PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1916 Project Name. Business Environment Reform and Institutional Strengthening Region

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1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1916 Project Name Business Environment Reform and Institutional Strengthening Region EUROPE AND CENTRAL ASIA Sector General public administration sector (40%); Other domestic and international trade (30%); Information technology (20%); Other industry (10%) Project ID P Borrower(s) REPUBLIC OF ALBANIA Implementing Agency Ministry of Economy, Trade and Energy (TBD) Environment Category [ ] A [ ] B [ ] C [ ] FI [x] TBD (to be determined) Date PID Prepared November 15, 2005 Estimated Date of April 13, 2006 Appraisal Authorization Estimated Date of Board August 26, 2006 Approval 1. Key development issues and rationale for Bank involvement 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 unlikely to be sustained in the absence of deeper reforms to improve the business environment and foster exports. Public sector policies and institutions, and regulatory practices have not been successful in shaping a business environment in a direction condusive to stimulate competitiveness of the private sector and to reduce the size of the informal economy 1. According to the 2005 Growth Competitiveness Index 2, Albania ranked only 100 th among 117 countries, lagging behind all other European countries. Several reports 3 have identified significant regulatory and institutional gaps and weaknesses in public sector policies and institutions that affect the private sector ability to perform efficiently and competitively, and to grow, hampering investor confidence. Government strategy. The new Government - which took office in September has shown a strong commitment to improving the business environment, enhancing private sector growth, and strengthening policy design and program planning. The Government s commitment is sustained by the recognized need for sound private sector growth, and job creation. It is also underlined by the wish to further integrate with the European Union (EU). To that end, an 1 A variety of indirect estimates place the size of the grey economy at 40 to 45 percent of official GDP. 2 Developed by the World Economic Forum (WEF). The WEF defines competitiveness as the collection of factors, policies and institutions which determine the level of productivity of a country which influences the level of prosperity that can be attained by an economy. At the same time, productivity is also the key driver of the rates of return on investment, which, in turn, determine the aggregate growth rates of the economy. Thus, a competitive economy is one that is likely to grow faster over the medium to long term. 3 These reports include the 2005 Administrative and Regulatory Costs Survey (ARCS), the 2005 Financial Sector Assessment Program (FSAP), the 2005 Private Sector Development Policy Note, the 2005 Status of Land Reform and Real Property Markets in Albania, and annual Doing Business Surveys and Business Environment and Enterprise Performance Surveys, and the 2004 Country Economic Memorandum.

2 improved business environment is essential to stimulate sound private sector growth and to reduce the size of the informal economy. An improved business environment is also a mediumterm priority identified by the European Commission (EC) for Albania s preparation for further integration into the EU. The Government s priorities are also reflected in the new Country Assistance Strategy (CAS) 4, which outlines a holistic approach to sustainable economic growth based on robust private sector activity and enhanced investment. Key developmental issues. The proposed project would support the Government in addressing the following weaknesses hampering sound private sector development. Heavy regulatory burden on business and poor dialogue with the business community as a result of a fragmented approach to regulatory reforms, poor regulatory governance, and weak public expenditures management. Despite some improvements in the past two years, the Government s efforts have not produced the expected results. The approach to regulatory reforms has suffered from fragmented government interventions, in a context of weak implementation capacity, lack of inter-ministerial coordination and poor consultation with the business community. Reforms have been ad-hoc without a clear strategic vision, and have materialized in isolated changes in legislation in the areas of competency of single ministries without taking into account the impact of any legislative change on the business sector and ultimately on medium-term public finance. Weak institutional and regulatory framework to enhance competitiveness and enable healthy competition. From the viewpoint of the enterprises, main problems reside in: (i) unfair practices; and (ii) the Metrology, Standardization, Testing, Quality accreditation (MSTQ) system. Unfair practices are reported as the most problematic constraint (79%) affecting private sector development. Despite the enactment of an EU-compliant competition law and the establishment of the Competition Authority (CA) in 2004, the expected improvement in the quality of goods placed on the market, or in the level of prices for users, has not been observed. Effectiveness of the competition policy regime suffers from weak implementation capacity, poor coordination between the CA and the ex-ante regulators for the utilities sectors, and scarce public awareness of competition policy issues. Furthermore, poor legislative framework and unclear practices (e.g., unsolicited bids) for concessions and Public Private Partnerships (PPPs) have led to monopolistic markets. The MSTQ system is still at a developmental stage. Standards are outdated and not in line with EU norms; the vast majority of 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 of imported goods or to certify that the quality of their exported goods meet EU standards. In addition, in the absence of functioning certification system, the enterprise sector has few incentives and opportunities to improve the quality of products both for the domestic and foreign markets. Furthermore, the role and functions of the MSTQ system are poorly known by both consumers and the industry. Other donors activities. Albania benefits from significant donor assistance in many sectors of the economy. Donor activity in the areas of proposed intervention has been fragmented. Through the CARDS program, the EU has financed capacity building programs and equipment for the MSTQ system. However, the difficulties in financing some activities (e.g., modernization of laboratories and translation of EU standards) are delaying the harmonization of the Albanian 4 The new CAS is expected to be submitted to the Board for approval on January 31, 2006.

