98254 Country Partnership Framework for Albania 2015 – 2019 World Bank Office Ibrahim Rugova Str., No. 34 Tirana, Albania www.worldbank.org.al Photos by Jutta Benzenberg, Blerta Kambo, Gent Shkullaku and Ana Gjokutaj Design by “Grid Cartels” Country Partnership Framework for Albania 2015 – 2019 CURRENCY EQUIVALENTS (Exchange Rate Effective, April 27, 2015) Currency Unit – Albanian Lek (LEK) 1.00 = US$ 0.00772 US$ 1.00 = LEK 130 GOVERNMENT’S FISCAL YEAR January 1 – December 31 WORLD BANK’S FISCAL YEAR July 1 – June 30 IBRD IFC MIGA Laura Tuck Karin Finkelston Keiko Honda Vice President Vice President Vice President Ellen A. Goldstein Tomasz A. Telma Ravi Vish Country Director Country Director Country Director Tahseen Sayed George Konda Frank Linden Task Team Leader Task Team Leader Task Team Leader 6 World Bank Group Country Partnership Framework For Albania Abbreviations and Acronyms AAA Analytic and Advisory Activities ADA Austrian Development Agency AFMIS Albania Financial Management Information System AGFIS Albania Government Financial Information System APL Adaptable Program Loan BEEPS Business Environment and Enterprise Performance Survey BoA Bank of Albania CEB Council of Europe Development Bank CEFTA Central European Free Trade Agreement CIT Corporate Income Tax CFRR Center for Financial Reporting Reform CMU Country Management Unit CPF Country Partnership Framework CPS Country Partnership Strategy CSC Citizen Service Center CSD Citizen-Centric Delivery DB Doing Business DDPFFA Department of Development Planning, Financing and Foreign Aid DLIs Disbursement Linked Indicators DP Democratic Party DPL Development Policy Loan DTF Doing Business Distance to Frontier EBRD European Bank for Reconstruction and Development EC European Commission ECA Europe and Central Asia ECSEE Energy Community of South East Europe EE Energy Efficiency EFF Extended Fund Facility EIB European Investment Bank EITI Extractive Industry Transparency Initiative EQ-FINREP Enhancing Quality of Financial Reporting ESP Environmental Services Project ESW Economic Sector Work EU European Union FDI Foreign Direct Investment FinSAC Financial Sector Advisory Center FIRST Financial Sector Reform and Strengthening Initiative FM Financial Management FMIS Financial Management Information System FY Fiscal Year GDP Gross Domestic Product World Bank Group Country Partnership Framework For Albania 7 Abbreviations and Acronyms GIZ Gesellschaft für Internationale Zusammenarbeit GP Global Practice HMIS Health Management Information System HPP Hydro Power Plant HSIP Health Systems Improvement Project IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICT Information Communication Technology IEG Independent Evaluation Group IFC International Finance Corporation ILO International Labor Office IMF International Monetary Fund IPS Integrated Planning System IRI Interactive Radio Instruction JIP Joint Implementation Program KfW Kreditanstalt für Wiederaufbau LADI Land Administration and Data Improvement LFS Labor Force Survey MDTF Multi-Donor Trust Fund MIGA Multilateral Investment Guarantee Agency MoF Ministry of Finance MoSWY Ministry of Social Welfare and Youth MW Mega Watt NCB National Competitive Bidding NPLs Non-performing Loans NSDI National Strategy for Development Integration OSCE Organization for Security and Cooperation in Europe P4R Program for Results PBG Policy Based Guarantee PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFR Public Finance Review PLR Performance and Learning Review PP Public Procurement PPA Public Procurement Agency PPP Public-Private Partnership PRC Procurement Review Commission RE Renewable Energy REPARIS Road to Europe: Program of Accounting Reform and Institutional Strengthening 8 World Bank Group Country Partnership Framework For Albania Abbreviations and Acronyms SAMP Social Assistance Modernization Project SCAs Savings and Credit Associations SCD Systematic Country Diagnostic SIGMA Support for Improvement in Governance and Management SME Small and Medium-sized Enterprise SORT Standardized Operations Risk-rating Tool SP Socialist Party TA Technical Assistance TF Trust Fund UN United Nations UNDP United Nations Development Programme UNICEF United Nations Children’s Fund USAID United States Agency for International Development WB World Bank WBG Word Bank Group WRIP Water Resources and Irrigation Project WSIP Water Sector Investment Project World Bank Group Country Partnership Framework For Albania 9 TABLE OF CONTENTS EXECUTIVE SUMMARY 12 I. INTRODUCTION 22 II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA 24 Social and Political Context 25 Recent Economic Developments 26 Poverty Profile 32 Development Challenges 34 III. WORLD BANK GROUP PARTNERSHIP STRATEGY 38 A. Government Program and Medium Term Strategy 39 Systematic Country Diagnostics: Albania’s Fundamental Priorities 40 B. Proposed World Bank Group Country Partnership Framework 42 Lessons from CPS Completion Report, IEG Evaluations, and Stakeholder Consultations 42 Overview of World Bank Group Strategy 43 Objectives Supported by the World Bank Group Program 51 C. Implementing the FY15 – FY19 Country Partnership Framework 60 ANAGING RISKS TO THE CPF PROGRAM 66 IV. M ANNEXES 70 10 World Bank Group Country Partnership Framework For Albania Figures Figures: Figure 1: Population Structure by labor status, percent, 2008 and 2013 Figure 2: Labor force status, household heads, 2012 Figure 3: Poverty headcount urban and rural areas, 2002–12 Figure 4: Incidence of poverty, by prefectures, 2012 Figure 5: CPF Results Framework and SCD Top Priorities Figure 6: CPF Results Framework: Core CPF Indicators Figure 7: Albania’s exports: the economy’s Achilles heel Tables: Table 1: Key Economic Indicators 2009 – 2017 Table 2: Overall Impact Assessment of SCD Policy Priorities on the Twin Goals Table 3: CPF Indicative IBRD Lending Program FY15-19 Table 4: Risk Rating Boxes: Box 1: Roma Population: Constrained Socio-Economic Opportunities Annexes: Annex 1: CPF Results Matrix Annex 2: World Bank-IFC Indicative Lending and AAA Program Annex 3: Indicative Sequencing of IBRD Lending Map of Albania World Bank Group Country Partnership Framework For Albania 11 EXECUTIVE SUMMARY Introduction i. This Country Partnership Framework (CPF) sets out the World Bank Group (WBG) program for Albania for the period FY15-19, aimed at supporting Albania’s aspiration to achieve equitable growth and in- tegration into the European Union. The WBG program will be pursued with a focus on the twin goals of reducing poverty and boosting shared prosperity. The CPF program of technical and financial support is designed selectively around a subset of top priorities identified in the Systematic Country Diagnostic (SCD), which assessed the constraints and opportunities to accelerate growth, reduce poverty and en- hance inclusion and shared prosperity. The SCD built on a longer-term effort by the WBG to strengthen the evidence base and analysis to support a process of priority setting as part of the science of delivery approach adopted by the Albanian Government upon assuming office in September 2013. Country Context ii. Albania emerged from the collapse of isolationist communism in the early 1990s as one of the poorest countries in Europe. The country then experienced rapid growth of nearly 6 percent per annum, rising into the ranks of middle income countries by 2008. The rapid pace of growth helped the country narrow the per capita income gap with the rest of Europe from 18 percent of average EU incomes in 1998 to 30 percent by 2012, and fueled aspirations to join the EU. Growth success- fully halved poverty from 25.2 percent in 2002 to 12.5 percent in 2008. Growth before 2008 was largely the product of rising domestic consumption, fueled by a real estate boom on the coast, and by remittances reaching as much as 10.8 percent of GDP from high levels of out-migration. The global and Eurozone crises in 2008 brought Albania’s growth to a near stand-still by 2012, and the country is struggling to recover, particularly given its historic ties to Europe’s poorer performing economies. Although the country avoided the recession seen elsewhere in Europe, the dramatic slowing of growth coupled with fiscal indiscipline and reform paralysis exposed severe macroeco- nomic imbalances, with a rapid escalation in public debt and arrears, unsustainable deficits in the energy sector and a sharp increase in non-performing loans in the banking sector. The poverty rate rose to 14.5 percent along with rising unemployment in the aftermath of the crises. iii. In this unfavorable context, a highly reformist Government took office in 2013 on a platform aimed at accelerating growth, creating jobs, restoring trust in government and furthering progress toward EU accession. The Government’s ambition and drive to reform are tempered by limited prior public sector experience and the country’s historically weak administrative capacity to im- plement change. Nonetheless, with adequate support from the international community, Albania now has a historic opportunity to break with the past and accelerate its path toward prosperity and integration into the EU. This opportunity has been met with an increased level of WBG support to implement deep and long-overdue structural reforms — a level of support which will be continued in the new CPF if reform commitment is sustained. 12 World Bank Group Country Partnership Framework For Albania Early wins iv. Recognizing the urgency of restoring growth and reducing poverty, the Government moved en- ergetically to begin implementing a medium-term program of fiscal consolidation and financial sec- tor stability that has included clearing public sector arrears equivalent to more than 5 percent of GDP. Concurrently, it has moved forward on structural reforms in energy and pensions that have important impacts on fiscal sustainability as well as growth and inclusion. Initial reforms were also undertaken to improve the investment climate and tackle corruption in public service delivery. The track record of the past year demonstrates the highest level of political commitment to resolve the deep-rooted issues facing the country. v. Government ownership and commitment enabled the World Bank Group to significantly step up its policy and operational engagement during 2014, including through provision of policy-based lending after a gap of five years. Government commitment also re-invigorated the dialogue on EU accession which is an overarching national goal for Albania, with support from 85 percent of the population. Al- bania’s reform progress in the past 18 months has been recognized internationally through, inter alia: i) granting of EU candidate status in June 2014; ii) Moody’s improving the outlook on its B1 rating to stable from negative and S&P raising its outlook on its B rating to positive from stable; and iii) placement for the first time in the top half of the global ranking in Doing Business 2014. Priority setting and the SCD vi. The WBG has been a trusted and highly-valued partner to Albania in the decades since the country emerged from communist isolation. In mid-2013, the WBG prepared a set of policy briefs for the incom- ing Government that, as a precursor to the SCD, systematically assessed the constraints and opportu- nities to restore growth and poverty reduction in Albania. The new Government relied on these briefs to convene an international advisory conference entitled Next Generation Albania: Shaping a New Model for Economic Growth. The Prime Minister adopted a science of delivery approach to governing, and this was reflected in his participation as a founding member of the WBG’s Global Network of Delivery Leaders. In late 2013, the new Government requested WBG technical support for an immediate priority-setting exercise based on available evidence. The WBG worked closely with the Government to define the top three priorities for each ministry as well as the top priorities for the Government as a whole, which would be the subject of close monitoring and facilitation by the Prime Minister through a newly-estab- lished Delivery Unit. The Government has since codified these priorities in its draft National Strategy for Development Integration (NSDI) which considers progress towards EU integration as an overarching national goal and outlines a vision to promote inclusive and sustainable economic growth. The Gov- ernment’s priorities to accomplish its vision include: ensuring macroeconomic and fiscal sustainability; enhancing competitiveness; making public services transparent and accountable; promoting efficient and sustainable use of natural resources, in particular water, energy and land sector development and management. vii. By mid-2014, with the Government priority-setting exercise completed, the WBG began the SCD preparation process in order to formalize and expand on the WBG’s earlier assessment of analytic work and available evidence. The value added of the SCD was to evaluate this evidence through the lens of World Bank Group Country Partnership Framework For Albania 13 the WBG’s twin goals of eliminating extreme poverty and boosting shared prosperity. Using the same evidence base, complemented with additional analysis (particularly on inclusion and shared prosper- ity), the SCD highlighted that the consumption-fueled growth model of the pre-crisis period is now exhausted and cannot be counted on to restore rapid growth in Albania, reduce poverty and improve prosperity among the bottom 40 percent of households. Restoring rapid growth is essential, as the line of sight to the twin goals is clear: aggregate growth in Albania has been strongly and reliably associated with both poverty reduction and increased welfare of the bottom 40 percent of the population. Thus, a new model is needed for the post-crisis era, based on restoring macro-fiscal sustainability and increasing domestic productivity and export-oriented growth. Accelerated growth is the sine qua non of resuming poverty reduction and increasing shared prosperity, but the inclusiveness of growth also matters. Such a model of accelerated, inclusive and sustainable growth requires deep structural reforms to release binding constraints to growth and to take advantage of Albania’s many endowments and opportunities while ensuring that the benefits of growth are inclusive and reduce regional disparities. viii. The SCD defined 12 broad priority areas for action to allow Albania to progress toward the twin goals. The Country Team prioritized these 12 further into three distinct groups based on their direct impact on achievement of the twin goals: fundamental priorities, supporting priorities and sustaining priorities. Those with the greatest direct impact on growth, poverty reduction and inclusion are consid- ered fundamental priorities, which then form the basis for selectivity in defining the WBG program within the CPF. The remaining priorities were viewed as supporting and sustaining priorities for enhancing the impact and sustainability of the fundamental priorities. The five fundamental priorities identified by the SCD are: i) restoring fiscal sustainability and financial stability; ii) establishing a high-quality business en- vironment that promotes firm growth and job creation; iii) providing clean energy efficiently, equitably and sustainably; iv) formalizing and enhancing the inclusiveness and sustainability of the land market; and v) enhancing governance, transparency and accountability of government. Country Partnership Framework: FY15-19 ix. The CPF reflects selectivity based on the fundamental priorities of the SCD that allows for ramping up support from the World Bank Group. The CPF selectively chooses only five of the twelve SCD priori- ties, and builds a program of support around this subset of priorities on the basis of additional selectivi- ty filters. In doing so, it keeps the line of sight to the twin goals and to issues of regional disparities and inclusion. In addition to the SCD-driven selectivity, the CPF is based on the following selectivity filters: i) championship – drilling down within the focus areas to interventions which have both high impact and strong government champions; ii) comparative advantage - carefully examining where the WBG can make the best contribution vis-a-vis other partners, especially the EU; iii) strategic programming – identifying where the WBG can support larger transformative operations, moving away from a prolif- eration of thinly-spread investment projects. x. The rationale to build the CPF around five fundamental priorities out of a total of twelve SCD prior- ities is based on these additional selectivity filters as follows: • Restoring fiscal sustainability and maintaining financial stability – this is an area of WBG com- parative advantage and long-standing engagement, where WBG brings established macro-fiscal analysis and a well-defined division of labor with the IMF. With championship from the highest lev- 14 World Bank Group Country Partnership Framework For Albania el of Government to tackle long-standing imbalances, the WBG has an unprecedented opportunity to support reform in this area. The WBG also has a comparative advantage among international partners in public investment management with strong body of analytic work including Public Fi- nance Reviews. • Establishing a high quality business environment – WBG engagement in Albania reflects a glob- al comparative advantage in this area (most visible through the Doing Business Report) as well as successful WBG engagement in this area in neighboring Balkan countries. The engagement ex- ploits the complementarity of IBRD and IFC, building on an ongoing IFC advisory engagement. It brings WBG expertise in assisting the Government to pursue legal and regulatory reforms aimed at improving the business environment and investment climate. The Ministry of Economic Develop- ment has been given a leadership role in this cross-cutting area, and is an effective champion and focal point for deepening reform in this area. • Providing clean, efficient, equitable and financially sustainable energy – the WBG will main- tain a high level of engagement while applying lessons learned from past engagement in the ener- gy sector in Albania. The WBG will engage in large operations expected to support a transformative turnaround in energy sector performance. Government has already begun waging a high-profile campaign to improve power sector performance. The full combined force of IBRD, IFC and MIGA will be brought to bear on the reform and investment needs of the sector. WBG engagement also leverages resources from other partners such as the EBRD and the EU. • Formalizing and enhancing inclusiveness and sustainability of land markets – the WBG is gen- erally recognized as the lead partner for land administration reforms in the Western Balkans, in- cluding Albania, where the WBG’s earlier engagement has produced improved regulatory regimes and measurable results on land registration and management. The WBG also has a successful track record of supporting environmental clean-up and land management in Albania, with important linkages to sustainable coastal tourism. • Enhancing governance, transparency and accountability of government –WBG will build on its analytic base and comparative advantage among development partners in supporting public service delivery reforms. It is well placed to support public service reforms by making them more transparent, better governed and citizen-centric. Government has made the strongest commit- ment at its highest levels to transform the relationship between citizens and Government, and has adopted a science of delivery approach to implement this which WBG has the capacity and knowl- edge to support. xi. The above rationale for engaging in these five priorities implies that other SCD priorities will not be addressed through WBG support. Among the areas where the IBRD will not commit financial resourc- es are: basic and secondary education, civil service reforms, security and rule of law, climate change, mining and agricultural production. On the last point, the IBRD will close out legacy operations, while IFC will look for opportunities to finance agribusiness projects as part of its work on the business en- vironment given the sector’s contribution to GDP and impact on employment. In transport, the IBRD will restrict engagement to the road sector, where public investment management is a central aspect of supporting fiscal consolidation. In some areas (e.g. security and rule of law) the WBG has limited com- parative advantage and EU has an active engagement. In other areas (civil service reform, agriculture), other international partners, especially the EU, will be supporting Government reform and investment needs. With respect to climate change, the EU Instrument of Pre-Accession (IPA) has earmarked signifi- cant financing for climate change initiatives. World Bank Group Country Partnership Framework For Albania 15 xii. The WBG will engage to support Government in achieving results related to the top SCD priorities, as outlined above. This engagement will consist of twelve CPF objectives grouped into three broad focus areas (see chart below): • Focus Area 1: Restoring macroeconomic balances. The SCD considers macro-fiscal sustainabil- ity and financial sector stability to be the highest priority, having a fundamental impact on the country’s ability to move to an accelerated and sustainable growth model. Albania’s economic vulnerabilities are exacerbated by its high public debt and arrears, inadequate planning and man- agement of public investments especially in transport infrastructure, unsustainable fiscal deficits and financial sector imbalances, including a large volume of non-performing loans. In the short term and beyond, these vulnerabilities can affect the generation of welfare gains and their distribu- tion among households and firms, the capacity of households and firms to accumulate assets, and the returns households and firms receive. Measures for growth acceleration will support income growth, thereby contributing to the twin goals. For instance, clearing public sector arrears is re- sulting in increased financial flows to the private sector, which is likely to raise domestic demand and contribute directly to growth and job creation. Addressing the macro-fiscal and financial chal- lenge is a pre-requisite for the country to transition to a new growth model. The strategy proposes three inter-related CPF objectives supported by a strong program of technical and financial inter- ventions to implement the agreed medium-term macro-fiscal framework. One CPF objective in this area will focus on fiscal consolidation, reforming areas with unsustainable fiscal liabilities, such as pensions. Wages and pensions were main drivers of Albania’s sharp poverty reduction prior to 2008. Pension reforms include social pensions targeted to protect the poor and the vulnerable population. Another objective will focus on enhancing transparency and predictability in financing and managing public investments, particularly in infrastructure. Better expenditure management and reduction of inefficient spending will make space for investments in social services and public infrastructure which will contribute to increased welfare of the poor and the bottom forty percent of the population through increased access to services and job creation. The third CPF objective will address financial sector weaknesses that jeopardize stability and undermine the role of finan- cial sector institutions in promoting growth and shared prosperity. • Focus Area 2: Creating conditions for accelerated private sector growth. This area will provide transformational support to Albania, through five CPF objectives, which corresponds to three of the top SCD priorities: i) establishing a high quality business environment; ii) providing clean, efficient and financially sustainable energy; and iii) formalizing and enhancing the inclusiveness and sus- tainability of the land market. The CPF objectives in this focus area support Government’s reforms through interventions that promote growth and enhance inclusion of the poor and the bottom forty percent. The SCD empirically demonstrates serious shortcomings in the business environ- ment by global standards, notwithstanding some recent progress. For this reason, improving the business environment is a CPF objective within this focus area. Central constraints include a heavy regulatory burden, inadequate framework for private investment, high informality, weak trade logistics and facilitation, barriers to labor market engagement, poor relevance of skills, and inade- quate corporate governance and financial reporting practices which limit firms’ access to financing and investment. Reforms to improve the business environment are critical for job creation, and can strengthen the link between economic growth and poverty reduction. The second CPF objective related to the business environment will support sustainable tourism development given its high potential as a key driver for growth, job creation and investments. Instability of electricity supply 16 World Bank Group Country Partnership Framework For Albania is identified as a top constraint to doing business in Albania, and is a third CPF objective within this focus area. Moreover, Government subsidies are at a fiscally unsustainable level in a sector where technical and non-technical losses had risen to nearly half of supplied electricity by 2013. Ensur- ing a reliable and affordable power supply is one of the most important foundations for increased investment, growth, job creation and poverty reduction. Development of Albania’s hydropower potential can serve as strong driver for economic growth to help disadvantaged regions overcome poverty disparities. The SCD priority related to land will be addressed through two more CPF ob- jectives. The first focuses on resolving historic land and property ownership issues which are critical for stimulating both urban and rural investments, and for overcoming poverty as well as regional disparities in the levels of poverty. The second CPF objective on land will focus on strengthening the productivity and sustainability of land use to promote development. This involves making bet- ter use of Albania’s abundant agro-forestry resources (which is an important element of inclusion in economic development). Securing property rights, formalizing land settlements and sustainable land management will have a positive impact on improving regional poverty disparities, reducing poverty and improving the welfare of the bottom forty percent by enabling more secure and pro- ductive use of assets. Economic regeneration of the coastal region through integrated tourism de- velopment will open a range of economic opportunities which will contribute towards overcoming poverty disparities. Overall in this focus area devoted to private sector growth, the WBG’s opera- tional and AAA engagement on skills, employment, and land and property rights will incorporate and address measures for reducing regional disparities and enhancing inclusion. • Focus Area 3: Strengthening public sector management and service delivery. This area addresses the fundamental SCD priority of enhancing governance, transparency, and accountability of gov- ernment. Within this SCD priority, the WBG program will selectively focus on interventions related to public sector management and service delivery, where the WBG has demonstrated comparative advantage. Civil service reforms, security and rule of law are being supported by the EU and other partners. WBG support is more directly aimed