ON INVESTMENT POTENTIALS AND

PRIORITY SECTORS

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SECRETARIAT OF INVESTMENT COUNCIL

Tirana, 4 October 2019

11/4/2019

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CONTENT

I. Object and Methodology

II. Context

III. Findings & Suggestions

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Stimulate the debate on sustainable growth options and potentialresources based on:

Recent dynamics of economic growth in the country, opportunities and constraints, unutilized resources (UNCTAD Reports, OECD, WB, etc.)

Private sector perceptions on the development of a market where sustainability principles must be ensured:

o Economic growth

o optimum in using natural resources, manpower, financial capital

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Objective

• Strategies and approved documents from consecutive governments

• Consultation and analysis of laws and by-laws

Desk-research

• Direct consultations (Tirana, Korça, Shkodër) of the Secretariat with representatives of business associations/chambers, public institutions, private companies and embassies

• Selected businesses– representatives from priority sectors contributing to the growth (trade, manifacture, energy, electronic communications, Fintech, agri-tourism, tourism, insurance, construction, facon, etc.);

• Pre-structured questionnaire;

• Investment Climate Surveys 2015-2018 (2019 under process);

• Focus Group in technical level (24 September 2019)

Consultations & Focus Group Meeting

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I. METHODOLOGY

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MEETINGS

40 PEOPLE

17

CEO

II. CONTEXT: COMMENTS FROM THE BUSINES

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o Business goes well, it could go better, but country lacks of infrastructure to enable more

investment.

o The focus in the ICT - sector is a revolution. Innovation and entrepreneurship are the key

words. Are we going to digitize the economy of just administration services? The context is

how do you fit in with what the world has to offer.

o The government should have a clear vision for the next 10 years. Vision of the people -

Albania, where we should go.

o Natural Resources - It is better to have large investors in this sector and not many small

investors who are not able to invest in processing these resources.

o The image of the country - needs to be improved. Albania is a small market to be considered

as a separate potential - it should be seen in the regional context.

o Tourism-potentials for development - we will definitely find manpower and invest.

II. Context: Growth dynamics and economy profile – from Industry to Services

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Until 1990s – Industryaccounted for 58% of GDP

Today – Services account for 50% of GDP

GDP increased 2.4 times

2.7%

average

growth

7.8%

average

growth

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Economic Freedom, Challenge: Rule of Law

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52.0

54.0

56.0

58.0

60.0

62.0

64.0

66.0

68.0

70.0

2016 2017 2018 2019

Economic Freedom

Montenegro Bosnia & Herzegovina Serbia Albania Kosovo

69.3

52.7

81.5

69.1

50.4

82.4

0.0

20.0

40.0

60.0

80.0

100.0

business freedom labour freedom monetary freedom

Regulatory Efficiency

2019 2018

86.373.9

80.685.172.7

67.5

0.0

20.0

40.0

60.0

80.0

100.0

tax burdon government spending fiscal health

Government Size

2019 2018

87.8

70.0 70.0

87.8

70.0 70.0

0.0

20.0

40.0

60.0

80.0

100.0

Trade freedom Investment freedom Financial freedom

Open Markets

2019 2018

54.8

40.4

30.6

54.1

39.9

25.4

0

10

20

30

40

50

60

property rights government integrity judicial efectiveness

Rule of Law

2019 2018

The 2019 Index covers data until the second half of 2018

Western Balkans will be vulnerable to external risks such as low global economic growth

811/4/2019Source: WEO, April 2019

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Albania Bosnia and Herzegovina Kosovo Macedonia, FYR Montenegro Serbia

Growth perspective in Western Balkans

2018e 2019f 2020f

2.21.8

0

0.5

1

1.5

2

2.5

2018e 2019f

advanced markets

4.5

4.4

4.35

4.4

4.45

4.5

4.55

2018e 2019f

emerging markets

Investment contribution to growth – Public vs. Private

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Orientation, efficiency and well-management of public investment in function ofcountry’s competitiveness by improving infrastructure, institutions and services tobusiness would strengthen the impact of legislative reforms on the investmentclimate.

Foreign Direct Investment- TAP & Devoll toward completion

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Years 2013 2014 2015 2016 2017 2018 T2-2019

Reinvestment ofearnings

(million Euro) -62 38 59 42 137 224 183

0 20 40 60 80 100 120 140 160 180

Albania

Bosnia & Herzegovina

Montenegro

North Macedonia

Serbia

Announced greenfield FDI projects, by destination in No.

2018 2017 2016 2015 2014 2013 2012 2011 2010

II. Business Perceptions

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69%

8% 8% 8% 8%

What is the future challenge of the business in Albania?

14%

7%

16%

27%

2%

2%

2%

30%

0% 5% 10% 15% 20% 25% 30% 35%

Natural resources

Digitalism

Energy

Agro processing

Logistics

Services

Financial services

Tourism

Can you mention 3 potential sectors for growth?

