Options for a new Albanian Investment Law

1
Options for a new Albanian Investment Law

• Karim Medjad
• Andrew Thorburn
• EC-UNDP
• Cards 2002
• Support for Trade Regulation and Promotion

2
Current Legal Framework for Investment

• Law 7764 on FDI (1994)
• Law 8957 on SMEs (2002)
• Law 9107 on Free Zones (2003)
• Law 9374 on State Aid (2005)
• Draft Law on the Creation of the National
  Business Agency (2006)
• Draft Law on Concessions (2006)

3
Criticisms about existing legal framework

• Not in line with current global trade and
  investment conditions
• Does not motivate foreign investors to consider
  Albania as an investment location despite its
  strengths and opportunities

4
Objectives of this Project

• Overall objective increase the flow of Foreign
  direct investment to Albania
• Specific objective develop a new draft
  investment law for Albania that
• is acceptable to major stakeholders
• reflects international best practice
• meets SAA requirements

5
Objectives of todays workshop

• First, clarify legal issue(s). Is it a question
  of
• Law (bad / poor drafting of existing FDI law)?
• Incentives (insufficient aids / tax breaks, etc)?
• Broader legal environment (unstable legislation?
  Weak judiciary? Competition from informal
  sector?)
• Then weigh options using a discussion draft

6

Sources

• FIAS (Foreign Investment Advisory Service)
  guidelines
• Regional legal benchmarking
• sample Balkan countries
• Why?
• Often comparable constraints (SAA, recent WTO
  accession, etc.)
• Competitors

7
What is wrong with current Albanian law on FDI?

• Not much
• In fact, this law
• offers considerable guaranties to all
  foreigners (either physical or judicial persons)
  willing to invest in business in Albania
  (Source US Dept. of State, 2005)
• Can only be improved at the margin
• Recommendation leave as is
• (stability matters more than perfection)

8
What is wrong with current Incentives in Albania?

• Law on free zone
• strength consistent with regional benchmark
• weakness not operational
• question what is the objective?
• Law on State Aid
• strength aligned with EU law
• weakness too discretionary
• Need for more tangible incentives?

9
International Best Practicesthe Catalogue of
Incentives

• Investment with substantial economic impact
• profit tax exemption, subsidised sites and
  infrastructure
• Micro enterprise regime
• profit tax ceiling
• SME regime
• Grants / Loans (or guarantees) for acquisition
  of certain (high tech) equipment
• Less favored areas
• Exemption from custom duties / from tax for
  change of land use
• Employment and training grants
• Free zones
• Exemption from custom duties / VAT
• Industrial, scientific, technological parks
• Exemption from profit tax / from tax for change
  of land use
• Creation of specialist VC funding mechanisms and
  other support services
• Services with high value added
• Grants for training

10
International Best PracticesPurpose of
Incentives

• Incentivise, NOT subsidize
• Target investment that would not occur otherwise
• Make the host country more attractive to
  investors
• Improve overall economic context
• Encourage new investment with higher value added
• Address needs of existing AND future investors
• Aspirational
• Encourage change in behaviour to improve
  competitiveness
• Capital investment
• Innovation / RDD
• Training new and existing employees

11
Benchmark of Incentives in the RegionMain
Findings

• Lack of imagination
• No real objectives or targets
• Race to the bottom
• Albania cannot currently afford certain
  incentives (e.g. subsidies )
• Is a  me too  law
• Possible?
• Relevant?

12
Policy recommendations

• Avoid race to the bottom
• Clarify objectives
• Start with a few targeted incentives only
• Predictability matters more than actual
  incentives
• Use automatic triggering mechanisms
• Nominate a Responsible Agency that can provide
  institutional memory and stability
• Develop arbitration to overcome judiciary problem

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If you agree

• What incentives should be ignored because they
  wont attract investment?
• What specific incentives are a priority?
• Type of incentive?
• Target sectors / activities?
• Large (as opposed to small) investments?
• What threshold?
• How can we put law on free zones into practice?
• Resolve cadastral problems
• Concession?
• Any need for additional legislation(s)?

14
Discussion

• Draft Law
• on the
• Promotion of Investment

15
Purpose of the Draft

• Tentative  me too  law
• Illustrates what can be done, NOT what must be
  done
• For discussion only
• In red regional benchmarks / examples

16
Aim of incentives

• Capital investment (fixed assets)
• Export / Trade
• Creation of new jobs
• Enhance skills
• Encourage Innovation (RDD, Science Parks, IZ)
• Disadvantaged areas
• Concessions PPP

17
Types of incentives

• Tax deduction
• Tax credit
• Exemption from custom duties, VAT
• Exemption from social security payments

18
What could be refined?Questions for discussion

• Target key activities (e.g. services) consistent
  with
• Albanias competitive advantages (e.g. labor)
• Albanias weaknesses (e.g. infrastructure)
• Distinguish SMEs from larger enterprises?
• Diversify tax incentives (accelerated
  depreciation, loss carry-forward, etc)?
• Consistency with law on State Aid?
• Who promotes monitors incentives?