided the majority of Albania’s energy capacity and continues to represent its main generation source. Through a lack of investment funds, only 35 per cent of potential capacity for development is currently being exploited. (GMB Publishing 2009). Australian based hydroelectric energy firms have a substantial advantage in expertise in exploiting the Albanian market. Studies show that Albania has a good solar energy potential. There are no large scale PV projects currently in operation; however the installation of major solar energy projects in planned by the Albanian government in 2015. (GMB Publishing 2009). Australian solar firms have the opportunity to explore Greenfield solar energy projects.

Various US Asset Management firms are launching into the fledgling Albanian property market to take advantage of the growing mortgage market. Albania is set to benefit from its planned accession to the EU, which it expects to be completed by 2014 and has already received €100m in funding. A 2007 World Bank report highlighted Albania’s high GDP growth and a dramatic decrease in poverty. Albania has received significant investment from international bodies such as International Bank for Reconstruction and Development. (Hirst, T, 2008). Commercial and residential property is an area of foreign direct investment that is attractive with the high power of the $A as compared to the Albanian LEK currency. Currently A = 85.01 ALL (Albanian LEK) and 1ALL = 0.1177 $A. (Quick Cross Rates, 2009). When Albania enters the EU zone, their currency will become stronger and inline with Euro zone parity.

Albania’s capital markets remain amongst the most embryonic within the whole of the central and Eastern Europe region. There are encouraging steps taken to put in place the legal and regulatory framework to build a functioning stock exchange. This makes convergence with the EU easier and provides financial and banking opportunities through a foreign investment framework to operate within. (Market Access 2008).

Albania recently witnessed an impressive growth in tourism in 2009. The government of Albania announced that there was a 42 percent increase in the number of tourists visiting the country, AENews reported.  Albanian government is claiming its coasts are more beautiful than those of the Riviera. (Forbes S, 2008). With new hotels, resorts, and restaurants, the Albanian private sector in tourism has been growing an average of 30 percent for five years. The Albanian economy had the best growth in Europe; foreign investments in Albania have increased 59 percent this year. Australian firms can invest in the infant tourism industry by providing expertise, with huge profit potential. (New Europe 2009).

The Albanian government has induced an affirmative attitude towards foreign investment; its strategy to strengthen the business environment was incorporated by the removal of administrative barriers to investment. The privatisation agenda is gaining momentum and the government is encouraging foreign investment. Almost one-third of the country’s population works outside the country. The remittances they provide help alleviate poverty and drive a boom in housing construction as well as infrastructure (Euromonitor International, 2009).

Albania’s Albania’s Democratic Party government knows full well that a battle for foreign investment looms and that Albania has some catching up to do. The previous low level of foreign interest is largely due to the fact that Albania’s international image is poor, but wrongly so. Albania’s service sector, especially its restaurants and hotels, are exceptional. The hospitality is great and Albanians are an outward-looking people. They are ready for an influx of tourists. Albania is also rich in natural resources, such as oil, gas, copper, chrome and hydroelectric potential. (Austin RC 2006)

The Albanian government under Prime Minister Berisha has created an excellent environment to attract investors to Albania. Special emphasis was paid improving infrastructure. The efforts on improving the legal system to protect investors also proved significant. It was also reported that many Western European companies have chosen to escape the high taxes in Europe by investing in Albania as the latter offers the best tax system in Europe with a 10 percent flat tax. (NEWEUROPE 2009).

The Albanian government has worked to make it easier to invest and do business in Albania, instituting a one-stop shop for registering a new business. Education is also emphasized, particularly by the private sector. Since the fall of communism, Albania has been an ally of the US, supplying troops. Its positive foreign policy attitude, economic and anticorruption successes are models for other Muslim nations. (Forbes S, 2008).

 Foreign firms experience various investment restrictions in Albania. Despite some recent improvement, Albania’s business freedom remains constrained by a burdensome regulatory environment. Even though starting a business is relatively quick, obtaining a business license requires 24 additional procedures and almost 100 more days than the world average of 225 days. (The Heritage Foundation, 2009).

Foreign and domestic firms are treated equally under the law, and nearly all sectors are open to foreign investment. Agricultural land may not be purchased by foreign investors but may be leased for up to 99 years. The Albanian state can expropriate an investment or asset for the purpose of public interest, but there are no legal provisions for compensation. This can be a deterrent or restriction for an Australian firm specialising in niche Albanian markets. Non-transparent regulations, inefficient bureaucracy, and corruption also restrict and discourage foreign investment in Albania. (The Heritage Foundation, 2009).

The financial system is relatively underdeveloped by western standards, even though progress has been made. Even though many banks have expanded their services, the use of cheques and credit cards is still not widespread. Although short-term credit is available, it is extremely expensive and difficult to obtain without large collateral security. This can restrict foreign investment for an Australian firm. In addition customer service is relatively poor compared to western standards. (Macro-Accessibility 2007).

The government has separated the Tirana Stock Exchange from the central bank, but the stock market remains inactive, and no shares are listed yet. Australian financial investment firms are currently restricted considering the Stock exchange is at an infant stage. Albania’s judicial system enforces the law weakly and is one of the country’s most tainted institutions. Judges are often appointed strictly for political reasons and can be corrupt. Protection of intellectual property rights is weak, and violations of copyrights and trademarks are common, therefore Australian and foreign firms with patented investments are subject to infringements without legal protection. (The Heritage Foundation, 2009). Land rights are not well defined, especially in coastal areas, and 70 percent of all civil court cases involve property disputes. This could have adverse effects for civil engineering organisations. (The Heritage Foundation, 2009).

Corruption in Albania is perceived as widespread. Albania ranks 105th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007, a very slight improvement from previous years. Corruption pervades all sectors and levels of government. Albania is a major transit country for the traffic in arms, narcotics, contraband, and humans. (The Heritage Foundation, 2009).

There a vast advantages and gains of FDI into Albania. It stimulates economic development and has helped developing countries such as Albania when faced with economic hardship previously. (Economy Watch 2009). Multi-billion dollar projects are underway in the energy sector to produce energy from wind, and solar sources, in addition to road and infrastructure construction. With FDI in the tourism industry, construction jobs in hotels and resorts are underway, also generating employment in the Albanian services sector. (New Europe 2009).

FDI into Albania permits the transfer of technologies and assists in competition between producers within the local market. Gains in the economy include the development of skills, and human capital resources by Albanian employees of Energy, Construction and Engineering firms receiving training on the operations of