at building citizens’ trust in government, strength- ening service provision and improving service delivery and access to basic services. This includes support to attract the private sector through Public Private Partnerships (PPPs) to engage in service delivery. This program will support four CPF objectives. The first focuses on the general efficien- cy of public service delivery. A weak legal, regulatory and governance environment is seen as a key contributor to poor service quality, limited accountability to service users, and unequal service provision for the poor and vulnerable. The Albanian public sector is characterized by weak per- formance management systems and a lack of transparency and accountability in service delivery. Albania’s public services are characterized by inefficiencies in spending, poor quality, weak insti- tutional capacity, low levels of accountability, socio-economic inequalities, and a high degree of informal payments pointing to corruption. Greater trust between citizenry and government needs to be created through changes in citizens’ interface with government. The remaining three CPF objectives focus on the quality and adequacy of service provision in social protection, health and water supply to the bottom forty percent of the population, citizenry in poorer regions of the coun- try and to the vulnerable communities, including the Roma population. WBG engagement in this area will directly support government’s efforts in better targeting while improving outreach and availability of public services. World Bank Group Country Partnership Framework For Albania 17 18 Albania: Linkage between CPF Objectives and SCD Priorities CPF Results Framework SCD Top Priorities World Bank Group Focus Area 1: Focus Area 2: Focus Area 3: Priority 1: Restoring Creating conditions Strenghening public Restoring fiscal sustainability macroeconomic for accelerated sector management balances private sector growth and service delivery and maintaining financial stability Objective 1a Objective 2a Objective 3a Country Partnership Framework For Albania Support improved Contribute to Support increased Priority 2: fiscal sustainability improved business efficiency of public Establishing a high quality business environment environment service delivery Objective 1b Provide strengthened Objective 2b Objective 3b public investment Support Sustainable Support improved management Tourism equity and access to Priority 3: in transport sector Development social protection Providing clean, efficient, equitable services and financially sustainable energy Objective 1c Objective 2c Support improved Support enhanced Objective 3c financial stability energy security, Contribute to Priority 4: efficiency & supply increased efficiency Formalizing and enhancing inclusiveness and access of health and sustainability of land markets services in hospital Objective 2d sector Provide expanded and inclusive Priority 5: land/property Objective 3d registration Provide enhanced Enhancing governance, transparency coverage of water and accountability and sanitation Objective 2e services Contribute to increase productivity and sustainability of land use Note: CPF Objectives color-coded to show linkage to SCD top priorities Cross cutting themes xiii. The CPF will also have two cross cutting themes. The first is attention to gender throughout the CPF focus areas, in terms of gender-sensitive analysis, gender-disaggregated monitoring and interven- tions to narrow the economic opportunity gap for women whether related to asset ownership, access to the labor market or quality of public services. For example, the proposed land management inter- ventions will facilitate female landholding, while the on-going social safety net intervention supports targeting of female beneficiaries. xiv. The second cross-cutting theme is the EU accession process as a long-term policy anchor and popular aspiration. The entire CPF program is geared to promote reforms and investments that further Albania’s accession agenda while bringing the country closer to achieving the WBG’s twin goals. The EU has developed a 2014-2020 strategy for the second Instrument of Pre-Accession (IPA2)1. The EU has turned to the WBG as a leading partner on the ground to provide much-needed implementation support for the ambitious reform agenda embraced by the Albanian Government. In some areas, the WBG will take the financial and technical lead where the WBG has a strong analytic base, relevant expertise and sizable financial resources. In other areas, the WBG will use smaller amounts of its resources to leverage larg- er IPA2 grant funding to deepen reforms, scale up interventions and maximize their impact. The EU roadmap requires Albania to make tangible progress on minority rights, including those of the Roma population, and on promoting socio-economic inclusion of the minorities. Implementing the CPF xv. Implementation of the proposed CPF program will draw lessons from implementation of the previ- ous Country Partnership Strategy (CPS) as outlined in the CPS Completion and Learning Review, as well as lessons from client surveys and multi-stakeholder SCD and CPF consultations. Among the lessons of the past is the wisdom of using analytic and advisory work to maintain the policy dialogue in priority areas even if Government lacks the will or capacity to engage at that time. Political will evolves, cham- pions emerge and capacity is developed over time. Having knowledge and clear recommendations to offer when the time is right can position the WBG to play a leading role in reforms and contribute to bigger results on the ground. Another important lesson is to maintain a manageable portfolio size through larger, more strategic interventions in areas with high potential and strong client ownership. xvi. In terms of program size, the CPF proposes indicative IBRD lending of about US$ 1.2 billion over the five year period if reform commitment remains exceptionally strong and depending on country demand and IBRD’s financial capacity. Under this assumption, up to 40 percent of the indicative lend- ing will be in the form of budget support if performance under the agreed medium-term macro-fiscal framework remains satisfactory. In FY14, reflecting the ambitious Government reform agenda, new IBRD commitments rose above US$300 million, a record amount for Albania, including two develop- ment policy loans (DPLs) to support macro-fiscal sustainability and financial stabilization. FY15 will also be a peak year, with new commitments of more than US$400 million, including a Policy Based Guaran- tee (PBG). IFC investments are expected to be on the order of US$ 150-200 million, and MIGA, which 1. The EC’s mechanism for providing technical and financial support to candidate and pre-candidate countries World Bank Group Country Partnership Framework For Albania 19 has gross exposure of around US$143 million in Albania (mostly in the energy sector), will continue to explore guarantee opportunities. xvii. The ongoing IBRD portfolio in FY15 consists of only eight operations totaling US$450 million. In- creased lending volumes linked to a substantially deeper reform agenda will focus on larger and more transformative interventions for bigger impact. The move from an average project size of US$10 million a decade ago to the present US$50 million or more will be continued throughout the CPF period. The indicative IBRD lending program envisages 15 new operations, for an average of three new opera- tions per annum and an average size of new operations of around US$70 million. The total number of operations in the portfolio will rise as planned from 8 to a steady state of around 12-13 ongoing operations2 to reflect IBRD’s ramped up support for the ambitious reform agenda. In opting for larg- er, more strategic interventions, the WBG will also provide more concentrated technical and capacity support to key counterpart institutions. The WBG will systematically support capacity enhancement measures in new operations, complementing the ongoing support provided through other partners, especially the EU. This technical and capacity support in new operations will focus especially on strate- gy development, fiduciary management, data systems and monitoring and evaluation. xviii. The CPF Results Framework, built around three focus areas with twelve CPF objectives and clear outcome indicators for each objectives, will serve as a management tool throughout implementation. Progress in CPF milestones will be annually monitored with the client and at mid-term under the Per- formance and Learning Review (PLR). The CPF Results Framework has been prepared by multi-sectoral results teams created around each focus area. These results teams will remain active during CPF imple- mentation, and will allow joint monitoring of progress by the Global Practices (GPs) and the Country Management Unit (CMU). Risks to CPF Implementation xix. The key risk to successful implementation of the CPF relates to Government’s overriding objective to restore equitable growth in Albania. This objective—and the WBG program support for it—face the risk of prolonged stagnation in the Eurozone, and in particular in neighboring Greece and Italy. Sub- stantial macroeconomic risks exist linked to a slower than projected recovery in the Eurozone which could lead to slower than expected growth, revenue collection and fiscal consolidation. This risk could have implications for the DPLs if macroeconomic framework goes off track. This risk will be mitigated by encouraging more diverse linkages to regional and global markets beyond Albania’s traditional in- vestment, trade and migration partners. xx. Delayed fiscal consolidation including from delayed structural reforms in the energy sector could have an effect on rebuilding investor confidence and medium-term growth prospects. This could im- pact the results anticipated under the energy sector CPF objective. Continued Government commit- ment in pursuing energy sector and public finance management reforms would result in significant efficiency gains and reduce the cost of reforms. Strong WBG engagement in these areas will be an 2. The number of on-going operations varies even within an FY due to the relatively rapid approval and implementation of development policy loans. 20 World Bank Group Country Partnership Framework For Albania important strategy to mitigate this risk. xxi. Weak governance and fiduciary environment and institutional capacity are the other substantial risks that can have an impact on the CPF objectives in areas such as land, tourism development, energy and water. These risks to the accomplishment of CPF objectives will be mitigated through engagement in areas where there is strong commitment to reform, by careful sequencing of projects recognizing and addressing the country’s institutional weaknesses, and providing targeted capacity support. The WBG programming also takes into account the next election cycle, mid-way during the CPF period, which may temporarily slow program delivery. Mitigating measures include some front loading of the pro- gram to take advantage of the current reform orientation, and conducting the mid-term PLR after elec- tions to make modifications to strategy as warranted to ensure Government ownership and continued commitment to reform. A strong communication and public outreach campaign, by both Government and by the WBG, will also be an important strategy to mitigate risks. World Bank Group Country Partnership Framework For Albania 21 INTRODUCTION 22 World Bank Group Country Partnership Framework For Albania I. INTRODUCTION 1. This Albania Country Partnership Framework for FY15-FY19 presents the WBG program and the associated results framework. Albania’s last Country Partnership Strategy covered the period FY11- FY14, with the CPS Progress Report delivered on April 18, 2013. The CPF has been sequenced af- ter the preparation of the SCD, with the program of technical and financial support selectively designed around the top five fundamental priorities identified by the SCD for Albania to make progress toward achieving the WBG’s twin goals. 2. The new CPF comes at an opportune moment to ramp up the WBG’s engagement in support of reforms by the Government elected in 2013 for a four year mandate. During its first year in of- fice, the government has embarked on major reforms to address long standing macro-economic, fiscal, and structural issues (especially in energy and pensions). The progress in these areas also contributed to Albania’s becoming an EU candidate country in June 2014 which is seen as a major milestone in the country’s aspirations for EU accession. Initial progress and results are encouraging, with the Govern- ment committed to sustaining the momentum by deepening and broadening the reforms to unlock Albania’s macro-economic and structural constraints. 3. The CPF benefited from the extensive consultations first conducted during the preparation and finalization of the SCD followed by CPF consultations, and from the Bank’s technical engage- ment with the Government on its priority setting exercise. Extensive SCD and CPF consultations were conducted with over a dozen stakeholders groups across the country backed by series of country team meetings involving the IFC, MIGA and IBRD teams. Using available evidence, the Bank provided technical support to Government in its own initial priority setting exercise. The priorities arising from this exercise are now reflected in Albania’s draft NSDI, spanning a five year period from 2015-2020. The final NSDI will be available by mid-2015. World Bank Group Country Partnership Framework For Albania 23 COUNTRY CONTEXT AND DEVELOPMENT 24 World Bank Group Country Partnership Framework For Albania II. COUNTRY CONTEXT AND DEVELOPMENT 2.1 Social and Political Context 4. Albania, with a population of 2.8 million, is situated in the Western Balkans in Southeastern Europe and possesses abundant natural resources and natural beauty. Its close proximity to two large European economies – Greece and Italy – worked to its advantage as these countries hosted large number of Albanian immigrants and served as key economic partners in terms of trade, capital and technology transfer. After the fall of communism, rapid economic growth also led to social change through a rise in income levels, steep drop in poverty, internal rural to urban migration as well as large scale migration to neighboring countries for employment opportunities. 5. Albania is making progress toward a fully functioning market economy and becoming eco- nomically more prosperous. After the fall of communism in 1991, progress during the early transi- tion years was rapid. From 1993 to 1995, GDP growth was at an impressive 10 percent per year, while inflation fell back to single digits. Governance shortcomings, most notoriously the pyramid schemes, wrecked the economy from 1995-1997. The country was further impacted by the war in neighboring Kosovo at the end of the decade, which resulted in almost 430,000 Kosovar refugees. Albania demon- strated resilience by bouncing back to establish a steady growth path with poverty rate reduced by half in 2008. 6. After an initial period of high fragility, the political process demonstrated signs of emerging stability. The 2005 parliamentary elections resulted in a smooth handover of power from one govern- ing party (Socialist Party, SP) to another (Democratic Party, DP). The DP retained a fragile majority until June 2013 when the SP-led coalition secured a clear victory in national parliamentary elections. These elections were viewed as generally free and fair by the EU, Organization for Security and Cooperation in Europe (OSCE) and other regional and international observers. 7. The June 2013 elections opened a new opportunity for engagement in Albania on its me- dium-term macro-economic and structural reforms. The new coalition government with a strong parliamentary majority assumed office in September 2013. This reform-minded Government moved energetically to tackle a long overdue reform agenda, beginning with fiscal consolidation and public financial management, including eliminating arrears over time, as well as addressing structural chal- lenges in pensions and energy sectors. Next national elections are scheduled in mid-2017, giving the government time to build a foundation for renewed growth and benefit from a gradual recovery in global markets, particularly in the EU which is Albania’s main trading partner. World Bank Group Country Partnership Framework For Albania 25 8. EU integration is a national goal for Albania. Albanians have long been pro-European. Several public opinion polls over the past two decades confirm that Albanians foremost desire their country’s integration in the EU. According to a survey organized by the Centre for European Studies, approxi- mately 68 percent of Albanians consider relations with the EU as most important for Albanian Foreign Policy direction in the coming ten years, while 85 percent of Albanians desire Albania’s membership in the EU. 2.2 Recent Economic Developments 9. Albania was the fastest growing non-oil economy in Europe in the decade prior to the 2008 global financial crisis. Non-tradable sectors such as construction and services led both output and employment expansion prior to 2008, contributing nearly three-quarters to output growth and 32 per- cent to employment growth. The reallocation of resources from rural agriculture to rapidly growing urban sectors such as construction and services contributed close to 60 percent of real GDP growth. 10. Strong domestic demand drove economic growth until the 2008 global financial crisis. Dur- ing 2000-2008, total consumption (public and private) accounted for almost 64 percent of growth in total aggregate demand. High import content of domestic consumption coupled with high rates of public investment led to not only a large trade deficit (averaging 24.5 of GDP in the period 2000-08), but also widening current account deficits. The rapid expansion of consumption was fueled by: 1) re- mittances (peaking at US$1.5 billion in 2008); and 2) domestic sources such as wages, other nonwage income, strong growth in credit, and the expanding fiscal deficit. Real wages grew at an average of close to 10 percent per annum, experiencing upward pressure from the sizeable flow of remittances and unrecorded flows from undocumented activities. Domestic demand was further fueled by lax fis- cal policy and a boom in credit growth. The average annual fiscal deficit stood at 5.2 percent of GDP between 2000 and 2008. The credit to the private sector grew an average of 180 percent a year. 11. The eurozone crisis slammed the brakes on Albania’s economic expansion. Economic growth started to slow in 2009, hitting bottom in 2012-13. In 2009–12, GDP growth halved to less than 3 per- cent, declining to around 1.4 percent in 2013. Because of Albania’s close links to the Greek and Ital- ian economies, which were among the most affected in Europe, exports, remittances, and financial flows declined. While exports drove the limited expansion of the economy post-2008, they remained highly market- and product- concentrated, with significant (and increasing) physical capital content in non-labor intensive sectors such as minerals and unrefined oil. FDI inflows, which, in 2000–08, had accelerated at an annual average of 3.8 percent, slowed to 1.7 percent per annum between 2009 and 2013. Investment ratios (around 25 percent of GDP) remained much higher than gross national savings (around 15 percent of GDP). While FDI continued to finance most of the current account deficit, external debt increased since 2009, albeit remaining at a manageable 36.7 percent of GDP in 2014. Remittances declined from 10.8 percent to GDP in 2009 to 6.6 percent in 2014, and their cover of the trade deficit declined from an average of 52 percent prior to the crisis, to 42 percent in the period after. 12. The sharp slowdown in the economy post-2008 caused the demand for labor to fall. Employ- ment declined across the economy, leading to contraction in household incomes and a rise in poverty. 26 World Bank Group Country Partnership Framework For Albania The poverty increase from 10.2 to 13.6 in urban areas in 2008-12 was primarily driven by the shock to the labor market. Till 2008, poverty decline was mainly associated with wages and pension, with marginal contribution of remittances. In 2009–13, employment and labor participation rates fell, reaching 44.5 and 52.7 percent, respectively. Low-skilled workers, previously employed in non-tradable sectors, were particularly affected by the weakening of labor demand. Labor-intensive sectors were hit the most. For example, between 2008 and 2013, output and employment in the construction sector contracted at an annual average rate of 3.5 and 4.4, respectively. However, output per worker grew post-2008 (albeit at a significantly slower pace than pre-crisis), primarily thanks to increasing capital spending under a loose fiscal stance. 13. Post-2008, unemployment and economic inactivity were also associated with lower socio- economic status. Not only did inactivity rates double post-2008, but poverty rates were also signifi- cantly higher among the inactive. From 15 percent in 2008, inactivity rates reached 38 percent in 2013. Inactivity among women increased significantly during the crisis period. The decline was largest among young women (15-34 years age), with around 7 percent decline in labor force participation rate be- tween 2007-2010. Individuals living in households in which the heads were active (either employed or self-employed) or retired were less likely to be poor than individuals living in households in which the heads were unemployed or inactive (see Figure 1 below). Among households in the bottom 40, for instance, 20 percent of working-age members were in unemployment, and 24 percent were out of the labor force, compared with 13 percent and 15 percent, respectively, in the top 60 percent of the income distribution (the top 60). In 2012, the incidence of poverty was 11 percent among households headed by employed persons, 13 percent among households headed by retired persons, 22 percent among households headed by unemployed persons, and 24 percent among households headed by inactive persons. The profile of the less well-off thus shows a higher share of household heads in unemployment and inactivity among the bottom 20 and bottom 40 (see Figure 2 below). Figure 1: Population Structure by labor status Figure 2: Labor force status, household heads (2008 and 2013) (2012) 100 100 80 36% 80 53% 60 6% 60 8% 40 38% 40 15% 20 20 24% 20% 0 0 2008 2013 2008 2013 Employed Unemployed Employee Self-Employed Unemployed Inactive Population Under 15 Years Retired Out of the LF Source: INSTAT Source: World Bank analysis based on LSMS 2012 data World Bank Group Country Partnership Framework For Albania 27 14. Albania avoided recession post-2008 largely because of a high level of government spending, and its substantial and growing public debt has become a key source of macro- economic vulnerability since the crisis. As economic growth slowed after 2008, fiscal deficits and public debt increased. Inability to boost fiscal revenues because of low tax revenue collection and large tax evasion, and structural burdens on the public expenditures led to an increase in the fiscal deficit. The public debt increased from about 55 percent of GDP in 2008 to about 71 percent in 2014. The high public debt level poses the risk of elevated interest expenditures, presenting a major vulnerability to the budget and risking crowding out other more productive spending. Over 55 percent of domestic debt (almost 30 percent of GDP) is subject to considerable rollover risk, and needs to be rolled over within a year. Fiscal pressures related to electricity shortages required transfers from the budget or state guarantees on the debt to the state-owned energy company. Poor budget planning and lack of control on investment commitments led to a failure of the gov- ernment to honor its contracts and to an accumulated stock of government’s arrears to the private sector at about 5.3 percent of GDP by end-2013. These arrears also contributed to a rise in non- performing loans (NPLs), reaching nearly a quarter of total loans in 2014. 15. In 2014, Albania’s Government started to implement an ambitious program of policy measures aimed at fiscal consolidation. The combined measures on the revenue side are es- timated at 2.1 percent of GDP. The corporate income tax (CIT) rate was increased from 10 to 15 percent. To limit the impact of the tax increase on lower income Albanians and businesses, the government has introduced a progressive income tax system, abolished the tax for small busi- nesses, and reduced the profit tax rate for small businesses to half of the corporate tax rate. On the expenditure side, growth of the public wage bill was frozen in 2014, except for the police, while increases in pensions have been indexed to inflation. In the framework of fiscal consolidation important steps have been taken to improve public financial management, in particular with refer- ence to arrears repayment and prevention. Measures have been taken to avoid over-commitments in public spending, as well as producing more realistic scenarios of future growth and revenue collection. The government has signed a 3 year Extended Fund Facility (EFF) agreement with the IMF, which aims at putting debt on a declining path after the government clears all arrears to the private sector in 2016. 16. Continuing consolidation measures on both revenue and expenditure side, are expected to significantly improve fiscal balances over the medium term. Increases in government rev- enues (namely, increases in the excise tax on cigarettes, the circulation tax, the withholding tax for income from interest, rent, dividends and capital gains) in the newly implemented budget of 2015, together with improvement in tax administration, are expected to increase the revenue to GDP ratio. The government foresees further revenue measures for 2016 in its medium-term fiscal framework as it relies strongly on revenue measures to achieve the fiscal consolidation. On the expenditure side, the budget foresees a decline in social spending, resulting from a reform of the disability assistance system and a reduction in the unconditional transfers to local governments. The government also aims at gradually reducing government guarantees to the energy sector as a result of the ongoing energy sector reforms. The government has also implemented a new pen- sion law which is expected to reduce government spending on pensions over the medium-term, while implementing a social pension. Sustained fiscal consolidation combined with an increase of GDP growth are expected to put public debt on a steep downward trajectory in the medium term. 28 World Bank Group Country Partnership Framework For Albania 17. Putting the energy sector on a financially stable path is crucial to growth and fiscal consolidation. Albania’s power generation is entirely dependent on water resources, while the sector’s financial problems impede continuous supply without resorting to government support. High distribution losses (about 44 percent in 2013) and regulated tariffs that are below production costs are at the root of the financial weaknesses in the electricity generation company KESh. In the distribution sector, the low collection rates from households, businesses and public institutions have contributed to the financial woes of the publicly owned distribution company (OShEE) which faces a large unfunded deficit of US$550 million. The government’s recently approved Power Sec- tor Financial Recovery Plan focuses on: i) changes in legislation through a New Power Sector Law; ii) improving management of the energy sector companies and bill collection; and iii) technical improvements in sub-transmission, distribution, system metering and the billing system. 