INCENTIVES & FISCAL POLICIES

•Trend - progressive tax on personal incomes

•Different VAT rates depending on sectors (20%, 6%, 0%)

•Albania aggressive for fiscal incentives & measures that support tourism & agrotourism

•North Macedonia and Serbia more aggressive targeting investors through national and regional economic free zones and direct remuneration for any new jobs.

MATRIX

ALBANIA vs REGION

•Apply a reduced dividend tax rate from 15% to 8%

• Implements the lower minimum turnover limit for VAT purposes of 2 Million ALL

•Different VAT rates (e.g: 6% for accommodation in tourism)

•Different Tax Rate on Profits (e.g: 5% for Software)

LATEST FISCAL INSTRUMENTS IN

ALBANIA

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III. MOMENT FOR REFLECTION

• Contraction of the growth rate of investments in the economy– what challenges to be expected?

• Close to the finalization of 2 major projects (TAP+Devoll) with considerable impact in the economic growth–need for diversification?

• Some of the most important strategies for economic development under expiration - what will be the next strategies...?

• Regional strategies IRAP and REA Map-regional context requires intensification of efforts.

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III. FINDINGS – INVESTMENT CLIMATE CHALLENGES

• Difficulties in focusing policies in line with the declared vision, lack ofsustainability and supporting projects

• Lack of data and lack of strategies’ impact evaluationSTRATEGIC

• Although the low cost, still a problem availability and scarce quality for labour market

• Restructuring of skills according to the labour market needs

• Emigration of professionals and employees

HUMAN RESOURCES

• Property – e.g: Investments Support Fund still non-established

• Non-functional judiciary system

• Cases of legal uncertainty

• High frequency changes of laws and administration causing lack of institutional memory

LAWS AND INSTITUTIONS

• High competition in the region

• Difficulties in materialization of legislation in concrete examples (TEDA, Strategic Investments)

OTHERS14

Agro-processing

• Fruits-vegetables

• Made in Albania

• Medicinal herbs

• Promotes the merger and creation of farms and value added in the country

Tourism• Direct contribution 8,5% of

GDP

• 7,7% of labour force in Albania,

• 7,5% of investments in the country, number of companies increased with 26%.

• 11% of all enterprises in Albania

• Sector with incentives and focus

• Still unused resources

Natural Resources

Renewable Energy Sources (New regulatory framework

- opportunities for diversification of resources,

market)

Hidrocarbons

(still unoptimized resources, new area development research, budget impact of “renta minerare”)

TEDAComplete legal framework and

incentives

Need to target investors and for investments in

infrastructure by the State

DIGITALIZATION

Liberalized market, expanding use of internet, upgrading to electronic public services and

MAP REA

Regulatory institutions

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III. POTENTIALS – PRIORITIES AND FOCUS

IV. SUGGESTIONS - STRATEGIC

ECONOMIC MODEL

• Initiating the debate on Albania’s economic model

• Priority sectors for the coming 10-15 years

• Focuss on SME support and fiscal administration

• Monitoring, good administration and transparency of public investments coordination (central and legal)

VISION

• Strategic approach on FDI attraction

• Create an experts platform, with a concrete plan of action to identify missing data, enable detailed analysis of Investment Impact

• Identification of concrete targeting opportunities

REGULATOR/BUSINESS COMPONENT

• Institution consolidation

• Preparation and Publication of the State Real Estate Fund

• Business cooperation at the sectoral level to enable applications in innovation and information technology funds, research and development

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IV. SUGGESTION- SECTORIAL

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Completion of the legal framework on the renewable energy sector

Implementation of concrete incentives for BRE sector

Making effective the liberalization of the energy market and the Energy Stock Market/ joint MIE-MFE-BusinessWorking Groups for the sector challenges (Energy Strategy 2018-2030)

TEDA

Incentive measures on the de-fragmentation of agricultural land and promoting the competitiveness ofdomestic production

Transparency on information and progress on donor support policies for the agro-processing sector andperformance of investments under public-private contracts in the sector

Establishment of a central policy-making institution to enable cross-sectoral coordination and to push forward the digital agenda,

Creating regulatory conditions for quality services in the field of electronic communications (broadband/5G).

Completing the regulatory framework and promoting FINTECH

IV. SUGGESTION- SECTORIAL, Education & Employment

Sectoral approach to Adapt Employment Policies and Improving Workforce Skills inPriority Sectors.

Creating a systematic collaboration platform between schools and businesses.

Government to enable the leasing of state-owned buildings to support the creationof training centers to re-dimensionate the workforce skills as per marketrequirements.

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DISCUSSIONS

• Is it a unique moment to discuss on the adaptation of a new development economic model for Albania?

• Is there a need for re-prioritization in the context of positioning in regional, European and wider markets?

• Where should policies and institutions focus on addressing key challenges (such as EU integration, regional competitiveness, or labor shortages) to reach the potential of the country's economy?

• Do we need a strategy for attracting foreign capital by priority sectors in the country?

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THANK YOU!www.investment.com.al

2011/4/2019