3 MSTQ system with the EU. CARDS programs have also supported training program for the competition institutions - which will end in and assistance to bring trade legislation closer to EU requirements. The new CARDS programs under preparation do not envisage any assistance in the financial sector. KfW is about to start a comprehensive program to improve the legal and regulatory framework for concessions and public-private partnerships. The Bank s competitive advantage. Through the careful combination of complementary investment and policy-based operations, the Bank provides a holistic approach that no donor can offer. The proposed project would assist the Government in implementing reforms in selected policy areas supported by a parallel operation, the Development Policy Loan planned for FY07. It would also be part of a package of closely linked operations, such as land management and accounting/auditing work, aimed at fostering a business environment in a direction conducive to private sector growth. The project would also create strong synergies with the ongoing Public Administration Reform project which has supported the implementation of an integrated public financial management system at the Ministry of Finance and District Treasury Offices. The Bank s involvement in the sector will help mobilize the support of the donor community, and contribute to better policy decision-making and implementation processes. Finally, the Bank s experience in other countries will help the Government in designing a coherent reform program. 2. Proposed objective(s) The overall objective of the BEEIR is to support the Government in fostering robust private sector activity and enhanced investment by strengthening the capacity of the public sector to undertake institutional reforms aimed at improving systematically the business environment in an EU-oriented context. The key project outcome will be demonstrated capacity to coordinate and implement reforms, and deliver selected public services in line with EU requirements. Key project beneficiaries would be public sector institutions involved in drafting business sectorrelated regulations, and in the delivery of public services (Measurement, Standards, Testing and Quality institutions 5, Competition Authority) for domestic and foreign businesses. Consumer protection and business associations although non-direct project beneficiaries will continue to be involved during project implementation. Expected outcomes would include: more efficient and transparent regulatory regimes and improved access to information required to start and operate a business; strengthened infrastructure to enhance the quality of Albanian products and services for the domestic and foreign markets, and increased compliance with EU requirements; and 3. Preliminary description In support to potential components of the DPL, the proposed operation would assist the Government in implementing a coherent agenda for institutional reforms aimed at improving the business environment through the following components: A. Building public sector capacities to undertake regulatory reforms on an ongoing basis 5 In Albania they comprise: the General Directorate of Metrology and Calibration, the General Directorate of Standardization and the Directorate of Accreditation.

4 The component would include the following activities: 1. Support to set up/strengthen the institutional framework for carrying out systematic regulatory reforms 6. This would include assistance to: (i) develop a regulatory policy to set out and prioritize reform targets; and (ii) build the institutional capacity to implement and supervise regulatory reforms according to clear accountability lines and transparent inter-ministerial coordination mechanisms; 2. Support to develop/strengthen appropriate regulatory tools and mechanisms to improve quality of new and existing regulations and access to information on regulations. This would include: (i) gradual introduction of properly adapted regulatory impact analysis (RIA); (ii) reviews of selected regulations with a view to eliminate and/or simplify unnecessary and discretionary regulatory practices; (iii) establishment of systematic and transparent consultation mechanisms with all the interested parties; and (iv) measures to improve access of the business sector to information about regulations affecting business activities, including steps, procedures and related costs. On all or most of the above accounts, Albania already has a range of useful experiences. These experiences, including institutional solutions applied to reduce administrative burdens, would be used as the basis for further strengthening regulatory reform efforts. B. Strengthening the public sector capacity to formulate and implement a strategy for the integrated development of the national MSTQ system in an EU-oriented context and according to the industry s needs. The component would finance the following gaps: Development Strategy for the MSTQ system. Assistance to: (i) develop and implement an integrated strategy for the development of the national MSTQ system, including definition of plans to guide the MSTQ institutions in the process for the acquisition of international recognition; (ii) stimulate industry use of innovation and MSTQ services to foster private sector s adoption of new technologies and equipment enabling improvements of products and processes; (iii) develop information campaigns for the public (consumers and businesses) to disseminate functions of the MSTQ system and business sector s requirements to export to EU markets; Metrology. Support to the General Directorate of Metrology and Calibration to upgrade its physical facilities/laboratories, equipment and staff skills for headquarters and regional centers; Standards. Support to the General Directorate of Standardization for the translation of EU standards into Albanian language to foster their use by Albanian industry; Accreditation. Support to the Directorate of Accreditation in building its assessment capacity and to develop an external pool of experts to carry out assessments of laboratories and personnel; Testing and Certification Labs. Support for the privatization (and subsequent accreditation) of public sector national and district food, veterinary and other labs in 6 The Prime Minister is about to: (i) establish a Task Force to be chaired by the Prime Minister and composed of relevant ministers responsible for the definition and monitoring of regulatory reform plans; and (ii) give the METE the mandate to implement these regulatory reforms.

5 order to promote the creation of accredited testing and certification laboratories to be owned and managed by the private sector or business associations. C. Strengthening the competition policy regime The project would assist in strengthening the competition policy regime by providing assistance to the CA to: (i) monitor and analyze the market; (ii) conduct investigations, ex officio or otherwise, on competition matters, enabling technically competent high-quality decisions; (iii) forcefully advocate for competition; (iv) enhance the dialogue with the sectoral regulators of the energy and telecom sectors; and (v) increase consumers and business awareness through wideranging public information campaigns. Possible Partnerships and Co-financing. The design of the BERIS reflects close coordination with other sectors and parts of the World Bank Group as well as major donors (e.g., EU CARDS, USAID, KfW). The team is also assisting the Government in seeking donor co-financing for the project. In this regard, the Swedish International Development Agency has expressed interest to co-finance World Bank projects supporting private and financial sector development, including the proposed project, and to assist the Government in project preparation. 4. Safeguard policies that might apply To be determined. 5. Tentative financing Source: ($m.) BORROWER/RECIPIENT 0 INTERNATIONAL BANK FOR RECONSTRUCTION AND 5 DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION 6 Total Contact point Contact: Silvia Minotti Title: Sr. Financial Sector Spec. Tel: (202) Fax: (202) sminotti@worldbank.org wb P:\ALBANIA\PFSD\BEEIR\1LENP\PID - draft for the PCN minutes BEEIR November 15.doc 11/15/ :07:00 AM