18. The financial sector has remained largely resilient post-2008, but risks to its stability are present. The financial sector, which strongly supported high consumption growth before the crisis, was hit with rapidly rising NPLs post-2008. Problems of portfolio quality, stemming from eas- ing of credit standards and overexposure towards sectors such as construction, came to the fore in the years after the global crisis and the NPL ratio climbed from 6.5 percent in 2008 to 25 percent by end-2014. The continued rise in NPLs is driven by a number of factors, including large govern- ment arrears of over 5 percent of GDP in 2013 (see above) which impacted corporate liquidity and borrowers’ ability to repay loans; loans in foreign currency to unhedged borrowers; judiciary weak- nesses which prolong the collateral execution process and deleveraging pressures from foreign banks as they reduce their local exposure. Credit supply to the economy slowed from an annual average of 57 percent immediately prior to the crisis (Q1 2005-Q2 2008) to 10 percent in the period Q3 2008-Q1 2014, further suppressing growth. 19. The Bank of Albania (BoA) has been vigilant in mitigating the financial sector risks through instituting capital adequacy and solvency ratios that are above international norms, and putting in place stringent provisioning rules. Credit growth returned to positive in the second half of 2014, pushed by somewhat higher demand resulting from improved business con- fidence and liquidity conditions of the private sector. However, the financial sector remains vul- nerable to further declines in profitability (for example, return on assets stood at 0.91 percent in November 2014). Moreover, the Albanian financial sector is exposed to risks related to a relatively high degree of euroization (some 60 percent of outstanding loans are in forex) and potential fur- ther deleveraging in a system dominated by subsidiaries of foreign banks, based in Austria, Greece, Italy and Turkey. In particular, there could be potential downsizing pressures on account of the Greek-owned banks in Albania (accounting for 18 percent of sector assets). The credit to GDP ratio of 39.8 percent remains much lower than other countries in the region. Access to finance for SMEs is limited and long term finance is not easily available. Stress tests show that some banks still re- main vulnerable to shocks. 20. The crisis in the Eurozone exposed vulnerabilities of the Albanian economy. With about 40 percent of the population living abroad (mainly in Greece and Italy), Albania has been among the top remittance receiving nations in the world. Remittances have trended downward since 2009 as migrant jobs were cut in the light of recession in Greece and Italy. The current account deficit corrected mainly through a decline in imports, due to lower than pre-2008 consumption and in- World Bank Group Country Partnership Framework For Albania 29 vestment. Despite maintaining a positive contribution to growth, exports post-2008 remained unsophisticated and far from reaching the country’s potential. The real effective exchange rate index has remained broadly aligned with fundamentals and has been fluctuating around a stable band since 2009. 21. Over the medium term, the economy is expected to gradually shift away from domestic- demand driven sources, and expand at an annual pace of 3 percent. The current account defi- cit is expected to widen primarily due to FDI-related imports (accounting to about 3 percent of GDP annually) related to the construction of a gas pipeline and a power plant. The current account deficit without these projects is expected to decline as the economy rebalances and export growth and share of exports in GDP continue to increase, while imports in terms of GDP are projected to decline slightly. As Albania’s growth model slowly shifts in the medium term, the contribution of consumption to growth is expected to decline from more than three-fourths in 2008 to about one- half by 2019 due to slower expansion of private consumption as growth in remittances moderates (see Table 1). At the same time, private investment is expected to grow thanks to improved confi- dence, increased inflows of FDI, and an improvement in financial intermediation. 22. As the economy reestablishes growth over the medium term, it has to address the prev- alent constraints to productive and competitive private sector which will facilitate export diversification and gains in global market shares, and ultimately boost household incomes. Overall, reforms to improve the efficiency of resource allocation in the economy, promote well- functioning markets, improve governance and strengthen institutions, improve access and equity in basic services, and ensure adequate protection for vulnerable and poor households are expected to affect household incomes positively across the distribution. For example, a strong institutional and business environment, the efficient provision of public services, and the availability of institu- tions to protect the poor and vulnerable have the potential to promote the accumulation and use of Albania’s assets and endowments. Reforms to improve the business environment and the func- tioning of markets in Albania are critical for job creation, and can strengthen the link between eco- nomic growth and poverty reduction. Private sector led job creation can contribute to increasing the quality of employment which is currently low, particularly among the less well off. Similarly, securing property rights and making the land market more inclusive is expected to have a positive impact on poverty reduction and the welfare of the bottom 40 by unleashing the productive use of land assets, particularly among population groups such as the bottom 40 and women. 30 World Bank Group Country Partnership Framework For Albania Table 1: Key Economic Indicators 2009 – 2017 Actual Est. Forecast   2010 2011 2012 2013 2014 2015 2016 2017 2018 2019   Annual percentage change unless otherwise indicated Real GDP 3.7 2.5 1.6 1.4 2.1 3.0 3.5 3.5 3.5 3.5 Contributions                     Consumption 1.9 1.6 0.9 0.0 1.9 2.2 1.0 1.3 2.0 2.2 Private consumption 1.5 1.5 0.8 0.0 1.1 2.3 0.9 1.2 1.9 2.3 Public consumption 0.4 0.1 0.1 0.0 0.9 -0.1 0.1 0.1 0.1 -0.1 Public investments -3.0 -0.1 -1.0 0.5 0.3 -0.1 0.9 0.2 -0.1 -0.1 Private investments 0.2 1.8 -2.0 0.3 0.7 1.3 1.8 2.2 1.7 1.6 Net exports 4.6 -0.8 3.7 0.6 -0.8 -0.4 -0.2 -0.2 -0.1 0.1 Exports 5.0 2.4 -0.2 2.0 4.3 2.3 1.9 2.9 2.5 2.5 Imports -0.3 -3.3 3.7 -1.4 -5.1 -2.7 -2.1 -3.1 -2.6 -2.4 Unemployment rate* 14.2 14.3 13.9 16.1 17.2           CPI (period average) 3.6 3.4 2.0 1.9 1.7 2.1 2.6 2.9 3.0 3.0 Fiscal accounts Percent of GDP unless otherwise indicated Expenditures 29.3 28.9 28.2 28.9 31.7 32.4 30.8 28.7 28.6 28.1 of which: arrears clearance         2.5 1.3 1.0       Revenues 26.2 25.4 24.7 23.7 25.9 27.6 28.2 28.2 28.2 28.2 General government balance** -3.1 -3.5 -3.4 -5.2 -5.6 -4.8 -2.6 -0.5 -0.4 0.1 Primary balance 0.3 -0.4 -0.3 -2.0 -2.8 -1.5 0.6 2.6 2.5 3.0 PPG (eop) 57.7 59.4 62.0 70.0 71.0 70.7 68.1 64.4 60.9 57.1 Selected monetary indicators  Annual percentage change unless otherwise indicated Broad money growth 12.5 9.2 5.0 2.3 3.8 5.5 7.0 7.6 7.5 7.3 Credit to non-government 10.1 10.4 1.4 -1.4 3.3 4.9 6.6 7.4 7.7 8.0 Balance of payments  Percent of GDP unless otherwise indicated Current account balance -11.3 -13.2 -10.2 -10.6 -13.9 -15.1 -14.9 -13.2 -10.5 -8.7 Imports of G&S** 53.2 56.8 52.1 52.9 56.1 56.6 56.5 55.2 52.9 51.6 Exports of G&S** 32.5 34.0 33.4 35.0 36.3 36.0 35.9 36.3 36.9 37.4 Foreign direct investment (net) 8.8 6.6 6.8 9.5 8.3 10.1 11.2 10.3 8.1 7.1 Gross reserves in months of 4.4 4.5 4.6 4.3 4.1 4.1 4.1 4.1 4.1 4.1 imports of G&S** *Labor force survey data **G&S refers to goods and services           World Bank Group Country Partnership Framework For Albania 31 2.3 Poverty Profile 23. Despite a long period of sustained growth resulting in GDP per capita of US$8,123, Albania is still one of the poorest countries in Europe. The strong economic growth lifted a significant number of people out of poverty. Between 2002 and 2008, poverty declined from 25.4 percent to 12.5 percent. Economic growth was inclusive, with consumption among the bottom 40 percent of the distribution grow- ing more quickly than the average for the country. Evidence suggests that positive consumption growth disproportionately benefited the less well off, with poverty falling by half in both rural and urban areas. Box 1: Roma Population: Constrained Socio-Economic Opportunities According to the official 2012 census, the Roma population represents 0.3 percent of the population or about 9000, but this may reflect underreporting due to fears of discrimination. Others estimate the size of the Roma population in Alba- nia to be 3% (Council of Europe) 3.2 percent of the Albanian population in 20103. Roma tend to belong to the poorest quintiles in Albania. Overall, poverty rates are higher among the Roma than among the non-Roma: controlling for other factors, Roma ethnicity was associated with a 170 percent increased likelihood of being poor.4 5 The Roma population in Albania has a lower stock and utilization of assets than the non-Roma. Across indicators, Roma have poorer outcomes. While literacy rates are around 95 percent among non-Roma neighbors, they reach only 65 percent among the Roma6. Malnutrition among Roma children is as high 65 percent compared to 24 percent for non-Ro- ma neighbors, with lifelong implications for health and cognitive development. In 2011, only a third of Roma children were enrolled in preschool. The 2011 UNDP/EC/WB Regional Roma Survey reports young Roma adults (aged 16-24) had completed only 3.9 years of schooling on average, compared to 10 years average of their non-Roma neighbors. The Roma population in Albania has relatively lower access to basic social services. The share of the Roma popu- lation without access to improved water sources (i.e. piped water in dwelling) is 30 percent, compared to 18 percent in non-Roma households. Similarly, large inequalities exist in access to improved sanitation, with 61 percent of the Roma having no access to household sanitation facilities, compared to 34 percent for the non-Roma. Roma population tend to have less access to economic opportunities, thus excluding them from contributing to and benefitting from economic growth. While small differences are found in employment and unemployment rates, differences are large in terms of the quality of employment. For instance, the Roma are more likely than the non-Roma to be in informal work (90 percent versus 71 percent, respectively. High rates of poverty and low rates of education perpet- uate the cycle of poverty and increase the risks of exclusion. 3. European Commission. 2011. Annex of the 2011 EU Roma Framework. Brussels. 4. EU Agency for Fundamental Rights, United Nations Development Programme, and UNDP/EC/WB. 2011. “Regional Roma Survey.” www.eurasia.undp.org. 5. World Bank analysis using LSMS data from 2005, 2008, and 2012. 6. UNDP/EC/WB Regional Roma Survey, 2011. www.eurasia.undp.org 32 World Bank Group Country Partnership Framework For Albania The global financial crisis eroded these gains Figure 3: Poverty headcount urban and rural areas in poverty reduction, and poverty head- (2002–2012) count, measured as the fraction of the popu- 30 29.6% lation with incomes below US$ 60 per person per month, increased to 14.3 percent in 2012. 25 24.2% Overall, poverty rates are higher among the 20 Roma population than among the non Roma 19.5% population. The Roma population tends to 15 14.7% 15.3% belong to the lowest quintile as described 13.6% in Box 1. Albania continues to have one of 11.2% 10 the highest poverty rates in Europe. How- 10.2% ever, despite slowdown in the economy and 5 increase in poverty, inequality measured by the Gini index shows a marginal decline from 0 28.2 in 2008 to 26.9 in 2012. Rural Urban 2002 2005 2008 2012 24. The profile of the poor and the bottom Source: World Bank analysis based on LSMS data 40 percent of population shows disparities across groups and along several dimen- Figure 4: Incidence of poverty, by prefectures, sions. The poor and the bottom 40 percent 2012 of population are not concentrated in either urban or rural areas (see Figure 3 below). In 2012, around 51 percent of the poor were liv- ing in urban and 49 percent in rural areas. A similar pattern is evident among the bottom 40 percent of the population, 48 percent of whom were living in rural areas, compared with 45 percent of the top 60 percent of the income distribution. Regional differences in poverty are significant. Among the 12 pre- fectures, Kukes is the poorest with 22 percent of population living below the poverty line, followed by Fier and Lezhe, both with 18 per- cent of the poor (see Figure 4 below). There is strong correlation between the level of edu- cation and poverty. The incidence of poverty is highest in households in which individuals have not completed primary education, at 15 percent, while only 3 percent among house- holds with individuals who have attained some level of tertiary education. Similarly, the bottom 40 percent of the population are less well educated than the rest of the pop- Source: World Bank ulation. Inequalities in education are high analysis on LSMS 2012 data. among the Roma population: while literacy Note: higher poverty - darker blue World Bank Group Country Partnership Framework For Albania 33 rate for the non Roma population is around 95 percent, it is only 65 percent among the Roma popula- tion. Similarly, significant gaps in living standards are also observed for the Roma population with their much lower human capital and economic opportunities as described in Box 1. Finally, poverty rates are higher among households with unemployed or inactive heads. In 2012, the incidence of poverty was 11 percent among households headed by employed persons; 13 percent among households headed by retired persons; 22 percent among households headed by unemployed persons; and 24 percent among households headed by inactive persons. 2.4 Development Challenges 25. This section discusses the key development challenges in Albania, and constraints to ad- vancing progress toward the twin goals of reducing poverty and boosting shared prosperity. Re- storing the macro-fiscal balance and financial stability is the key development challenge in Albania, followed by energy sector risks, and governance and institutional constraints that affect provision of basic public services. Land and property right issues and inefficiencies in management of natural re- sources are among the key constraints that affect Albania’s ability to take advantage of its rich natural endowments. These development challenges are critical for poverty reduction and thus motivate the WBG engagement outlined in this CPF. 26. The key development challenge for Albania is to restore macro-fiscal balance and maintain financial stability. The macroeconomic imbalances will continue to exert downward pressure on the economic gains of households and create disincentives for accumulation and productive use of factors of production. Restoring a sustainable macro-fiscal framework is, therefore, a high-order requirement for reigniting growth and increasing prosperity. Fiscal consolidation efforts by the authorities (see paragraph 15) represent an important step toward improving macro-fiscal stability. It is supported by structural reforms aimed at reducing explicit and implicit contingent liabilities (such as in the energy sector and the pension system) to ensure that the consolidation process is not undermined because of inefficient ad hoc expenditures and is in line with the medium-term fiscal framework. Furthermore, efforts will be required to strengthen capacity of the local governments to mobilize revenues which are currently insufficient to allow local governments to provide quality public services. Finally, while the financial sector is with solid liquidity ratios and strong provisioning requirements, it remains exposed to a number of potential vulnerabilities, including low and declining commercial bank profitability, large stock of NPLs, substantial levels of euro-based lending, deleveraging pressures (see paragraph 18). These are risks, which, if realized, could negatively affect economic growth. 27. Fiscal stability is further undermined by significant risks from the energy sector. Electricity is almost entirely dependent on hydro-sources, variability of which inevitably translates into output variability. Historically, the sector has been overwhelmed by significant losses of electricity distribution, leading to annual power imports of €120 million to €160 million to cover these losses, thus making the distribution entity the worst performing company among the Southeast European countries. The biggest cause of losses is theft, which suggests that metering, billing, and enforcement are weak. The fi- nancial distress of the sector translated into fiscal distress because the budget ultimately covered these losses. 34 World Bank Group Country Partnership Framework For Albania 28. On the governance side, the weak rule of law, due to discretionary enforcement of laws and regulations, represents the key governance risks. With the exception of political stability, recent surveys suggest stagnation or even reversal against the relevant governance indicators in the last two years.7 The recent trend in governance indicators is mostly related to areas that require strong adminis- tration and judiciary to enforce the rule of law. In this context, Albania’s EU candidate status is an oppor- tunity to strengthen public administration and judiciary, and the fight against corruption. 29. In spite of recent improvements, institutional and governance barriers and prevalence of corruption negatively affect private sector businesses and employment growth. The country made significant improvement in its latest Doing Business ranking and moved from 90th to 68th position globally. This reflects recent progress in streamlining procedures for obtaining construction permits, starting a business, registering property and paying taxes. Nevertheless, the latest Business Environ- ment and Enterprise Performance Survey (2013) shows that it is still more burdensome to deal with construction permits, trade logistics, inspections, and property and land registration in Albania than in neighboring countries. Corruption was identified as the single largest obstacle to entrepreneurship by 56 percent of businesses surveyed in 2013 IFC “Tax Compliance Cost Survey”. The latest IFC’s Enter- prise Survey 2013 found that 85.9 percent among medium and 100 percent among large enterprises pay bribes to secure government contracts. The prevalence of corruption also encourages widespread informality.8 Informality is widespread in the labor market taking up an estimated 36 percent of GDP. Es- timates suggest that close to half of total employment outside agriculture corresponds to informal em- ployment, and nearly three-quarters of the labor in construction is informal. Informality affects growth of formal businesses, decreases tax revenues, and distorts labor market incentives9. Moreover, as noted in the SCD, the vulnerable segments of the population are predominantly engaged in the informal sec- tor which impedes them from taking advantage of economic opportunities. 30. Employment growth is further undermined by low labor participation, low employment rates, and inadequate skills. These features are prevalent particularly among youth, women, and the bottom 40 percent of the population. The latest Quarterly Labor Force Survey (LFS Q2 2014) suggests that 61.3 percent of the population 15–64 years old is active in the labor market, either employed or actively looking for a job. Labor force participation is particularly low among women – 50.1 percent, while male labor force participation rate is 73.2 percent. Unemployment rate increased to 17.7 percent in the second quarter of 2014, compared with 16.4 percent in the same quarter in 2013, and with 13.7 percent in the same quarter in 2012. Unemployment is particularly prevalent among youth (aged 15 – 29), 33.5 percent of whom were unemployed in the second quarter of 2014. Relevance of skills for jobs is considered weak which creates further constraints. These constraints are greater for the vulnerable communities who have lower educational attainment levels than the general population. Firms cite inadequate skills as a constraint to business development, signaling labor market demands inconsist- ent with education and training outcomes. As per the latest Enterprise Survey, among the Southeast European countries Albania has the largest share (36 percent) of firms reporting that the workforce does not possess the skills they require, highlighting a potentially important skills mismatch in the country. 7. Transparency International – Corruption Perception Index; World Economic Forum – Global Competitiveness Index and Judi- cial Independence Index; Economist Intelligence Unit – Democracy Index. 8. World Bank estimates informality around 47 percent (2010-11). This estimate is in line with the 43 percent reported by INSTAT in 2013. 9. 2013 The Enterprise Survey identified informality as the top obstacle particularly for small and medium businesses, with 19 and 25 percent respectively claiming that informality is the top obstacle in the business environment. World Bank Group Country Partnership Framework For Albania 35 With weak labor market engagement and declining remittances, it is necessary to strengthen the capac- ity of Albanian households to generate labor market income. This will require long-term commitment to policies such as the alignment of labor supply with the needs of the labor market for the creation of (formal) jobs and the development of the skills needed to boost firm-level productivity, attract invest- ment, and expand access to higher productivity and better paying employment opportunities among the population. 31. Quality and equity in access to basic public services disproportionately affects the poor and the less well-off. In the health sector, 98 percent of poor women reported barriers to access, including among the vulnerable groups (such as the Roma population), compared with two thirds among the wealthiest quintile. Health care delivery in Albania is characterized by the poor quality of care, inade- quate primary care and preventive services, the excessive use of tertiary hospital care, and persistent unofficial payments. Education outcomes are inadequate with the latest PISA survey (2012) showing that more than 60 percent of 15-year-olds are functionally illiterate in mathematics. The poor, includ- ing Roma population, and those in the bottom 40 percent of the population have lower enrollment rates in pre-primary, upper-secondary, and tertiary education. In the water sector, twenty percent of the poorest have no in-house sanitation facilities. Seventy-five percent of the households in Fier, the second-poorest prefecture in the country, report that the water provided there is not safe for drinking. About 50 percent of the population has access to a sewerage connection, while the rest use on-site san- itation facilities. In the transport sector, road quality is undermined by poor maintenance. The country needs €40 million to €45 million per annum to maintain the country’s primary and secondary roads, while there is a large stock of unfinished road construction. 32. The main poverty-focused program requires better targeting and enhanced coverage. More- over, the benefits received by the poorest quintile are among the lowest in Europe. As of 2012, the share of the poor covered by the program was 24 percent, but the coverage of the non-poor had risen from 5.2 percent in 2008 to 7.4 percent in 2012. Meanwhile, the spending on disability assistance has increased because of growth in the number of beneficiaries and the overly generous indexation and ad hoc expansion in benefits. In 2007–13, the number of beneficiaries rose from 108,000 to 165,000. The disability assistance program does not effectively target and support the truly disabled. As a result, social safety nets do not effectively address the needs of the poor and are inadequate in protecting the vulnerable and the disadvantaged from household or systemic shocks. 33. Rich natural diversity and abundant natural resources are not sufficiently contributing to growth. The beautiful coastline holds potential for tourism and economic development as one of the key drivers of growth. To realize this potential, the country requires a major upgrade of its environmen- tal infrastructure, and the protection of coastal assets which would also promote sustainable tourism. Tourism has the potential as one of the key drivers for growth, job creation and investments – both foreign and domestic. During the past three years, the tourism sector has experienced a rapid increase in annual tourist arrivals but it still needs to convert this to a sustainable increase in value added and employment. Albania has a high proportion of forest cover and fertile soils, but most of the forest and pastureland are in poor condition. Fragile soils, combined with unsustainable forestry and agri- cultural practices have led to severe erosion, particularly in remote uphill areas where rural poverty is concentrated and persists. The delivery of public environmental services is also characterized by large inefficiencies. Of an estimated 360,000 hectares that have been equipped for irrigation in the country, 36 World Bank Group Country Partnership Framework For Albania only 80,000 hectares were irrigated (2009), and many canals and pumping stations are no longer op- erational. Moreover, Albania has high vulnerability to natural disasters, especially floods, on account of weather variability and climate change. 34. Another reason for missing the opportunity to take advantage of natural endowments is related to insecurity in property rights which seriously affects the productive use of land. Albania has one of the lowest scores (137 of 148 countries) in the world in terms of overall property rights, par- ticularly physical property rights. The lack of well-functioning land markets is having broad negative impacts on rural development (for example, substantial farm fragmentation) and urban development (the uncontrolled growth of urban settlements). Lack of urban planning, reflected in the rapid informal growth of urban areas, has undermined the growth potential of Albanian cities. With respect to rural areas, the land privatization process has resulted in a large number of tiny and scattered farms, holding back the development of the agricultural sector. As of 2012, there were 350,916 agricultural holdings in Albania, averaging 1.02 ha. Most farmers remain locked in low-income, subsistence structures, unable to utilize their land assets to generate economic gains. Overall, unsustainable land management and poor enforcement of property rights represents the key obstacle preventing firms, farms and house- holds from entering the land market. This has direct consequences not only on landownership, but also on income generation and the incidence of poverty. Some groups, such as women and the less well-off are at an additional disadvantage because they are excluded from landownership. 35. Finally, while Albania has a rather positive gender inequality index, gender gaps exist in certain areas. As per the UNDP Human Development Index 2013, Albania’s Gender Inequality Index was positive with a ranking of 41 out of 148 countries. However, there are still considerable inequalities in the participation of women in the labor market, and property rights. There are almost twice as many men landowners than women landowners, and most women landowners have a property share of less than 25 percent. Moreover, women working in agriculture are especially disadvantaged. According to a recent World Bank study using data till 2012, the overall gender gap in poverty had disappeared (for women to 14.51 percent and for men to 14.34 percent). Although women have educational parity with men, female labor force participation lags far behind male participation rates for those with less than a college education. Women’s participation in the labor force dropped dramatically between 2008 and 2012, increasing the gap. Women’s wage rates lag behind those for men. For women 25 - 64 years old, hourly wage rate is 84.8 percent of the rate for men. There is also a gender gap in hourly pay in some industries, including agriculture and education. World Bank Group Country Partnership Framework For Albania 37 WORLD BANK GROUP PARTNERSHIP FRAMEWORK 38 World Bank Group Country Partnership Framework For Albania III. WORLD BANK GROUP PARTNERSHIP FRAMEWORK 36. This section begins with a summary of the Government’s program as reflected in the draft Strategy for National Integration and Development. It then highlights the fundamental priorities identified through the SCD which drive selectivity in the CPF. It then draws lesson learned from the implementation of the previous CPS program before outlining the structure of the CPF, the proposed WBG program and its implementation. 37. The WBG provided support to Government in its initial priority-setting exercise drawing on available evidence to identify the constraints and opportunities for economic growth. This work with the Government on its priority setting was followed by the preparation of the SCD drawing largely on the same evidence base and undertaking complementary analyses in areas such as inclusion and shared prosperity. Based on this analysis, the SCD identified twelve broad priority areas divided into three distinct groups: fundamental priorities, supporting priorities and sustaining priorities. The CPF structure reflects selectivity based on the five fundamental priorities of the SCD, and outlines a program around three focus areas encompassing these five fundamental priorities. The CPF takes into consid- eration the lessons from the implementation of the previous CPS, as well as recommendations from previous IEG evaluations, and feedback received during stakeholder consultations. An indicative IBRD lending of US$1.2 billion is proposed, and IFC investments are expected to reach US$150-200 million over the period FY15-FY19. Focus on results has been a guiding principle during the preparation of the CPF, and will be maintained throughout its implementation. A Government Program and Medium-Term Strategy 38. Government engaged in an initial priority-setting exercise which is now being codified in the National Strategy for Development and Integration for 2015-2020. The WBG contributed to Government’s priority-setting exercise. In mid-2013, the WBG prepared a set of policy briefs for the newly elected Government which was a precursor to the SCD. These briefs assessed the constraints and opportunities to restore economic growth and reduce poverty in Albania. They served as an input into an international advisory conference called Next Generation Albania: Shaping a New Model for Eco- nomic Growth which was convened by the incoming Government. The Prime Minister has introduced a science-of-delivery approach to governing, and this was reflected in his participation as a founding member of the WBG’s Global Network of Delivery Leaders. In late 2013, the Government requested WBG support for an immediate priority-setting exercise using available evidence and data. The WBG sup- ported the Government to define the top three priorities for each Ministry and for the Government as a whole. The cross-cutting priorities would then be closely monitored by the Prime Minister through a newly-established Delivery Unit, so that high level political attention could be brought to bear in un- World Bank Group Country Partnership Framework For Albania 39 locking implementation constraints. The Government has codified its initial priorities in its draft NSDI which considers progress towards EU integration as an overarching national goal and outlines a vision to promote inclusive and sustainable economic growth. The Government’s priorities to accomplish this vision include: ensuring macroeconomic and fiscal substantiality; enhancing competitiveness; making public services transparent and accountable; promoting efficient and sustainable use of natural resources, and in particular water, energy and land sector development and management. 39. In pursuit of its aspirations for EU accession, Albania also adopted a roadmap for planned reforms in the EU priority areas: public administration, judicial system, organized crime, corruption and human rights. The roadmap includes monitoring of Albania’s progress in promoting inclusion and equal economic opportunities for the minorities, including the Roma population. The EU promotes integration and improved living standards of the Roma population including improved access to educa- tion, employment, health care and housing. The decision of the European Council of June 2014 to grant Albania a candidate status is recognition of the reform efforts taken by the Albanian authorities. It also creates further encouragement to accelerate reforms in the five EU priority areas. The EU is heighten- ing its engagement under its 2014-2020 strategy for the second instrument of Pre-Accession (IPA2), the European Commission’s instrument for providing technical and financial support to candidate and pre candidate countries. 40. Government’s recent reform track record in implementing its priorities has been encourag- ing. Reform progress is visible in the areas of public financial management, business environment, energy sector, pensions, and public service delivery. With the support of the WBG and the IMF, the Government has prepared a new public financial management strategy for bringing transparency and quality in management of public resources. It initiated investment climate reforms to promote private sector and business growth which contributed to its significantly improved performance in Doing Busi- ness ranking. Recognizing that reforms in the energy sector are important for increased investments, growth and jobs, the Government took bold steps aimed at clamping down on abuses of the system and instilling a culture of accountability. New law on pensions was approved in July 2014 introducing more fairness to the system as well as reducing the fiscal impact on the budget. The Government has launched a set of innovative reforms to promote good governance, accountability and transparency in management and delivery of public services. Work on all these areas demonstrates Government’s com- mitment on implementing the priorities codified in the draft NSDI. Systematic Country Diagnostics: Albania’s Fundamental Priorities 41. The WBG engagement with the Government on its priority setting was followed in mid-2014 by the preparation of the SCD to formalize and expand on the earlier assessment of analytic work and available evidence. The SCD added value by distilling and evaluating the same evidence through the lens of the WBG’s twin goals of eliminating extreme poverty and boosting shared prosperity. The evidence base was complemented with additional analysis, particularly on inclusion and shared pros- perity. The SCD highlighted that the consumption-fueled growth model of the pre-crisis period is now exhausted and cannot be counted on to restore rapid growth, reduce poverty and improve prosperity among the bottom forty percent of households. It also noted equity concerns for population groups that have less access to economic opportunities. Restoring rapid economic growth is essential, as the line of sight to the twin goals is clear: aggregate growth in Albania has been strongly and reliably associated with both poverty reduction and increased welfare of the bottom 40. 40 World Bank Group Country Partnership Framework For Albania 42. Thus, in the medium to long run, a new model is needed, based on restoring macro-fiscal sus- tainability and increasing domestic productivity and export-oriented growth. While this process of rebalancing the economy is gradual, it will require immediate and persistent efforts in macroeco- nomic management and structural reforms. Accelerated growth is the sine qua non of resuming poverty reduction and increasing shared prosperity, but the inclusiveness of growth also matters. Such a model of accelerated, inclusive and sustainable growth requires deep structural reforms to release binding constraints to growth and to take advantage of Albania’s many endowments and opportunities. Over- all, sound fiscal policies and strong commitment to pursue further reforms in the business environment, the energy sector, and land and property rights are expected to support growth over the medium term. 43. The SCD identified twelve priority areas for action in order to restore growth and make it inclusive for progressing towards the twin goals in a sustainable manner. These twelve priorities were then ranked on the basis of their impact on the twin goals. A prioritization exercise led to three distinct groups of priorities: fundamental priorities, supporting priorities and sustaining priorities (See Table 2). Five priorities were considered fundamental; the remainder was considered supporting and sustaining for enhancing the impact and sustainability of the fundamental priorities. The five funda- mental priorities with the greatest impact on growth, poverty reduction and inclusion formed the basis for selectivity in defining the WBG program within the CPF. The five fundamental SCD priorities are: i) restoring fiscal sustainability, financial stability and macroeconomic balances; ii) establishing a high-quality business environment that promotes firm growth and job creation; iii) providing clean energy efficiently, equitably sustainably; iv) formalizing and enhancing the inclusiveness and sustainability of the land market; and v) enhancing governance, transparency and account- ability of government. Given the reliance on a similar evidence base and WBG’s engagement in Gov- ernment’s initial priority setting exercise, the fundamental priorities emerging from the SCD with most impact on inclusive and sustainable growth are considerably aligned with Government priorities allow- ing for ramped up support from the WBG. Table 2: Overall Impact Assessment of SCD Policy Priorities on the Twin Goals Policy Priorities Overall Impact Restoring fiscal sustainability and maintaining financial stability Fundamental Establishing a high quality business environment Fundamental Providing clean, efficient, equitable and financially sustainable energy Fundamental Formalizing and enhancing inclusiveness and sustainability of  land markets Fundamental Enhancing governance, transparency and accountability of government Fundamental Increasing the quality and inclusiveness of labor market engagement Supporting Improving quality, access and relevance of education and training systems Supporting Improving efficiency, access and quality of public services delivery Supporting Improving inclusiveness of access to financial markets Supporting Enhancing effectiveness and efficiency of social protection systems Sustaining Ensuring sustainable use of natural resources and stewardship of the environment Sustaining Improving quality, efficiency and equity of health services Sustaining World Bank Group Country Partnership Framework For Albania 41 B Proposed World Bank Group Country Partnership Framework Lessons from CPS Completion Report, IEG Evaluations, and Stakeholder Consultations 44. Overall performance of the previous CPS program (FY11-FY14) was assessed as moderately satisfactory. The CPS was designed to support the NSDI by prioritizing three strategic country ob- jectives: i) accelerating recovery in Albania’s economic growth through improved competitiveness; ii) broadening and sustaining Albania’s social gains; and iii) reducing Albania’s vulnerabilities to climate change. Good results emerged towards the end of the CPS period with the initiation of key reforms for fiscal consolidation, maintaining financial sector stability (supported by two DPLs), and commence- ment of pension reforms. There was also some progress in strengthening private sector competitive- ness. Service delivery outcomes were strongest in the transport sector, followed by consolidation of gains in education and health sectors, and strengthening efficiency of social assistance spending. WBG support also contributed to addressing the effects of climate change, and to improved natural resource management. However, progress in the energy sector outcomes remained weak with rising sector defi- cits. 45. Implementation of the previous CPS program presents important lessons for the WBG pro- gram going forward: • It is important to stay engaged and continue the policy dialogue with the Government counter- parts even during periods when there is insufficient drive for reform, as continuity of engage- ment supports the Government in articulating future policies. • Open dialogue with a broad spectrum of stakeholders increases the ownership of the program. • Project design should be adjusted to the commitment for reforms and institutional capacity of the counterparts. • Proliferation of small and thinly spread interventions, particularly in a small country, should be avoided as it challenges client capacities and is difficult to monitor. • The CPF results framework with fewer outcomes and measurable indicators helps to evaluate performance. • High quality, demand driven, and relevant AAA strengthens the WBG overall engagement. 46. Lessons were also learned from the WBG’s extensive prior engagement in the energy sector. A failed privatization of the electricity distribution company and a non-operational new power plant were two visible symbols of inadequate reform and poor performance in the energy sector. The lessons learned include: i) the need to tackle the sector holistically rather than focusing on particular institu- tions or investments; ii) the importance of combatting rampant corruption in order to bring about sus- tainable improvements in sector performance; iii) the need to strengthen governmental policy-making and regulatory bodies in parallel with private sector engagement; and iv) the need for extensive post- privatization “after care” to ensure that the terms and conditions of privatization are fully met on a timely basis. The WBG support to Government’s energy program during this proposed CPF period reflects these critical lessons. 42 World Bank Group Country Partnership Framework For Albania 47. In addition to lessons learned, the Albania CPF preparation benefited from consultations conducted during the preparation of the SCD. Four consultative meetings were organized in the capital and different regions during the SCD preparation to present the findings and obtain feedback from a broad group of stakeholders on the challenges and opportunities that the country was facing. The stakeholders also provided their recommendations on priority areas for future WBG intervention focusing on accelerated growth, job creation, and careful management of natural resources. In the final round of the CPF consultations, the proposed WBG CPF program was presented to obtain feedback from the stakeholders, both in the capital and regions. The SCD and CPF consultations drew partici- pants representing diverse constituencies, including representatives of vulnerable communities. 48. Country Survey 2014 has been another important document that informed the preparation of this CPF. The FY14 Albania Country Survey results showed highly positive perception of the role of the WBG in Albania. The WBG is seen as a long term partner, responsive and an excellent collaborator with the government and other development partners. Finally, the WBG program was viewed as rel- evant and aligned with country priorities. In terms of future partnership, respondents welcomed WBG engagement in almost all areas, with some recommending more focus on growth acceleration, public sector governance, and agriculture. 49. IEG evaluations underline the importance of project ownership, and political economy analy- sis. IEG reviews of ICRs and Project Performance Assessment Reports for the projects in the social sec- tor (health, education and the social expenditure DPL) provided a number of recommendations that were taken into considerations during the preparation of this CPF. These recommendations could be summarized as follows: i) high quality Bank analytic work and technical assistance is necessary but not a sufficient ingredient for achievement of project objectives - ownership by the Government and key stakeholders is equally important; ii) political economy analysis is critical to assess the likelihood for successful implementation of reforms; iii) the design and implementation of well-functioning manage- ment information systems, and monitoring and evaluation systems is critical for results; and iv) DPLs and sector specific investment projects provide important complementary support to help govern- ment implement challenging reforms.   Overview of World Bank Group Strategy 50. The overarching goal of the CPF is to support Albania’s aspiration for achieving equitable growth and integration into the EU. This goal will be pursued with a focus on advancing progress towards the twin goals of reducing poverty and increasing shared prosperity. In doing so, the CPF will take forward the SCD’s direction for a new economic strategy which will contribute to rebalancing of the economy toward equitable, inclusive and export driven growth, which is appropriate and relevant in the Albanian context as historically growth in Albania has been associated with increases in real in- come gains. 51. The structure of the CPF reflects selectivity based on the fundamental priorities of the SCD that allows for ramping up support from the World Bank Group. Given the reliance on a similar evidence base and WBG’s prior engagement in Government’s initial priority setting exercise, the funda- mental priorities emerging from the SCD show a considerable alignment with Government priorities. The CPF selectively chooses only five of the twelve SCD priorities, and builds a program of support around this World Bank Group Country Partnership Framework For Albania 43 subset of priorities on the basis of additional selectivity filters. Within the SCD fundamental priorities, the CPF exercises further selectivity by engaging on a sub-set of areas where WBG engagement is expect- ed to have the highest impact and where WBG financing leverages or complements EU engagement. For instance, the CPF program selectively focuses on specific public sector services under focus area 3 where the WBG has demonstrated comparative advantage. Consequently, the CPF program will focus on systems improvement, sector governance, and enhancing citizens’ trust in public services including through e-governance and development of management information systems. Within the governance area, rule of law and broader civil service reforms will not be a part of this focus area as these are being addresses by the EU. 52. In addition to the SCD driven selectivity, the CPF is based on the following selectivity filters: • Country ownership and championship. Focusing on areas which have both high impact and strong government reform championship. • Comparative advantage. Carefully examining WBG’s comparative advantage vis-a-vis other partners, and especially the EU. • Strategic programming. Moving away from proliferation of small spread out interventions, and shifting to larger and more transformative interventions, which, in several cases, require cross- sectoral synergies. 53. The rationale to build the CPF around five fundamental SCD priorities out of total of twelve SCD priorities is based on these additional selectivity filters as follows: • Restoring fiscal sustainability and maintaining financial stability – this is an area of WBG comparative advantage and long-standing engagement, where WBG brings established macro- fiscal analysis and a well-defined division of labor with the IMF. With championship from the highest level of Government to tackle longstanding imbalances, the WBG has an unprecedented opportunity to support reform in this area. • Establishing a high quality business environment – the WBG engagement in Albania reflects a global comparative advantage in this area (most visible through the Doing Business Report) as well successful WBG engagement in neighboring Balkan countries. WBG engagement exploits complementarity of the IBRD and IFC, building on an ongoing Trade and Competitiveness advi- sory engagement. It brings WBG expertise in assisting the Government to pursue legal and regu- latory reforms aimed at improving the business environment and investment climate. The IFC engagement will also provide technical assistance in legal and regulatory reform in investment policy aiming to increase FDIs and investment in agribusiness given the sector’s contribution to GDP and impact on employment. The Ministry of Economic Development has been given a lead- ership role in this cross-cutting area, and is an effective champion and focal point for deepening reform in this area. • Providing clean, efficient, equitable and financially sustainable energy – the WBG will main- tain a high level of engagement while applying lessons learned from its past engagement in the energy sector in Albania. WBG will engage in large operations expected to support a transforma- tive turnaround in energy sector performance, The Government has already begun waging a high-profile campaign to improve power sector performance. IFC will support indirect finance through the banking sector for smaller renewable energy projects and through advisory work to 44 World Bank Group Country Partnership Framework For Albania government, financial institutions and companies working in renewable energy. The full com- bined force of IBRD, IFC and MIGA will be brought to bear on the reform and investment needs of the sector. WBG engagement also leverages resources from other partners such as the EBRD and EU. • Formalizing and enhancing inclusiveness and sustainability of land markets – the WBG is generally recognized as the lead partner for land administration reforms in the Western Balkans, including Albania, where the WBG’s earlier engagement has produced improved regulatory re- gimes and measurable results on land registration and management. The WBG also has a suc- cessful track record in supporting environmental clean-up and land management in Albania, with important linkages to sustainable coastal tourism. • Enhancing governance, transparency and accountability of government – the WBG has a comparative advantage among international partners in supporting social services and public services’ governance reforms related to public service delivery, and has a strong body of ana- lytic work including Public Finance Reviews to underpin such efforts. Government has made the strongest commitment at its highest levels to transform the relationship between citizens and Government, and has adopted a “science of delivery” approach. The WBG has the ability to support this science of delivery approach as it applies to deep reforms in public service delivery. 54. The above rationale for engaging in these five priorities implies that other SCD priorities will not be addressed through WBG support. Among the areas where the WBG will not commit new financial resources are: primary and secondary education, security and the rule of law, climate change, mining and agricultural production. While development challenges remain in these areas, the WBG will not engage here as the country will use its own resources or engage other partners to tackle these issues. On climate change, 20 percent of the EU’s Second Instrument of Pre-Accession financing is ear- marked for climate change activities. In transport, the WBG will restrict engagement to road sector. In some areas (e.g. security and rule of law) the WBG has limited comparative advantage. In other areas (climate change, agriculture), other international partners, especially the EU, will be supporting Govern- ment reform and investment needs. 55. CPF Results Framework and Core CPF Indicators. The WBG strategy outlined above gives rise to a result framework of CPF objectives grouped into three broad focus areas that also correspond to the top SCD priorities (see Figure 5 below). The twelve CPF objectives will be supported by a manageable set of core indicators which will be met through the proposed WBG interventions (see Figure 5 below). Results will be realized through achievement of targets for these core indicators which will form the basis for evaluating performance at the end of the CPF period. Annex 1 presents the CPF Results Matrix which includes new interventions as well as ongoing/legacy activities. Results of on-going operations contribute to the achievement of many of the CPF objectives, which are themselves aligned to top SCD priorities. Annex 2 presents the World Bank-IFC’s existing and indicative program, advisory services, trust funds and AAA to support the focus areas and objectives outlined in the Results Matrix. The CPF focus areas and objectives are described in the following section. World Bank Group Country Partnership Framework For Albania 45 46 Albania: Linkage between CPF Objectives and SCD Priorities CPF Results Framework SCD Top Priorities World Bank Group Focus Area 1: Focus Area 2: Focus Area 3: Priority 1: Restoring Creating conditions Strenghening public Restoring fiscal sustainability macroeconomic for accelerated sector management balances private sector growth and service delivery and maintaining financial stability Objective 1a Objective 2a Objective 3a Country Partnership Framework For Albania Support improved Contribute to Support increased Priority 2: fiscal sustainability improved business efficiency of public Establishing a high quality business environment environment service delivery Objective 1b Provide strengthened Objective 2b Objective 3b public investment Support Sustainable Support improved management Tourism equity and access to Priority 3: in transport sector Development social protection Providing clean, efficient, equitable services and financially sustainable energy Objective 1c Objective 2c Support improved Support enhanced Objective 3c financial stability energy security, Contribute to Priority 4: efficiency & supply increased efficiency Formalizing and enhancing inclusiveness and access of health and sustainability of land markets services in hospital Objective 2d sector Provide expanded and inclusive Priority 5: land/property Objective 3d registration Provide enhanced Enhancing governance, transparency coverage of water and accountability and sanitation Objective 2e services Contribute to increase productivity and sustainability of land use Note: CPF Objectives color-coded to show linkage to SCD top priorities 56. The three CPF Focus Areas are described below: Focus Area 1: Restoring macroeconomic balances. This focus area includes three CPF objectives that aim to support Albania’s efforts to improve fiscal sustainability, strengthen public investment management and improve financial stability that are nec- essary for fiscal stability. The SCD considers macro-fiscal sustainability and financial sector stability to be the highest priority, having a fundamental impact on the country’s ability to move to an accelerated and sustainable growth model. Albania’s economic vulnerabilities are exacerbated by its high public debt and arrears, unsustainable fiscal deficits, inadequate planning and management of public investments es- pecially in transport infrastructure, and financial sector imbalances, including a large volume of NPLs. In the short term and beyond, these vulnerabilities can affect the generation of welfare gains and their distribution among households and firms, the capacity of households and firms to accumulate assets, and the returns households and firms receive. For instance, clearing public sector arrears is resulting in increased financial flows to the private sector, which is likely to raise domestic demand and contribute directly to growth. Meas- ures for growth acceleration will support income growth thereby contributing to the twin goals. Wages and pensions were main drivers of Albania’s sharp poverty reduction prior to 2008. Pension reforms include social pensions targeted to protect the poor and the vulnerable population. Better expenditure management and re- duction of inefficient spending will open space for investments in social services and public infrastructure which will contribute to increased welfare of the poor and the bottom forty percent of the population through greater access to services and greater potential for job creation. Addressing the macro-fiscal and financial challenge is a pre-requisite for the country to transition to a new growth model. The strategy proposes three inter-related CPF objectives supported by a strong program of technical and financial interventions to im- plement the agreed medium-term macro-fiscal framework. One CPF objective in this area will focus on fiscal consolidation, reforming areas with unsustainable fiscal liabilities, such as pensions. Another will focus on enhancing transparency and predictability in financing and managing public investments, particularly in infrastructure. The third CPF objective will address financial sector weaknesses that jeopardize stability and undermine the role of financial institutions in promoting growth and shared prosperity. Focus Area 2: Creating conditions for accelerated private sector growth. This focus area will provide transformational support to Albania which corresponds to three of the top SCD priorities: i) establishing a high quality business environment; ii) providing clean, efficient and financially sus- tainable energy; and, iii) formalizing and enhancing the inclusiveness and sustainability of the land market. The CPF objectives in this focus area support Government’s reforms through interventions that promote growth and enhance inclusion of the poor and the bottom forty percent. The SCD empirically demonstrates serious shortcomings in the business environment by global standards, notwithstanding some recent pro- gress. For this reason, improving the business climate is a CPF objective within this focus area. Central con- straints include a heavy regulatory burden, inadequate framework for private investment, high informality, weak trade logistics and facilitation, barriers to labor market engagement, poor relevance of skills, inade- quate reporting practices of the real sector companies and lack of quality corporate governance of both real and financial sector which limit firms’ access to financing and investment. Reforms to improve the business environment are critical for job creation, and can strengthen the link between economic growth and poverty reduction. The second CPF objective related to the business environment will support sustainable tourism development given its high potential as a key driver for growth, job creation and investments. Instability of energy supply is identified as a top constraint to doing business in Albania, and is a third CPF objective World Bank Group Country Partnership Framework For Albania 47 within this focus area. Moreover, Government subsidies are at a fiscally unsustainable level in a sector where technical and non-technical losses had risen to nearly half of supplied electricity by 2013. Ensuring a reliable and affordable power supply is one of the most important foundations for increased investment, growth, job creation and poverty reduction. Development of Albania’s hydropower potential can serve as a strong driver for economic growth to help disadvantaged regions overcome poverty disparities. The SCD priority related to land will be addressed through two more CPF objectives. The first focuses on resolving historic land ownership issues which are considered critical for stimulating both rural and urban investment, and for overcoming poverty as well as regional differences in the level of poverty. The second CPF objective on land will focus on strengthening the productivity and sustainability of land use to promote development. This involves making better use of Albania’s abundant agro-forestry resources (which is an important element of inclusion in economic development). Economic regeneration of the coastal region through integrated tour- ism development will open a range of economic opportunities which will contribute towards overcoming poverty disparities. Securing property rights, formalizing land settlements and sustainable land manage- ment will have a positive impact on improving regional poverty disparities, reducing poverty and improving the welfare of the bottom forty percent by enabling more secure and productive use of assets. Overall in this focus area devoted to private sector growth, WBG operational and analytic engagement on skills, employ- ment, sustainable tourism and land and property rights will incorporate and address measures for reducing regional disparities and enhancing inclusion. Focus Area 3: Strengthening public sector management and service delivery: This focus area includes four CPF objectives related to increased efficiency of public service delivery and improved equity and access to basic social services. This area addresses the fundamental SCD priority of en- hancing governance, transparency and accountability of government. As noted in paragraph 51, further se- lectivity is exercised in this focus area by directing assistance towards areas of WBG comparative advantage. The WBG will focus selectively on public sector management and service delivery to improve the efficiency in public service delivery, while civil service reforms, security and rule of law are being addressed with support from the EU and other partners. WBG support is more directly aimed at building citizens’ trust in govern- ment, strengthening service provision, and improving service delivery and access to basic social services. This includes support to the private sector through Public Private Partnerships to engage in service deliv- ery. This program will support four CPF objectives. The first focuses on general efficiency of public service delivery. A weak legal, regulatory and governance environment is seen as key a contributor to poor service quality and limited accountability to service users. The Albanian public sector is characterized by weak per- formance management systems and a lack of transparency and accountability in service delivery. Albania’s public services are characterized by inefficiencies in spending, low quality, weak institutional capacity, low levels of accountability, high degree of informal payments pointing to corruption, and socio-economic ine- qualities. Greater trust between citizenry and government needs to be created through changes in citizens’ interface with government. The remaining three CPF objectives focus on the quality, equity and adequacy of service provision in social protection, health and water supply services to the bottom forty percent of the population, citizenry in the poorer regions of the country, including the Roma population. While the poor in general have inequitable access to services, vulnerable communities are particularly excluded from essential services. WBG engagement in this area will directly support government’s efforts at better targeting while improving outreach and availability of public services. 57. The CPF activities under each of the three focus areas will be underpinned by two cross cutting themes. Gender, as the first cross cutting theme, is well integrated in the CPF results framework as it cuts across the objectives and several interventions. Gender dimensions will continue to be integrated in opera- 48 World Bank Group Country Partnership Framework For Albania tions and analytic work. Gender disaggregated data and monitoring backed by gender-sensitive analysis will be systematically utilized during project preparation and implementation to ensure interventions are appropriately developed and monitored. The current portfolio retains a strong focus on female beneficiar- ies such as under the ongoing Social Assistance and Modernization Project, while the upcoming Integrated Land Management Project includes facilitating female landholding. The ongoing Environment Services Project aims to fully mainstream gender considerations across all project components including promoting women’s involvement in associated environmental income streams. Although Albania fares relatively well on gender parity index, a large gender gap exists in labor participation rate. The proposed AAA on Skills, Employment and Labor Market will especially focus on this. 58. The second cross-cutting theme is the EU accession process as a long term policy anchor. The CPF program is geared to promote reforms and investments that further Albania’s accession agenda while bring- ing the country closer to achieving the WBG’s twin goals. In the context of the IPA2 strategy, the EU has turned to the WBG as a leading partner on the ground to provide much-needed implementation support for the ambitious reform agenda embraced by the Albanian Government. In some areas, the WBG will take the financial and tech- nical lead with its strong analytic base, relevant expertise and sizable financial resources. In other areas, smaller amounts of WBG resources would leverage larger IPA2 grant funding to deepen reforms, scale up interventions and maximize impact through joint efforts. The EU roadmap also requires Albania to make tangible progress on minority rights, including those of the Roma population, and on promoting socio-economic inclusion of the mi- nority communities. The CPF program will provide complementary support in the relevant and appropriate areas. 59. The strategy envisages addressing the needs of the bottom 40, the poor and vulnerable popula- tion through technical and financial interventions. While the ongoing Social Assistance Project seeks to better target the bottom forty percent – including the Roma population – the new Health System Improvement Project includes measures to reduce the burden of health expenditures on the poor. Going forward, issues of equi- ty and inclusion will be addressed under the proposed areas of engagement such as local government finance and governance, land and property rights, skills and employment, and sustainable tourism. The engagement on local finance and governance will be underpinned by analytic work which will include policy recommen- dations using evidence-based assessment on the existing constraints to accessing equitable and quality services by citizens in the poorer and more deprived regions. The operational engagement in this area will build on this evidence to develop appropriately targeted interventions to improve governance and access to services for the poor, the bottom forty percent, including the Roma population. The bottom forty percent and the poor depend on small land holdings with limited ability to use land for market income, often with insecure land titles. Efforts to improve land formalization and property registration will promote inclusion and land security among these more vulnerable groups. WBG support for sustainable tourism in the southern coast will incorporate initiatives to boost growth, local entrepreneurship and job creation, specially promoting measures to enhance the participation of the vulnerable population. The analytical work, such as on Skills and Employment, will provide the opportunity for evidence-based analysis to better target the subsequent financial intervention. It will strengthen the evidence base and present appropriate policy incentives for: i) reducing the barriers to formal employment for the bottom forty percent, youth and women; ii) strengthening labor market information systems; and iii) strengthening active labor market programs to promote activation of youth, women and the Roma population. 60. The proposed new activities during the program period are designed to contribute directly to the CPF objectives (see Annex 1). The WBG program described in paragraphs 61-77 presents the importance and relevance of the proposed interventions for accomplishing the CPF objectives that support the twin goals. Legacy operations in the portfolio are included where these contribute to the new CPF objectives and are also included in Annex 1 results matrix. World Bank Group Country Partnership Framework For Albania 49 50 Figure 6: CPF Results Framework: Core CPF Indicators World Bank Group Objective 1b Objective 2c Objective 2d Objective 2e Objective 3a Objective 3b Objective 3c Objective 3d Objective 1a Provide Objective 1c Objective 2a Objective 2b Support Provide Contribute to Support Support Contribute to Provide Support strengthened Support Contribute Support enhanced expanded and increased increased improved increased enhanced improved public improved to improved sustainable energy inclusive productivity efficiency of equity and efficiency and coverage of fiscal investment financial business tourism security, land/property and public access to social access to water and sustainability management stability environment development efficiency registration sustainability service protection health sanitation in transport sector and supply of land use delivery services services services Country Partnership Framework For Albania No All Road Sector NPLs DB distance Key Electricity 20% of 35.000 ha Citizens' time Coverage of of % of income 77.000 accumulation Investments reduced to frontier infrastruture distribution properties provided with required to the poorest spent on out households of new central appraised for to 20% ranking operational losses lowered registered in improved obtain targeted quintile in the of pocket provided with government economic improved for sustainable by 50% th edigital irrigation and administrative Solidarity health household water arrears viability and from 66 to 74 tourism in registration drainage services Albania expenditures connections and aligned with south coast system services reduced increased from for the poorest 3000 new medium term by 15% 25% to 38% quintile households budget reduced from sewer framework 9% to 7% connections Number of Electricity Sustainable firms, customer land especially in collection is management export maintained at practices oriented a sustainable adopted in sectors average rate 7500 ha increased by of 90% of additional 3-5% land area Electricity market deregulation on the demand side reached 20% of net demand Objectives Supported by the World Bank Group Program COUNTRY GOAL: Restructured public finances to ensure fiscal and macroeconomic stability FOCUS AREA 1: Restoring macroeconomic balances CPF OBJECTIVES: 1a. Support improved fiscal sustainability 1b. Provide strengthened public investment management in transport sector 1c. Support improved financial stability 61. This focus area responds to the country goal of restructuring public finances to ensure fiscal and macroeconomic stability. Reducing macro-fiscal and financial sector vulnerabilities is a pre-req- uisite for accelerating Albania’s growth. The SCD provides evidence that macroeconomic imbalances related to high public debt, high structural fiscal deficits, public sector arrears, large potential external imbalances and a chronic, high volume of NPLs in the financial sector provide significant constraints for Albania’s ability to make progress toward reducing poverty and promoting shared prosperity. These imbalances reduce the expected returns on investment for households and firms, discouraging in- vestment in human and physical capital and constraining further improvements, and increasing the likelihood of poverty and exclusion. The accumulation of arrears, for example, has contributed to the buildup of non-performing loans (NPLs), which in turn has limited the ability of productive firms to raise financing. High public debt contains the government’s ability to open fiscal space to strengthen social programs for the poor and - if unaddressed – could lead to a crowding out of productive government spending. The government is committed to lowering public debt from 71 percent in 2014 of GDP to 69 percent by end 2016 and to well below 60 percent by 2019. CPF Objective 1a: Support improved fiscal sustainability 62. Fiscal consolidation and sound public financial management are important steps towards improving macro-fiscal stability. Central government consolidation would need to be supported by improvements in monitoring and a reduction in explicit and implicit contingent liabilities in order to ensure that the consolidation process is not undermined through in-efficient ad hoc expenditures. Cutting inefficient spending will create fiscal space for social services and welfare programs for the poorest, while strengthening fiscal policy will contribute to efficiency gains - critical in a fiscally constrained environment - in public service delivery, especially social services that directly benefit the poor and the bottom forty per- cent of the population. Strengthening the growth and shared prosperity stance of fiscal policy is therefore particularly important in the context of sustained fiscal consolidation. The CPF foresees a series of budget support operations aimed at improving fiscal sustainability. On the broader public financial management (PFM) front, the World Bank - together with the EU and the IMF - is supporting the clearance of central gov- ernment arrears of around 5.2 percent of GDP and the implementation of measures that will prevent the re-occurrence of central government arrears. The EU is also currently preparing a budget support operation that focuses on strengthening Albania’s PFM. Trust-funded TA projects include Strengthening the Capacity of Financial Supervisory Authority and REPARIS which are aimed at developing public sector accounting and financial reporting capacities for Albania. The PFM reform agenda has been closely coordinated among the EU, the IMF and other European development partners. World Bank Group Country Partnership Framework For Albania 51 63. Improvements in fiscal sustainability also require strengthening of sub-national financing and governance. The local government and territorial reforms initiated by the Government provide an opportunity to support the fiscal and administrative decentralization agenda focusing on sub-national financing and associated local governance reforms. The CPF foresees a Subnational Public Finance Re- view which could form the basis for a multi-sectoral result based operation on sub-national financing and governance focusing on fiscal and service delivery areas. This analytical engagement at the sub national level will provide an important basis for subsequently addressing issues of regional disparities and equitable provision of services for the bottom forty percent and the vulnerable segments of the population including the Roma population. The analytical work will also provide an opportunity to conduct an initial assessment of service delivery arrangements under the new local governments that are expected to be in place after the June 2015 local elections. WBG proposed interventions in this area will be closely coordinated with international partners providing technical support to the Government on local government reforms. CPF Objective 1b: Provide strengthened public investment management in transport sector 64. Improving public investment management in the infrastructure sector, and specifically in the transport sector, is important to scale up public investment in a way that supports the country goals of macro-fiscal stability and inclusive growth. Weak and poorly planned public investments in the transport infrastructure contributed to the mounting government arrears and incomplete physical assets. This sector has been responsible for almost all capital investment arrears and addressing this challenge is essential to promote fiscal discipline through systematic planning and budgeting. These arrears have been a major source of financial distress, leading to the consequent slowdown in infra- structure projects, halting employment opportunities for a large part of the non-agricultural low skilled labor. Better planning and budgeting, with predictable financing of technically viable infrastructure, will create more stable employment opportunities for the poor and the bottom forty percent. Fiscally sound and transparent management of public investments is being supported in the transport sector through a Results Based Roads Maintenance Project leveraging enhanced engagement of other IFIs. A follow up transport reform operation will be considered at a later stage in the CPF to rebalance the public expenditure program towards maintenance of assets, support better planning and management and safeguard against future arrears. IFC support to develop PPPs in the road sector will contribute to efficiency gains through private sector involvement. Through this investment and PPP advisory sup- port, the IFC expects to facilitate US$45 million in financing of highways aimed at improving access for 100,000 people. Other partners active in the sector include the EBRD, EIB and the EU. CPF Objective 1c: Support improved financial stability 65. Reducing NPLs, reviving credit growth, and strengthening bank and non-bank prudential authorities are essential for spurring growth, protecting the income of economic agents and increasing financial inclusion. The high level of NPLs is both a potential source of macroeconomic instability and a key impediment to improving access to financing and promoting financial stability. While the authorities have adopted a number of measures to strengthen key aspects of the NPL reso- lution framework, further judicial reforms are essential improve the insolvency regime and collateral execution processes. Overall, strengthening the independence and capacities of financial regulators is the sine qua non for the maintenance of financial stability and further development of financial sector 52 World Bank Group Country Partnership Framework For Albania intermediation. It also creates the preconditions for financial inclusion in areas with a low financial pen- etration such as rural areas, paving the way for welfare gains among the bottom 40. Strengthening the capacities of the financial regulators, improving the insolvency regime, collateral execution and private bailiff structure are examples of additional steps that could support future credit growth. Supporting the banking and nonbanking sectors with advice on risk management and NPL resolution as well as corporate governance will optimize NPL portfolio management and the value of distressed assets. It will also address the issues of transparency, functioning of boards, and decision making by the boards of Albanian banks, and further enhance the performance of financial sector operators. Policy reforms in this area will be supported by a second Financial Sector Modernization DPL which would continue to implement the reform agenda started under the DPL in the series. This engagement provides comple- mentarity with the IMF program. COUNTRY GOAL: Increased competitiveness to ensure economic growth FOCUS AREA 2: Creating conditions for accelerated private sector growth CPF OBJECTIVES: 2a. Contribute to improved business environment 2b. Support sustainable tourism development 2c. Support enhanced energy security, efficiency and supply 2d. Provide expanded and inclusive land/property registration 2e. Contribute to increased productivity and sustainability of land use 66. The five objectives under this Focus Area directly correspond to several top SCD priorities, and support the country goal to increase competitiveness for growth and shared prosperity. Al- bania remains poorly integrated with the world and exports amount to only 30 percent of GDP (see Figure 7 below). As a small open middle-income economy, Albania’s main path to prosperity is through more successful international integration, especially with Europe. Albania needs to address the funda- mental constraints across multiple dimensions to integrate successfully with Europe and the world. A country the size of Albania needs an exceptionally strong business environment to attract investors and connect to international supply chains. However, companies have not been investing and creating jobs because doing business has been too cumbersome. First, the operating environment for businesses remains weak which also gives rise to high unemployment and inactivity with barriers to labor market engagement, in particular for vulnerable groups and women. Relevance of skills for jobs is considered weak which creates further constraints contributing to low labor engagement especially for the bottom forty percent. Second, Albania faces a number of infrastructure constraints, especially in the energy sec- tor which create additional uncertainty and cost to investors, particularly in manufacturing. Third, land management and land market in Albania require further development to contribute their full potential to a strong investment climate, social stability and inclusive growth. World Bank Group Country Partnership Framework For Albania 53 Figure 7: Albania’s exports: the economy’s Achilles heel10 (Exports as share of GDP) 200 150 100 50 0 Kosovo Bosnia & Albania Serbia Montenegro Macedonia, Panama Malaysia Ireland Singapore Herzegovina FYR Unsustainable natural resource management, inefficient environmental services, unsustainable forestry and agriculture practices undermine the potential for economic development, rural and urban invest- ments and tourism growth, and increase inequalities in poverty and income. Recognizing these mul- tiple constraints, the WBG will seek to contribute to this focus area through five CPF objectives which have strong cross-sectoral and cross-cutting dimensions. CPF Objective 2a: Contribute to improved business environment 67. The Albanian government, private sector, the WBG, and the donor community have identi- fied a subset of business environment constraints which are seen as a barrier to economic growth and job creation. Business constraints include: inefficiencies in cross border trade; a costly and burden- some construction permits process; unreliable enforcement of commercial disputes; burdensome tax administration; poorly defined business exit and insolvency framework; and a fragmented and unpre- dictable FDI (Foreign Direct Investment) framework. Another critical constraint is the limited access to finance for firms and households, especially for women, rural populations, and the less well off. Firms in Albania currently have limited access to finance because of the heightened risk in banking sector due to high level of NPLs, low penetration of financial services and low financial inclusion. The proposed Finan- cial Sector DPL will help support financial intermediation while a proposed Competitiveness and Jobs DPL will provide support for improving the investment climate, expanding access to finance and may also integrate and leverage ICT opportunities such as ICT enabled jobs. Other development partners active in this area include the EU which focuses on competitiveness and innovation. EBRD supports the development of a more competitive private sector through an active investment policy and techni- cal assistance in key sectors. USAID is currently supporting agribusiness competitiveness in Albania through technical assistance. 10. World Development Indicators (2014). 54 World Bank Group Country Partnership Framework For Albania 68. A paucity of adequately skilled labor force is also a growing constraint to the business envi- ronment. Evidence from firm and labor surveys show that about 3 out of 10 firms in Albania reported skills as a major or very severe constraint, just behind infrastructure and corruption. The skills supply, nurtured by education and training systems, has not adapted well to changes in skills demand11. This demonstrates gaps in how education and training systems achieve quality and relevance and translate these into market-valued skills. This market failure involves the lack of strong quality assurance and of information on the returns to different careers and postsecondary vocational training offered by insti- tutions to guide students’ choices. These have two main consequences: high variation in the quality of provision and misguided career choices that result in imbalances in the skills supply of graduates. The impact of improvements likely will be felt in the medium to longer term, but policy actions and inter- ventions are needed in the short to medium term. The CPF will also support an analytic program that will seek an evidence-based understanding of the labor market and the constraints faced by women and the bottom forty percent to labor force participation. Further policy support for job creation, in- cluding on labor market reforms, will be provided under the proposed Competitiveness and Jobs DPL and associated analytic work. The proposed Skills and Employment Project will focus on strengthening the relevance of the training system and active labor market programs, including creating enhanced linkages between the training system and employers. Other development partners engaged in the area of vocational education and labor issues include the EU, Germany and ILO. CPF Objective 2b: Support sustainable tourism development 69. Albania’s rich land endowments and pristine natural beauty are yet to be fully tapped for sustainable tourism development. The country’s natural and land resources are poorly planned and developed especially in the coastal region. Issues such as uncontrolled urban growth, lack of adher- ence to building standards and stressed municipal infrastructure in key coastal towns have increased pressure on the pristine and fragile nature and habitats and land resources threatening the asset base that is the foundation of this tourism potential.  Government is committed to developing tourism as a key source of growth and employment and is promoting sustainable tourism as a strategic sector that will provide opportunities for generating regional growth and jobs for the local population including the bottom forty percent. A more focused regional approach can also help build institutional capacity for sustainable tourism development through improved coordination, better management and sus- tainable use of cultural and natural heritage. Building on the results of a recently closed IBRD project in the coastal region, the sustainable development of natural and cultural assets will be integrated in a cross cutting way with urban and environmental infrastructure to boost tourism development and eco- nomic growth in Albania’s coastal region under a proposed Coastal Zone Regeneration and Sustainable Tourism operation.  The proposed operational and analytical engagement will take into consideration regional disparities, and the needs of excluded communities and the bottom 40 including through po- tential employment opportunities generated through tourism growth.  WBG’s engagement in this area is expected to leverage other partners’ assistance.  11. Source: Growing with Jobs in ECA report. World Bank Group Country Partnership Framework For Albania 55 CPF Objective 2c: Support enhanced energy security, efficiency and supply 70. Security of electricity supply and a financially efficient energy network are essential to sup- port economic growth. The power sector suffers from significant inefficiencies related to the speed and reliability of power supply. An unreliable and expensive power supply dissuades large firms looking to enter emerging markets, and existing firms ranked electricity constraints as one of the main con- straints (BEEPS 2014). Efficient management of electricity distribution and diversification of electricity generation potential is required to ensure security of supply and financial sustainability. Recurrent en- ergy shortages because of fluctuations in rainfall, persistently high distribution losses (about 44 percent in 2013), and regulated tariffs below recovery costs, have resulted in unsustainable fiscal support from the government. In the distribution sector, low collection rates among households, businesses, and public institutions (78 percent in 2013) have contributed to rising fiscal costs. In response to these chal- lenges, the Power Sector Recovery Project supports Government’s ambitious reform program in the energy sector. It aims to improve reliability of power supply and financial viability of the power sector. While clamping down on illicit energy use by households, firms and public agencies, Government is also improving targeting and coverage of the energy safety net for poor households, with WBG support. The World Bank funded Dam Safety project is rehabilitating existing hydropower dams to enhance security and safety of operations. Development of Albania’s hydropower potential for domestic and export use is a high- potential driver of growth for some of Albania’s poorer and more remote regions, helping to overcome geo- graphic poverty disparities. Ongoing WBG assistance would be complemented by a proposed energy development operation supporting further market reform and diversification of energy sources. IFC investments and advisory services will contribute to the installation of additional 110 MW of renewable energy. Moreover, the IFC’s ongoing Balkan Renewable Energy Project aims to improve the regulatory framework for renewable energy, by assisting private companies and banks to assess renewable energy proposals, and by providing dedicated lending instruments to commercial banks. The WBG is working in close collaboration with other active partners in this sector including the EU, EBRD, EIB and KfW. CPF Objective 2d: Provide expanded and inclusive land/property registration 71. Land and property markets require further development to contribute their full potential to economic growth. The country suffers from historic land restitution issues which pose a significant ju- dicial and fiscal burden and undermine growth, as well as considerable informal settlements and other types of land insecurity. Albania lacks a modern system for registering, recording and transferring land and property, and suffers from an incoherent legal framework and divided institutional responsibilities in this area. Securing property rights and formalizing land settlements will create a more enabling envi- ronment for investments that will also benefit women and the bottom forty percent of the population. The government has recognized the large challenges in this area and has requested the Bank to as- sist in developing a comprehensive, integrated land management approach for the sector and provide continued support in property registration. Results achieved under an earlier Bank financed operation aimed at establishing a modern cadaster and initiating property registration will be complemented by the existing Land Administration and Data Improvement (LADI) Trust Fund focusing on digitalization of property maps, and by a proposed Integrated Land Management Project that would support digitized property registration, and an integrated land management policy. This would support urban planning and management, and contribute to stimulate urban and rural investments. The WBG will be the key partner to support movement toward the EU acquis communitaire as the changes in land policies 56 World Bank Group Country Partnership Framework For Albania and institutional responsibilities are required per the EU directives. The WBG and the EU are currently the main development partners engaged in the area of land and property registration. The Council of Europe is providing support on the legal and restitution framework. CPF Objective 2e: Contribute to increased productivity and sustainability of land use 72. Strengthening the productivity and sustainability of land use to promote development is a key government priority supported under this CPF objective. This reflects Albania’s abundant natural resource endowment as a main driver of future growth. Engagement in this area is also ex- pected to address regional disparities in poverty (see paragraph 23, and Figure 2). Critical land usage challenges include low farm productivity, non-inclusiveness of land markets, lack of urban planning and enforcement, unsustainable land management practices and poor use of natural resources. Enhancing land productivity and maximizing sustainable use of Albania’s natural endowments will boost farm- ing income thereby generating regional growth and job opportunities for the bottom forty percent of the population. Existing engagement in this area includes support for enhancing sustainable land management practices through the recently approved Environmental Services Project, and improving agricultural land productivity through the ongoing Water Resources and Irrigation Project that will close towards the end of the CPF period. While new IBRD investment in agriculture is not foreseen in the CPF, IFC could support agribusiness as part of its broader work on the business environment if the opportu- nity arises. The WBG operational and analytical engagement take into consideration regional disparities and incorporate measures for enhancing gender dimensions in the interventions, and the bottom 40 in- cluding potential employment opportunities generated through tourism growth. WBG’s engagement in this area is expected to leverage other partners’ assistance. COUNTRY GOAL: Governance and modernization of public services for transparency and accountability FOCUS AREA 3: Strengthening public sector management and service delivery CPF OBJECTIVES: 3a. Support increased efficiency of public service delivery 3b. Support improved equity and access to social protection services 3c. Contribute to increased efficiency and access of health services in hospital sector 3d. Provide enhanced coverage of water and sanitation services 73. This CPF focus area corresponds to a top SCD priority and supports the country goal of en- hancing governance and improving service delivery to the citizens. The SCD identified “enhancing governance, transparency and accountability of government” as among the top five priorities to stimu- late growth, reduce poverty and enhance prosperity. The CPF will focus selectively within this broad priority on four related CPF objectives where the Bank has comparative advantage and a track record of engagement and results. Government reform program for increasing the efficiency of public service delivery will be supported through the first CPF objective in this focus area and improving equity, effi- ciency and access to basic social services will be supported through three CPF objectives. WBG engage- ment in these areas will build on its comparative advantage by supporting systems improvement and reforms across key public services, while some broader governance areas, such as the rule of law and civil service reforms, are being addressed through EU engagement. World Bank Group Country Partnership Framework For Albania 57 CPF Objective 3a: Support increased efficiency of public service delivery 74. Improving service delivery, increasing transparency, reducing scope for corruption and en- hancing the accountability of government underpin this CPF objective. This will improve man- agement and use of scarce public resources. The quality of public service delivery and government accountability to citizens are undermined by corruption, fragmented institutional arrangements and weak planning and implementation. Government recognizes the lack of trust that citizens have in pub- lic services delivery, and wishes to transform the interface between citizens and the state. Government has initiated a bold reform of public service delivery, entitled “Innovation against Corruption,” in June 2014. The goal is for citizens to benefit from improved access to administrative services, greater efficien- cy in the delivery of these services, reduced transactions costs and a reduction in petty corruption. This will translate into time and cost savings for service users with special efforts taken to identify the needs of vulnerable groups, the poor and the bottom forty percent of the population and improve their ac- cess to administrative services. The CPF will support Government’s program through the Citizen Centric Service Delivery Project. The project will support innovative citizen-centric design of administrative ser- vice delivery and help develop a new service culture. Development of proactive feedback mechanisms will allow beneficiaries to suggest improvements in services to better address their needs. In addition, benefits to government agencies will be in the form of streamlined business processes, digitization, and improved efficiency. Other development partners engaged in this area are the EU (deeply engaged in public sector reforms, including digitization), UNDP, and Italian cooperation. Those engaged in the broader and parallel domain of civil service reforms, rule of law and security, and anti-corruption efforts include the EU, Swedish Cooperation, USAID and Swiss Cooperation. Strong coordination with develop- ment partners will be maintained to ensure complementarity. CPF Objective 3b: Support improved equity and access to social protection services 75. Government is implementing reforms in social protection programs that focus on improved equity and access for poor, excluded and the bottom forty percent of the population. Weak gov- ernance, poor targeting and inefficiency are at the root of poor access to social protection services by poor, remote and excluded population. Only a quarter of the poorest households receive targeted last-resort social assistance, whereas spending on disability payments has been growing wildly due to inadequate screening and targeting. Benefits administration for Solidarity Albania, the social assistance program, and disability programs is undergoing improvements to enhance capacity, simplify the com- plex application processes and establish systems for managing information.  Establishment of effective management information system (MIS) will improve efficiencies in applying for and awarding benefits. Government is committed to improving the effectiveness of social assistance benefits and has initiat- ed an ambitious reform program to strengthen the design, administration and governance of these transfers. The reform program focuses on improving the equity and efficiency of the social assistance program and disability assistance benefits. The new pension law approved in 2014 opened the way for significant and long-overdue pension reforms that are now under implementation. The Bank-fund- ed Social Assistance Modernization Project (SAMP) supports the Government in implementing these reforms that aim to reduce poverty and vulnerability. It also supports improvements in transparency through proactive communications, and modernized information systems. Additional financing for SAMP is envisaged in the CPF. 58 World Bank Group Country Partnership Framework For Albania CPF Objective 3c: Contribute to increased efficiency and access to health services 76. Albania’s health system performance shows improvements in several areas yet progress is mixed in other areas requiring significant effort to improve efficiency and access. While health outcomes are relatively strong by regional standards, financial protection of households against high out-of-pocket payments (OOP) is weak, and quality of care in hospitals is a serious concern. Average life expectancy is relatively good but the burden of non-communicable disease is high and health service quality is low. Public spending in health sector suffers from inefficiencies and inequities. The poor and those with chronic diseases face a high and growing burden of out of pocket health expenditures which currently represent 10 percent of income among the poorest households. The health sector requires reforms in governance and performance management in public hospitals to better plan and adapt ser- vice capacity to needs, strengthen management and governance, and improve efficiency and quality of care. Government has demonstrated strong commitment to undertaking reforms in key areas including improving health financing systems and hospital services, pharmaceutical reforms and moving toward universal coverage through expanding social health insurance. The Government program includes pol- icy interventions to improve health care services, enhance public accountability and structural reforms to improve service delivery. The newly approved IBRD Health Systems Improvement Project and IFC PPP in health are directly aligned with Government’s health sector reform strategy and support the achievement of reform objectives. Reforming the hospital sector by creating a more accountable man- agement structure, improving monitoring and management of service quality and enhancing financial access through social health insurance are some elements of IBRD support. A PPP in hospitals is being supported by the IFC. Other development partners engaged in the health sector include the Swiss Co- operation, Italian Cooperation, and the Council of Europe Development Bank (CEB). Objective 3d: Provide enhanced coverage of water and sanitation services 77. Albania’s public investments in water and wastewater services are poorly governed and per- forming below optimum levels requiring significant support to maintain both quality and sus- tainability of services. Service delivery in the water sector has historically lacked a transparent and well governed planning process leading to unreliable services to citizens, weak utility performance and poor management of the existing asset stock. The existing utilities require efficient and transparent management and a medium-term incentive framework that is currently lacking. Water services are pro- vided at local government level and are fragmented through 57 utility companies which make it chal- lenging to provide efficient management, good access and quality services. Adequate access to water and sanitation services is particularly important for the bottom 40 who are disproportionally affected by poor access and limited services. Better governance and transparent management of public service delivery investments will continue to be supported through the existing project in the water sector and associated analytic work. The legacy operation, Water Sector Investment Project (WSIP), is included in this objective as it aims to improve the utilities’ services and expand citizen’s access to services. A proposed analytic work as well as the Regional Danube Water Program will provide policy support for a medium term sector financing strategy to support sustainable service delivery. The WBG interventions in this area are coordinated with development partners active in the water network and services includ- ing the KfW, GIZ, ADA, USAID and the EU. World Bank Group Country Partnership Framework For Albania 59 C Implementing the Country Partnership Framework 78. The Albania CPF for FY15-19 builds on the ongoing portfolio which broadly aligns with the proposed objectives of the new CPF. There are currently 8 projects with commitments totaling US$450 million. These projects are supporting investments in energy, irrigation, water supply, environ- ment, health and social protection. Albania’s portfolio performance has been at par with ECA (Europe and Central Asia) region performance, with disbursement rate averaging about 21 percent over the last ten years. 79. IBRD indicative financing up to US$1.2 billion is proposed in support of the FY15-FY19 CPF program with significant front loading in the initial period keeping pace with Government re- form and subject to exceptional progress on the reform program, country demand and IBRD’s financial capacity. Under this assumption, up to forty percent of the indicative lending is expected to take the form of budget support subject to continued satisfactory performance on the agreed macro- fiscal framework (See Table 3). IFC investments are expected to reach US$150 – US$200 million during the CPF period. In FY14, reflecting the ambitious Government reform agenda, new IBRD commitments rose above US$300 million, a record amount for Albania, including two DPLs to support macro-fiscal sustainability and financial stabilization. FY15 will also be a peak year, with new commitments of over US$400 million including a PBG. For IBRD, FY15 serves as a bridging period between the previous CPS and this CPF, reflecting an investment lending program outlined in the CPS Progress Report. The pro- posed WBG FY15-FY19 lending, analytic and technical assistance program is outlined in Annex 2. The PLR at mid-term will assess progress in delivering the program, and will make necessary adjustments for the remaining CPF period to incorporate possible shifts based on actual performance, progress in reforms and emerging country developments. 80. The CPF brings a greater focus on results. The choice of instruments in the indicative program includes IPFs, in several instances with incorporation of Disbursement Linked Indicators (DLIs), Addi- tional Financing for well performing operations, and policy-based lending in support of macro-fiscal and structural reforms. The CPF proposes several IPF operations adopting a results-based approach in diverse sectors such as transport, local governance, and public service delivery, opening the way for a more programmatic engagement in the latter years using a sector wide approach. 81. In line with the selectivity filter of strategic programming, the shift to larger more trans- formative operations will be maintained. The move from an average project size of US$10 million a decade ago to the present US$50 million will be continued with average project size expected to reach US$70 million by the end of the CPF period. This would help in avoiding proliferation of too many small operations with high transaction costs that can be unmanageable in a small country context and over- burden government capacity. The IBRD indicative lending program envisages 15 new operations with the number of projects in the portfolio rising to between 12-13 operations by the end of the CPF period (see Annex 3). 60 World Bank Group Country Partnership Framework For Albania Table 3: CPF Indicative IBRD Lending Program FY15-19 FY PROJECT IBRD (US$ million) Albania Health System Improvement 40 Road Safety and Maintenance 80 Policy Based Guarantee (PBG) 220 FY15 Power Sector Recovery Project 150 Sub-total FY15 490 Citizen Centric Service Delivery 32 Integrated Land Management 45 Coastal Regeneration & Sustainable Tourism 53 FY16 Financial Sector Development Policy Loan 100 Sub-total FY16 230 Sub-National Finance and Governance FY17 Competitiveness and Jobs DPL SAMP Additional Financing Sub-total FY17 180 Energy Sector Development Skills & Employment FY18 Development Policy Loan Sub-total FY18 200 Transport Reform FY19 Development Policy Loan Sub-total FY19 120 TOTAL 1,22012 12. This includes the PBG in the amount of US$220 million. World Bank Group Country Partnership Framework For Albania 61 82. The CPF seeks to maximize the synergies among the IBRD, IFC and MIGA. There is currently a strong collaboration between the IBRD and IFC in the area of business environment where the teams work jointly. Active collaboration in transport, competitiveness, skills development and health is fore- seen during the CPF period. Further deepening of this collaboration will be considered in the context of the relevant Joint Implementation Plan (JIP). IFC will strengthen its current investments and advi- sory services in energy and banking sector, and will further lend support to export oriented businesses, renewable energy SMEs, transport, health and waste management. All three agencies are providing mutually reinforcing assistance in the energy and financial sectors. MIGA is involved in three projects in the energy, financial, and tourism sectors. MIGA’s involvement in the energy sector dominates the exposure, with US$ 143 million in gross, and US$ 71 million in net exposure to one project. Supporting foreign investment through political risk guarantees, in close coordination with the IFC and IBRD, will remain a strategic priority for MIGA’s activities in Albania. Current payment arrears affecting Albania’s energy sector are a concern and pose a challenge for MIGA. Areas for potential further MIGA involve- ment include the manufacturing, agribusiness, and services sectors. 83. More operationally relevant analytical work and knowledge support will be part of the CPF program. The analytic work will contribute to the CPF objectives by filling the knowledge gap in im- portant growth promoting areas such as municipal public finance, labor market, jobs and growth and sustainable tourism in the coastal region. Country specific analytics will be backed by regional AAA in the areas of poverty assessment, energy efficiency, gender diagnostics, education and innovation. While gender specific AAA is proposed, gender and inclusion will also be addressed in a cross cutting manner in all relevant analytic work. The IFC will continue to provide advisory services in financial sec- tor, climate change, improving business environment, and waste management at municipal level. It will expand its engagement to support PPP transactions and privatizations in extractive industries, waste management at municipal level, and to financial institutions to help launch highly differentiated supply chain finance programs. 84. The scaled up Bank engagement during the CPF period will require Government’s strong im- plementation performance as well as the Bank’s regular technical and implementation support. The shift of the CPF to larger and more transformative operations, while easing the administrative bur- den on government institutions, will also present capacity challenges particularly in fiduciary areas and on overall program monitoring. Recognizing the existing capacity constraints, the WBG program will systematically incorporate capacity enhancement measures in all new operations, complementing the support provided by other partners. In addition, technical assistance will be provided to the Supreme Audit Institution to strengthen its capacity for audit and associated functions. These broader areas will be complemented by ongoing capacity enhancement measures in sectoral line ministries, especially for strengthening monitoring and establishing management information systems, such as envisaged in the Citizen-Centric Service Delivery, Social Assistance Modernization, Roads Maintenance and Health Systems projects. These monitoring systems will be strengthened to adequately assess performance and impact across gender and inclusion dimensions. Broader support for establishing Integrated Plan- ning Systems is under implementation through a Trust Fund managed by the World Bank. 85. The good integration of the Trust Fund portfolio, as seen in the previous CPS, will be further deepened. Currently there are 7 active Recipient Executed Trust Funds amounting to US$12.5 mil- lion focused on natural resources, integrated planning system, public sector accounting and extractive 62 World Bank Group Country Partnership Framework For Albania industries. A set of important Trust Funds are in the pipeline to support accounting standards and strengthen supervision capacities of the financial supervisory authority. 86. The results focus initiated during CPF preparation will be maintained throughout its imple- mentation. The joint WBG preparation process initiated during the SCD preparation has been further strengthened during CPF preparation through the establishment of multi-GP results teams centered on each focus area which have cross cutting objectives. This process contributed to developing a shared vision and alignment first around the SCD priorities and then around a set of focused CPF objectives. These multi-GP results teams, under the leadership of the Program Leaders/Lead Specialists, will remain active during CPF implementation. The teams will take responsibility for monitoring progress towards results and provide guidance for modifications, as needed, during the PLR. This results based approach also complements the Albanian Government’s focus on results. 87. Regular portfolio performance reviews at the country level contribute to a high level over- sight of program performance and allow for timely resolution of emerging bottlenecks. The portfolio performance reviews will be conducted at three levels: i) bi-annual portfolio reviews initiated during FY14 will continue under the leadership of the Ministry of Finance; ii) quarterly reviews will be conducted with relevant ministries to seek resolution of emerging issues related to problem or high risk projects; and iii) an annual review will be conducted with a particular focus on assessing progress on the CPF supplementary indicators. The CMU will work with the GPs to encourage teams towards a more results oriented supervision which will underpin portfolio reviews and CPF monitoring, and will also en- courage greater proactivity for poorly-performing operations, including options such as restructuring at any point and not only at mid-term review. Review of Government Procurement and Financial Management systems 88. Albania has made progress in public procurement reform yet significant challenges remain. Public procurement legislation in Albania substantially complies with the EC Procurement Directive 2004/18. There are two high level entities involved in Public Procurement: the Public Procurement Agency (PPA) which has regulatory functions, and the Procurement Review Commission (PRC) which is responsible for review of procurement complaints. While there have been improvements in the public procurement review system, public procurement in Albania faces serious challenges regarding signifi- cant undervaluation of bids which often lead to poor quality of works. Another challenge is the high number of unpublished negotiated contracts. Notwithstanding the moderately high rate of complaints addressed to the contracting authorities and to the PRC in particular, the perceived lack of trust in the review mechanism is another challenge for public procurement. Currently, the PPA with the support of the EU funded SIGMA project is in the final stages of developing a general strategy for public procure- ment system in Albania. The PPA is also in the process of consultations for introducing amendments to the law on public procurement to address issues and shortcomings identified during the implementa- tion of the current law. 89. The World Bank will continue to provide technical support with the aim of increasing oppor- tunities for the use of the country systems in Albania. The Bank support for strengthening public procurement in Albania will be threefold. First, it will provide technical assistance to increase compli- World Bank Group Country Partnership Framework For Albania 63 ance monitoring and transparency in public procurement, strengthen efficiency and transparency in public procurement, and improve external audit carried out by the State Audit Institution. Second, Albania is the first country in the region to pilot e-procurement for the World Bank financed projects with the first contract procured through the e-procurement system in 2012. The e-procurement system has been certified by the World Bank for the use of International Competitive Bidding (ICB) and National Competitive Bidding (NCB). The pilot has given positive results and it has been used by implementing agencies also for other donor funded projects (such as EIB, and EBRD). Following good results and feed- back from the pilot, the use of government’s e-procurement system will be applied to at least one part of Albania’s portfolio during this CPF cycle. Third, Government decision to streamline project manage- ment of donor-financed projects into the line ministries will require that each new World Bank financed investment operation to include necessary procurement capacity building support in the relevant min- istries. 90. Albania benefited from a number of detailed reviews13 of its Public Financial Management system that have paved the way for progress in this area. The last 2011 PEFA assessment conclud- ed that Albania has an adequately functioning fiscal and budget management system enabling the government to finance and execute a budget that delivers public services to the general population. Albania scores relatively well on comprehensiveness and classification of the budget, basic treasury op- erations (including budget, and payroll controls), financial reporting/transparency and public access to government budget and financial information. The most notable steps to improve core public financial management system over recent years encompass the implementation of the Treasury Single Account and the development of the Albania Financial Management Information System (AFMIS) which will be expanded to all participating entities14(budget institutions and a limited number of municipalities) to enable direct expenditure prioritization, management, commitment and contract registration. Further enhancements to the system are planned including implementation of new modules on budget prepa- ration, external assistance and medium term budget planning, pre-commitment control and linkages to the tax collection system. These improvements have the potential to provide the Ministry of Finance with a fully functional financial management information system. For the Bank’s lending operations, acceptable elements of the country financial management systems are expected to be used while con- currently supporting system strengthening. Partnership and coordination 91. Collaboration and coordination with development partners will remain strong with WBG engagement leveraging other partners’ assistance. The last decade witnessed a decrease in the number of development partners in Albania, with many bilateral partners increasingly channeling their support through the EU. Nevertheless, foreign assistance has been crucial in supporting Albania’s ca- pacity building and capital investments. With around US$350-US$400 million external annual support, 13. Two PEFA assessments (2006 and 2011), a Public Expenditure Review (2006), a Public Finance Review (2013), annual EU-SIG- MA reviews, and other analysis by the World Bank, the IMF, the EC, and other organizations. 14. Albania has a total of 429 budget institutions, including local institutions and special funds, which together have created 1548 spending units for the purpose of budget execution through the Treasury system. The five pilot institutions that are already connected include the General Directorate of Roads, the National Assembly, the National Agency of Natural Resources, the National Licensing Center and the Intelligence Service. Supported by SETS. 64 World Bank Group Country Partnership Framework For Albania Albania still relies quite heavily on foreign financing which covers 40 – 50 percent of the capital expen- ditures in the budget. The WBG and the EU are the key strategic partners in Albania, and their programs cover multiple sectors. The complementarity with other development partners’ programs is presented in the earlier discussion about the CPF objectives. 92. The Government is committed to enhance the effectiveness of development cooperation in support of national priorities. Leadership is provided by the Deputy Prime Minister, who is also leading the NSDI preparation, through the Department of Development Planning, Financing and For- eign Aid (DDPFFA). Albania has adhered to principles of aid effectiveness undertaken under the Paris Declaration, Accra Agenda for Action and Busan partnership for Effective Development Cooperation. Development partners’ coordination takes place through the Donor Technical Secretariat. The secre- tariat facilitates stronger information exchange among development partners, and with Government to improve aid effectiveness. EU is leading the efforts to strengthen donor coordination mechanisms including streamlining the Sector Working Groups with the aim to work with Government on a sector wide approach for harmonization of development assistance. World Bank Group Country Partnership Framework For Albania 65 MANAGING RISKS TO THE CPF PROGRAM 66 World Bank Group Country Partnership Framework For Albania IV. MANAGING RISKS TO THE CPF PROGRAM 93. The overall risk to achievement of development objectives outlined in the CPF is assessed as moderate. The risks to the CPF development objectives are summarized in table 4. The Government is pursuing an ambitious program of structural reforms to bring the country back on an accelerated growth path. The partnership between the WBG and the Government of Albania is strong with the reform environment in the country lending itself to deeper WBG engagement. The following areas are assessed as the key risks for the achievement of the CPF development objectives. Table 4: Risk Rating Risk Categories Rating (H, S, M, L) 1. Political and governance M 2. Macroeconomic S 3. Sector strategies and policies M 4. Technical design of project or program M 5. Institutional capacity for implementation and sustainability S 6. Fiduciary S 7. Environment and social M 8. Stakeholders L Overall M Note: H = High; S = Substantial; M = Moderate; L = Low yy The key risk to successful implementation of the CPF relates to the Government’s overriding ob- jective to restore growth. This objective, and the WBG program to support it, faces substantial macroeconomic risks. This could have implications for the DPLs if the macroeconomic framework goes off track. Albania has a relatively high exposure to developments in neighboring countries, especially Greece and Italy, through remittances, exports and foreign investments. Prolonged stag- nation in the Eurozone, and a slower than projected pace of recovery in the Euro area could lead to lower than expected growth, revenue collection and fiscal consolidation. Moreover, given the large exposure of the financial sector to external regulatory shocks, there are risks of potential pressures from deleveraging of foreign banks. Significant efforts are underway by the Albanian authorities supported the EU, the IMF and the WBG to ensure macroeconomic stability. The government has World Bank Group Country Partnership Framework For Albania 67 signed a 3 year Extended Fund Facility (EFF) with the IMF which aims at putting debt to a declining path after the government clears all arrears in 2016. The WBG has provided significant assistance to support government’s reforms in the fiscal domain, and to address vulnerabilities of the financial sector. While these ongoing government efforts will mitigate the macroeconomic risk, Albanian economy remains vulnerable to external shocks and slower growth in the Eurozone could have an impact on the country’s economic performance. This risk will be mitigated by encouraging more diverse linkages to regional and global markets beyond Albania’s traditional investment, trade and migration partners. The WBG will continue to monitor performance in the Eurozone and be flexible to adjust its program in order to respond to possible emerging needs. While this risk affects the overall CPF program, it is greater for the objectives supported by DPLs under Focus Areas 1 and 2. The WBG will also provide specific support for crisis preparedness such as to the financial sector for conducting crisis simulation exercises. The WBG will maintain its strong coordination with the IMF and EU to ensure joint and timely support should deterioration occur in the macroeconomic outlook. yy Institutional weaknesses and capacity constraints in implementing agencies may undermine pro- gress in spite of strong political commitment for reforms and could pose a substantial risk. These risks could exacerbated with the implementation of territorial and administrative reforms and shift of greater responsibilities to local government units which currently have weak institutional capac- ities. In addition the objectives pertaining to land and tourism development could face potentially higher social and environmental safeguard risks. The WBG program is designed to engage in areas where there is strong commitment for reforms and capacity for implementation. Some risks will be mitigated by incorporating stronger institutional reform elements, providing capacity support to line ministries and including targeted capacity support in all new IBRD lending. This risk will also be mitigated through careful sequencing of projects recognizing and addressing the institu- tional weaknesses. For example, the follow on operations in land management, energy, and coast- al regeneration and sustainable tourism build on the institutional strengthening initiated under previous operations. Engagement in new areas will build on strong analytic work to inform the subsequent operations such as: skills and employment, jobs and competitiveness, and sub-national financing and governance. In order to promote sustainability, there will be increased use of govern- ment structures during implementation with strong M&E arrangements and inclusion of measures to strengthen government monitoring systems. yy The fiduciary environment and weak governance represent substantial risk to the achievement of CPF objectives. Some weaknesses are identified in the overall fiduciary environment, characterized by low and moderate scores in key diagnostic indicators. Despite improvements, lagging areas, as identified in the 2011 PEFA assessment include: i) multi-year perspective in fiscal planning and policy formulation; ii) internal audit; iii) implementation of the integrated planning system; and iv) scope and nature of the external audit function. The Public Finance Review in 2013 emphasized the need of further technical assistance to strengthen and modernize cash management and pre-com- mitment control over expenditures. Significant efforts are underway with support from the EU, IMF and the WBG for strengthening public financial management. The Ministry of Finance has recently approved a comprehensive PFM strategy which provides the basis for further support. Recurring procurement and contract management problems have been observed in the Bank portfolio dur- ing the previous CPS period, and support (such as through hiring of IT procurement experts) has 68 World Bank Group Country Partnership Framework For Albania been provided in projects with complex design components. Increasing use of e-procurement and Bank guidelines in the procurement process allows for greater oversight thereby mitigating some risks. The fiduciary and governance risk is system-wide with potential impact on CPF objectives supported by investment lending in areas such as land, energy, tourism development and water. Mitigation measures include systemic improvements while benefiting from the ongoing support being provided by WBG and other partners. yy Stakeholder risk is considered relatively low given: i) the World Bank’s track record of positive results in Albania; ii) strong public support for the Government’s medium-term reform program and iii) renewed dynamism of the EU accession process, which further strengthens public support for re- forms. Overall, stakeholder risk is considered low, although some of the more controversial reforms (such as clamping down on illicit energy use) generates some public opposition. The WBG program takes into account the next election cycle midway during the CPF period which may slow program delivery. Mitigating measures include some front loading of the program to take advantage of the current reform orientation, and conducting the mid-term PLR after elections to make modifications to strategy as warranted to ensure Government ownership and continued commitment to reform. A strong communication and public outreach campaign, by both Government and by the WBG, will also be an important strategy to mitigate risks. World Bank Group Country Partnership Framework For Albania 69 ANNEXES Annex 1: CPF Results Matrix Annex 2: World Bank-IFC Indicative Lending and AAA Program Annex 3: Indicative Sequencing of IBRD Lending Map of Albania 70 World Bank Group Country Partnership Framework For Albania ANNEX 1: CPF RESULTS MATRIX 2015 – 2019 FOCUS AREA 1: RESTORING MACROECONOMIC BALANCES The Government considers reducing the country’s macro-fiscal and financial vulnerabilities as pre-requisites for economic growth and poverty reduction. Albania’s strong growth and sharp decline in poverty halted in the aftermath of the 2008 global financial crisis. The country’s economic vulnerabilities have been heightened by high public debt and arrears, inadequate planning and management of public investments, unsustainable fiscal deficits, and mounting non-performing loans (NPLs). The Government is implementing a strong medium-term reform program to restructure public finances for macro-economic stability, and reforms for financial sector stability. Progress in this focus area is expected to contribute to economic growth and poverty reduction. This Focus Area encompasses three inter-related CPF objectives supported by a strong program of technical and financial interventions. CPF Objective 1a: Support improved fiscal sustainability Intervention logic: This CPF objective will directly contribute to Government’s reform program that seeks to promote macro-economic stability and restore growth. Sustained implementation of fiscal policies is required to improve efficiency of public spending at the central government level, enhance revenue measures, tackle outstanding public arrears, address sustainability of pensions, and strengthen public debt management. Interventions with development policy operations allows the financing of an orderly medium-term fiscal consolidation which nurtures growth rather than forcing an ad hoc adjustment which would either undermine growth or require further unsustainable government borrowing on domestic markets. Analytical and operational engagement - through DPLs - has contributed to Government’s public financial management reforms, with encouraging results. The recently approved Policy Based Guarantee (a conversion of the second DPL operation), the proposed Public Finance and Growth DPLs and analytic and advisory interventions will continue to support Government efforts towards building a much needed transparency and planning in budgeting and fiscal discipline. The newly initiated administrative and territorial reforms provide an opportunity to extend the fiscal engagement to the sub-national level to, the critical mass for service delivery. The proposed intervention at the sub national level, underpinned by a sub-national public finance and governance review, will contribute to inclusive growth and will address issues of regional disparities. The overall advisory and technical interventions benefit from a close coordination among the EC, the IMF and the World Bank. In the local finance and governance area where the proposed operation is not yet fully developed, appropriate adjustment will be made at the time of the PLR to incorporate relevant CPF indicators. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Current Portfolio: No accumulation of new Reduce public and publically guaranteed debt to GDP ratio Albania PBG (approved March 27, 2015) central government arrears to 65 percent by 2017; 61 percent by 2018; and 60 percent and arrears backlog cleared by 2019 Proposed: Baseline: 2.6% of GDP - (Baseline: 71%) 2014 Sub-national Finance and Governance (FY17) Target: No central Percentage deviation between actual and budgeted Public Finance and Growth DPLs (FY18, FY19) government arrears - 2018 expenditure not more than 5 percent in 2015, 2016 and 2017 Ongoing TA: Central government arrears stock as of end 2015 is smaller Public Debt Management than 1 percent of GDP Macro-economic monitoring Revised Organic Budget Law has been approved by Public Financial Management Grant for Albania, and IPS 2 TF Parliament (2015) Developing Public Sector Accounting, and Financial Report Grant for Albania 50 % and 70% of municipalities prepare annual municipal development plans 2018, 2019 respectively Proposed AAA: Sub-national Public Finance Review ESW on Growth and Shared Prosperity 71 72 CPF Objective 1b: Provide strengthened public investment management in transport sector Intervention logic: The infrastructure network in Albania is a key asset in support of growth, development initiatives and job creation. The transport sector has a predominant share in public infrastructure investments. It has been responsible for accruing the largest share of arrears owed by Government on capital projects reflecting ad hoc planning and budgeting of capital projects. Addressing this issue is thus critical for supporting fiscal consolidation and PFM reforms. Prioritization of investments in road sector, with appropriate technical feasibilities and available financial resources, is necessary to ensure that economically viable investments are selected that contribute to economic growth. Progress has been made by Government in developing a Medium Term Budget Plan (MTBP) 2015-17 that prioritizes new transport sector investments. The recently approved Results Based Road Safety and Maintenance Project particularly addresses this issue and aims at supporting Government efforts towards bringing fiscal discipline in transport sector investments and rebalancing the resources between new investments and asset maintenance. The IFC Advisory and investments for Public Private Partnerships in Albania Highways complement WB engagement. Accomplishment of progress in the core indicator will contribute to enhancing transparency and predictability in managing public investments in the transport infrastructure. A proposed Transport Reform Project will further deepen support for fiscally sustainable public investment programs. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Current Portfolio: All road sector investments Development of sustainable PPP for improving road Results Based Roads Maintenance Project (Approved March 27, 2015) are appraised for economic conditions through PPP advisory services and investment viability and aligned with Facilitation of investments in financing for highways to Proposed: medium term budget improve access to transportation for 100,000 people framework Transport Sector Reform (FY19) Baseline: Ad hoc planning Road investment program prepared with feasibility, IFC advisory and investment for PPP Albania Highways and budgeting of capital economic analysis, prioritization, and resource requirements investments - 2015 for implementation. Draft prepared (2016) and approved Target: All road sector (2017) investments aligned with Multi-year road maintenance plans prepared (annual basis the medium term budget 2016 onwards) from a zero baseline in 2015 framework - 2018 Length of project road under performance based maintenance: (annual monitoring in line with maintenance plan) 1335 km of national roads under implementation from 2016 onwards from the current zero baseline CPF Objective 1c: Support improved financial stability Intervention logic: The financial sector, which strongly supported high growth before the crisis, was hit with deleveraging by foreign banks and rapidly rising NPLs post-2008. It has remained largely resilient post-2008, but both internal and external risks to its stability are present. If risks materialize, a crises in the financial sector would likely reverse economic recovery and increase poverty. Even in the absence of a crisis, constraints in accessing finance reduce business investments that lead to growth and jobs. Strengthening the capacities of the financial regulators, improving the insolvency regime, collateral execution and private bailiff structure are examples of additional steps to support future credit growth. WBG interventions to support Government reforms in these areas, and especially in reducing the high level of NPLs, are critical to improve access to finance, and promote financial stability. A first phase of reforms was supported under the Financial Sector Modernization DPL in 2014. A second Financial Sector Modernization DPL will further deepen support for financial sector reforms focusing on reduction of NPLs and on actions for improving the resilience of the financial sector. A strong technical assistance program including through Trust-funded TA projects complements the policy engagement under the DPL. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Pipeline: Reduce NPLs to 20 percent NPLs have declined (from 24.9 percent in 2014) by 2 percent Financial Sector Modernization DPL 2 (FY16) or below points in 2016 and another 2 percent points by 2018 NPL Reduction: Ongoing TA: Baseline: 24.9% - 2014 FIRST: Strengthening the supervision and regulation of the insurance sector Target: 20% - 2018 FIRST: Strengthening the supervision and regulation of private pensions SECO TF to strengthen capacity of AFSA to regulate and supervise investment fund and capital markets; Risk Management and NPL Resolution and Corporate Governance Proposed AAA: SECO TF to Enhance Quality of Financial Reporting 73 74 FOCUS AREA 2: CREATING CONDITIONS FOR ACCELERATED PRIVATE SECTOR GROWTH As a small, open middle-income economy, Albania’s main path to prosperity is through successful international integration, especially with Europe, with increase in investments and jobs created. For this, the business environment and supporting infrastructure must be improved considerably. Progress under this area is expected to directly contribute to inclusive growth, boost shared prosperity and reduce poverty. The Government has accorded a high priority to improving the business climate and increasing Albania’s competitiveness. While there has been some recent progress, serious shortcomings remain in the business environment. These include heavy regulatory burden, high informality, inadequate framework for private investment and barriers to labor market engagement, poor relevance of skills and inadequate corporate governance and financial reporting practices. These shortcomings are exacerbated by infrastructure constraints, especially in the energy sector, and weaknesses in the land sector including in property registration and in the sustainable and productive use of land for investments. Due to its cross and multi-sectoral dimensions, this focus area will be supported by four inter-related CPF objectives. CPF Objective 2a: Contribute to improved business environment Intervention logic: Albania’s business environment remains unattractive by global standards (about middle of the global rankings, with excessive bureaucracy, widespread corruption and lack of contract enforcement), and needs to improve in order to stimulate the higher level of investment needed to accelerate growth and create jobs. Albania’s current business environment is a serious constraint to growth. Key areas requiring improvement include cutting the regulatory burden, strengthening the policy, legal and institutional framework for domestic and foreign investment and improving trade logistics and facilitation. Progress in these areas is necessary for Albania’s shift towards a new growth model and for improving the business environment. A proposed Competitiveness and Jobs DPL will support Government’s medium term reforms for improving the investment climate and expanding access to finance, and will provide policy support for labor market reforms and job creation. The joint IFC and World Bank program incorporates investments, advisory services and analytic work. IFC Debt resolution program will improve the insolvency framework to strengthen loan recovery, and enable viable businesses to rehabilitate and have further access to credit. Low quality of labor market engagement, especially among the bottom forty percent, youth and women, is also a key constraint to inclusive growth. Firms report a mismatch between job requirements and available skills. Analytic and advisory program will build the currently inadequate evidence base on labor market issues and provide advice on priority reforms. It will also underpin a proposed Skills and Employment Project that will enter late in the CPF period and will focus on strengthening the relevance of the training systems and active labor market programs, including enhancing linkages with employers. Albania’s performance on the Doing Business DTF measure will be used to assess progress as it reflects improvements across multiple dimensions of the business environment. Some of the indicators for measuring the achievement of this objective will be further elaborated at the PLR stage, in line with the preparation cycle of the proposed DPL and other interventions. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: 2016 DTF: 69 Proposed: Improve Doing Business 2017 DTF: 72 Competitiveness and Jobs DPL (FY16) Distance to Frontier (DTF) Special focus on: Skills and Employment Project (FY18) Baseline: DB2015: 66 - Construction Permits DTF: IFC Western Balkans Trade and Competitiveness Program Target: DB2018: 74 Baseline: DB2015 - 56 IFC Investment to finance underserved segments including SMEs and women Target: DB2017 – 70 - Trading across Borders DTF: Ongoing TA: Baseline: DB 2015 - 72 IFC Indicator Based Reform Advisory in ECA Indicator 2: Target: DB2017 – 82 IFC Tax and Transparency Project Increase number of firms, IFC SEE Regional Debt Resolution Project especially in export- IFC Regional Corporate Governance Project oriented sectors; Target CFRR regional EU-REPARIS6 program, and EQ-FINREP7 country Project 3-5% increase in number of Reduced costs to companies for operating businesses firms (measured through compliance cost savings) Proposed TA: Baseline: 111,000 firms - Baseline: 2013 Strengthening ICT sector for investments and jobs 2013 Target: additional 4400 - Proposed AAA: 2018 Skills, employment and labor markets CPF Objective 2b: Support sustainable tourism development Intervention logic: This CPF objective related to the business environment will support sustainable tourism development given its high potential as a key driver for growth, job creation, and investment. Much of Albania’s growth and export potential has been linked to nature based sectors. The country needs to take full advantage of its natural resources balancing this with sustainable development of the high potential tourism sector as a key driver for economic growth. Tourism development has largely been unplanned lacking a strategic focus to develop the high tourism potential regions of the country in an integrated and sustainable manner. The Government has given a high priority to development of sustainable tourism in the coastal region and has requested WBG assistance. A proposed Coastal Regeneration and Sustainable Tourism Project, with cross GP collaboration, is an appropriate intervention as it has the potential to support promotion of sustainable tourism and economic growth in the coastal region, while preserving the physical beauty of Albania’s southern landscape. This operation builds upon the experience and lessons learned from a recently closed IBRD project in the coastal region. As the proposed new operation is at an early stage of preparation, its associated indicators and targets will be incorporated at PLR time. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Saranda Port, landfill and water supply functional (2015) Proposed: Key infrastructure (port, Coastal Regeneration/Sustainable Tourism Project (FY16) water supply, landfill) Integrated development plan for sustainable development of operational in south coast tourism circuit in coastal region finalized (2016) Proposed AAA: for sustainable tourism Growth/tourism and sustainable development in coastal region Baseline: Absence of key operational infrastructure - 2012 Target: Key infrastructure operational - 2015 75 76 CPF Objective 2c: Support enhanced energy security, efficiency and supply Intervention logic: Inefficiency in the energy sector is a major brake on investment and expansion of businesses in Albania. Energy sector reforms are fundamental for sustaining growth, improving fiscal sustainability and promoting private sector growth. Existing firms rank electricity constraints as one of the main burden of their operations (BEEPS 2013). Reliability of power supply is essential for large firms to enter the emerging market. World Bank’s existing portfolio (Dam Safety Project and the Power Sector Recovery Project) is designed to directly respond to the CPF objective as it seeks to optimize generation performance, increase and diversify domestic power generation, improve distribution efficiency and collection rates and improve management of hydro resources. The IFC will work with Government to enhance the regulatory framework for renewable energy through the Balkan Renewable Energy Project, while concurrently providing indirect finance to small hydropower producers through the banking sector and coordinating advisory work with the banks and companies involved in renewable energy projects. WBG interventions address the key bottlenecks in the sector and will support creation of the necessary conditions for businesses to establish, grow and export more through: i) diversified domestic power generation and increased energy efficiency; and ii) improved management of hydro resources (through integrated approaches to watershed management). The core and supplementary indicators are designed to evaluate performance in these areas. A proposed IBRD operation for Energy Sector Development, during the latter CPF period, will support further market reform and diversification and improvement of energy sources, possibly including gas diversification. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: No further accumulation of SOE and budgetary institutions Current portfolio: Electricity distribution payables/arrears to energy Companies by end-2016 (annual) Power Recovery Project (FY15) losses are 19% Private sector participation in management of Distribution ECSEE Dam Safety (FY09) Baseline: 38% - 2014 Company under a management contract (2016) Proposed: Energy Sector Development New power market model approved (2015) and effective IFC investment in Renewable Energy (2016) IFC selective investment in energy, infrastructure and extractive industry Indicator 2: Proposed AAA: Electricity customer Upgraded infrastructure to facilitate electricity market Energy Sector Note collection rate is liberalization (100% metering system for medium voltage Risk Mitigations Strategy Study maintained at a sustainable customers and all IPPs) 2018 Flood Management Study on the Drin River average rate of 90% Social impact and energy Tariff Assessment between 2015-19 Impact Assessment of Medium Voltage Customers’ Deregulation Baseline: 80% - 2014 Implementation of enhanced Corporate Governance system for Power Utilities (2017) On-going TA: Extractive Industries Transparency Initiative (EITI) IFC SEE Regional Renewable Energy Program (RE), Energy Efficiency (EE) and investment Indicator 3: to revive credit growth The electricity market IFC contribution to additional 110 MW renewable energy deregulation on the through investment and advisory services demand side has reached 20% of total net demand Baseline: 9% - 2014 Target Year 2018 CPF Objective 2d: Provide expanded and inclusive land/property registration Intervention Logic: Land and property right reforms are essential for ensuring transparent and efficient management of Albania’s land to promote both rural and urban investments and economic growth. Lack of land access and an efficient land market are key obstacles for development and investment in the country. A clear legal framework to guide a long lasting solution to property issues is still missing. A key constraint is the incomplete registration of property and land. The first registration of property is still in an early stage with only 10 percent of properties registered supported through an earlier World Bank assisted project. The Government is preparing an integrated land management framework to address these constraints and has requested World Bank support. A proposed Integrated Land Management Project will further expand property registration/digitalization and support the development of an integrated land management policy and legal framework. It will also help in the development of Spatial Data Infrastructure (SDI) to create a comprehensive land information service to provide users, including investors, with access to a wide range of harmonized land –related information and services. Gender and inclusion dimensions will be given a special attention. Given the high gender gap in land ownership, administrative procedures for land formalization and property registration will incorporate measures to particularly address women’s low landownership, and will be backed by public informational campaigns for greater outreach to women. The proposed IBRD project will work with the property registration authorities to include gender disaggregated data in the government MIS system. Progress in this area is especially critical for Albania’s path to EU accession. EU is financing a World Bank managed Land Administration Trust Fund that supports the development of the national digital registration/cadaster data improvement methodology. As the IBRD pipeline operation is under preparation, the PLR will provide more detail on the targets and baselines. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Pipeline: Increase in percentage of Increase in the percentage of properties registered in Integrated Land Management Project (FY16) properties registered in the the digital registration system 15% (2018) – gender Ongoing TA: digital registration system disaggregated data Land Administration and Data Improvement EU Trust Fund gender Baseline: 10% - 2014 Increase in the number of property transactions submitted Target: 20% - 2019 on-line 10% (2017), 20% (2018) 77 78 CPF Objective 2e: Contribute to increased productivity and sustainability of land use Intervention logic: A modern Albanian economy requires productive and sustainable management of Albania’s land resources. Low farm productivity, non-inclusiveness of land markets and unsustainable land use and management are key constraint to private investments and economic growth. Enhanced productivity and sustainability of land use is critical to promote development and investments. Albania needs to take full advantage of its land resources and enhance land productivity and increase farming income to contribute to economic growth. The core indicators arise from the Environment Services Project approved in 2014 and the legacy Water Resources Irrigation Project that has been included in the results matrix due to its contribution to enhancing land productivity. These interventions will contribute to sustainable land and forest management practices to maximize benefits from Albania’s natural land endowments and also raise land productivity and farming incomes. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Current Portfolio: Additional land area (ha) Sustainable land management practices adopted for 3000 Environmental Services Project (FY15) where sustainable land hectares (2017), and 4000 hectares (2018) Water Resources and Irrigation Project (FY13) management has been adopted People in targeted forest and adjacent communities with Baseline: 0 - 2013 increased Target: 7500 ha - 2018 monetary/non-monetary benefits from forests: 500 (2017), 1000 (2018); and from agricultural lands: 500 (2017), 800 Indicator 2: (2018) – all data gender disaggregated Area (ha) provided with improved irrigation and Increase in recovery of irrigation O&M costs as percentage drainage services in of O&M charges invoiced: 20% (2016), 50% (2017); and 50% agricultural land benefiting (2018) water users. Baseline: 0 - 2012 Target: 35.000 (ha) - 2018 FOCUS AREA 3: STRENGTHENING PUBLIC SECTOR MANAGEMENT AND SERVICE DELIVERY A key Government priority is the modernization and improved governance of public services, and enhancing the quality and coverage of public sector services. The quality of public service delivery and its accountability is marred by corruption, a weak governance environment, poor service quality, and unequal service provision for the poor and vulnerable. This area supports Government reforms to increase efficiency of public services and improve equity and access to basic social services. The Government recognizes the citizens’ lack of trust in public services and its reform program in this area seeks to bring about visible improvements in the citizenry’s interface with public service delivery. This focus area, supported by four CPF objectives, directly reaches out to the bottom forty percent, the poor and the vulnerable communities including the Roma population. CPF Objective 3a: Support increased efficiency of public service delivery Intervention Logic: Reestablishing a relationship of trust between citizens and their Government, and combatting widespread corruption in service delivery are essential for national cohesion and the higher investment needed to pursue Albania’s growth and EU accession agenda. The public service delivery systems require transparency, process re-engineering and regulatory changes to enhance citizens’ trust and facilitate their interface with Government. This entails re-engineering administrative services, digitization, and implementing performance management measures. The World Bank will support the Government public services reform program in these areas though a pipeline Citizen-Centric Public Service Delivery Project which will contribute to the innovative design of administrative services to improve governance and accountability in public services. This intervention has been selected as it directly responds to the Government’s good governance priority and anti-corruption reforms through a combination of technical and financial support. As some of the indicators (including baselines and targets) of this pipeline project are under preparation, these will be updated at the time of the PLR. The baseline will be established through a citizen survey that is expected to be completed prior to Board. The complementarities with the interventions (under CPF objectives 3b-d) will further strengthen the achievement of this CPF objective. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Pipeline: Reduction in time required Number of key services with business process re-engineered Citizen-Centric Service Delivery Project (FY16) for citizens to obtain Number of key services with level 2, 3 and 4 automation targeted administrative services : Baseline: 0% - 2014 Target: 15% reduction - 2019 79 80 CPF Objective 3b: Support improved equity and access to social protection services Intervention logic: Social protection services supported under this objective include the national social assistance program called Solidarity Albania, the disability benefits and pensions. The social assistance services have been operating in a weak governance environment requiring improvements in targeting and equitable access. Overall, greater focus on inclusion, improved coverage and targeting of social safety nets and implementation of pension reforms will contribute directly to the welfare of the poor and the vulnerable communities. It will allow better use of scarce public resources and allow excluded groups to more fully participate in economic opportunities and the labor market. Social assistance programs are undergoing reforms for greater transparency and equity though which targeting is also improving. The Social Assistance Modernization Project is improving targeting and governance in disability benefits and in Solidarity Albania, the largest social assistance program of the country. Implementation of the pension law being supported through technical assistance. The existing World Bank project is well positioned to support the CPF objective. The target dates for the indicators (during mid CPF period) are within the life span of this ongoing project. The proposed additional financing will further deepen WBG support in this area to further enhance monitoring systems, governance improvements and coverage for equitable access. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Current Portfolio: Coverage of the poorest Pensions sub-laws developed to implement pension reforms Social Assistance Modernization Project (FY13) income quintile by the (2015) Solidarity Albania (social assistance program) Adoption of social model for Disability Assistance eligibility Proposed: increases to 38% criteria (2017) SAMP Additional Financing (FY17) Baseline: 25% - 2012 Target: 38% - 2018 Reduced share of disability beneficiaries that are functionally able (in %) (2017) Baseline: 14 % Target: 10% Establishment of MIS for Social Assistance programs (2016) Operations guidelines adopted for system based inspection for detection and remedy of fraud and error in social assistance programs (2016), and implementation (2017) Percentage of households receiving benefits for the Solidarity Albania program that have been screened for eligibility using the Unified Scoring Formula Baseline: 0 Target: 50% (2016) - 95% nationwide (2017) CPF Objective 3c: Contribute to increased efficiency and access to health services Intervention Logic: Health outcomes in Albania are relatively strong by regional standards but efficiency and quality of care is poor and financial access to health services, especially of the poor and vulnerable, is a serious concern. Financial protection of households against high out-of-pocket payments (OOP) is weak. Government reforms in the hospital sector include creating a sound management structure, improving financial access and establishment of a health management information system to support improvement in monitoring and management for better health service quality and efficiency. It is anticipated that specific population groups, including those with chronic diseases, will benefit from improved health care and the reduced copayments for essential, low- cost medicines. The core indicator for measuring the achievement of this CPF objective supports the reduction of out-of-pocket payments for the poorest while the supplementary indicators will support the poor and vulnerable population through reduction in medicine prices. The performance management and governance reforms in selected public hospitals will create greater accountability and more efficient service provision for the population. The newly approved Health Systems Improvement Project and an IFC PPP project in health provide support in these areas, including strengthening management information systems, improving governance and financial access, and developing a PPP in the health sector. All these areas have been identified as critically important to support increased efficiency and access of health services in the hospital sector. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Current Portfolio: Reduced percentage of Reduction in average prices for (a) 10 most common Health Systems Improvement Project (FY15) income spent on out of prescription medicines; and (b) 10 most expensive hospital IFC PPP Advisory Services Project pocket health expenditures, medicines (2018) for the poorest quintile Proportion of cheapest generic copies dispensed for 10 most Proposed AAA: Baseline: 9% - 2012 common off - patent drugs (2017) Health Regional Target: 7% - 2018 Number of public health sector laboratories operated through Public Private Partnerships Baseline: none Target: 9 regional and 2 tertiary care hospitals (2017) CPF Objective 3d: Provide enhanced coverage of water and sanitation services Intervention Logic: In the water sector, public investments in water networks are poorly governed and performing below optimum levels with irregular service delivery to citizens. Water sector is one of the top Government priorities where an integrated water management approach is being developed to address issues of coverage and access as well as issues of financial and institutional sustainability. The IBRD legacy Water Sector Investment Project is well positioned to support this priority as it includes measures to enhance water and sanitation coverage as well as efficient and sustainable asset management. IBRD will support Government in its efforts towards providing additional supply capacities to address acute water shortages and to develop the proper network capacity to support this additional capacity. Aiming at longer term sustainability of investment, IBRD will support institutional strengthening and preparation of performance monitoring and performance improvement plans. The core indicators directly contribute to the CPF objective. A proposed analytic work as well as the Regional Danube Water Program will provide policy support for a medium term sector financing strategy to support sustainable service delivery. CPF Objective Indicators Supplementary Progress Indicators WBG Program Indicator 1: Current Portfolio: Piped household water 10,000 piped water household connection and 1000 new Water Sector Investment Project (FY14) and sewer connections sewer connections (2017) that are benefiting from Proposed AAA: rehabilitation works Water Supply & Sanitation Sector Policy Support undertaken by the project 45,000 piped water household connections and 2000 new sewer connections (2018) Household water connections Baseline: 0 - 2013 Target: 77,000 – 2019 Sewer connections Baseline: 0 - 2013 Target: 3000 sewer connections - 2019 81 ANNEX 2: WB - IFC INDICATIVE PROGRAM FY15-19 CURRENT PIPELINE/PROPOSED AAA/TA PORTFOLIO LENDING RESTORING MACROECONOMIC BALANCES Policy Based Guar- Pipeline: On-going TA: antee (approved World Bank: World Bank: March 27, 2015) Financial Sector Modernization FIRST: Strengthening the supervision and regulation of private pensions DPL2 FIRST: Strengthening the supervision and regulation of the insurance Results based sector Roads Maintenance Proposed: Public Debt Management and Improvement Sub-national Finance and Gover- SECO TF to strengthening capacity of AFSA to regulate and supervise Project (approved nance investment fund and capital markets March 27, 2015) Public Finance and Growth DPLs Macro-economic monitoring Transport Sector Reform Public Financial Management Grant for Albania, and IPS 2 TF Developing Public Sector Accounting, and Financial Report Grant for IFC: Albania Investment for PPP Albania IFC: Highway Risk Management and NPL Resolution and Corporate Governance Proposed AAA: Sub-national Public Finance Review ESW on Growth and Shared Prosperity World Bank: Pipeline: On-going TA: CREATING CONDITIONS FOR ACCELERATED PRIVATE SECTOR GROWTH ECSEE Dam Safety World Bank: World Bank: Power Recovery Integrated Land Management Land Administration and Data Improvement EU TF Project Project Disaster Risk Management TF Water Resources Extractive Industries Transparency Initiative (EITI) and Irrigation Proposed: CFRR regional EU-REPARIS program, and EQ-FINREP country Project Project Competitiveness and Jobs DPL Environmental Skills and Employment Project IFC: Services Project Coastal Regeneration/Sustainable Indictor Based Reform Advisory in ECA Tourism Project Advisory Support on Risk management/NPL Investments and TA to FIs to revive credit growth in renewable energy Energy Sector Development (RE) and energy efficiency (EE) Regional Corporate Governance Project IFC: SEE Regional Debt Resolution Project IFC: Investment in Renewable Energy Tax and Transparency Project Tax and Transpar- Western Balkans Trade and Compet- ency Project (2012- itiveness Program Proposed TA: 2015) Investment to finance underserved World Bank: Regional Debt Reso- segments including SMEs and Advisory support for Integrated Water Management Strategy lution Project women Strengthening ICT sector for investments and jobs Investments in Selective Investments/Advisory in power generation, energy, infrastructure, extractive Proposed AAA: banking, oil and and export oriented industries Skills, employment and labor markets gas, and general Education Regional manufacturing Energy Sector Note Risk Mitigation Strategy Study Flood Management Study on Drin River Social Impact and Energy Tariff Assessment Growth/Tourism and sustainable development in coastal region Impact Assessment of Medium Voltage Customers’ Deregulation World Bank Pipeline: Proposed AAA: STRENGTHENING PUBLIC SECTOR Social Assistance World Bank: World Bank: MANAGEMENT AND SERVICES Modernization Citizen-Centric Service Delivery Pension Regional Project (SAMP) Project Health Regional Water Sector Water Supply and Sanitation Sector Policy Support Investment Project Proposed: (WSIP) SAMP Additional Financing Health Systems Im- provement Project (approved February 2015) IFC: PPP Advisory Ser- vices Project 82 ANNEX 3: INDICATIVE SEQUENCING OF IBRD LENDING (FY15-19) In Numbers FY15 FY16 FY17 FY18 FY19 Portfolio 8 10 11 13 13 Closing Projects 1 0 1 1 1 New Projects (including DPLs) 4 4 3 2 2 Investment Projects end of FY (excluding DPLs) 8 10 11 13 13 83 MAP OF ALBANIA 84 World Bank Office Ibrahim Rugova Str., No. 34 Tirana, Albania www.worldbank.org.al