Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 24189-ALB

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNAT'IONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY

OF THE WORLD BANK GROUP

FOR

ALBANIA

May 28, 2002

South East Europe Country UnitECCO4Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without WorldBank authorization

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Last CAS Progress Report: March 2000 (Report No. IDA/R2000-20)

Currency Equivalents(Exchange Rate Effective April 30, 2002)

Currency Unit = LekI Lek = US$0.007

US$1.00 = 147 Leks

Government Fiscal Year

January I - December 31

Abbreviations and Acronyms

AAA Analytical and Advisory Activities I-PRSP Interim Poverty Reduction StrategyACP Anti-Corruption Plan JSA Joint Staff AssessmentCAE Country Assistance Evaluation KESH Korporata Energjitike ShqipetareCAS Country Assistance Strategy (Albanian Energy Corporation)CDD Community-Driven Development LSMS Living Standards Measurement SurveyCEM Country Economic Memorandum M&E Monitoring and Evaluation

CFAA Country Financial Accountability Assessment MIGA Multilateral Investment Guarantee AgencyCG Consultative Group MDGs Millennium Development Goals

CGA Country Gender Assessment MOES Ministry of Education and ScienceCPAR Country Portfolio Performance Review MP Member of ParliamentDFID Department for International Development (UK) MTEF Mediur-Term Expenditure Framework

EBRD European Bank for Reconstruction and Development NGO Nongovernmental OrganizationEIB European Investment Bank OED Operations Evaluation Department

ESW Economic and Sector Work OSCE Organization for Security and Co-OperationEU European Union in Europe

FEFAD Foundation for Enterprise Financing and Development PIU Project Implementation UnitFIAS Foreign Investnent Advisory Group PRGF Poverty Reduction and Growth FacilityFoA Friends of Albania PRSC Poverty Reduction Support Credit

FSAC Financial Sector Adjustment Credit PRSP Poverty Reduction StrategyFY Fiscal Year SAA Stabilization and Association Agreement

GDP Gross Domestic Product SAP Stabilization and Association ProcessGPRS Growth and Poverty Reduction Strategy SEED Southeast Europe Enterprise DevelopmentIBRD International Bank for Reconstruction and Development SME Small and Medium Enterprise

IDA International Development Association UNDP United National Development ProgramIFC International Finance Corporation USAID United States Agency for International

IMF International Monetary Fund DevelopmentINSIG Insurance Institute of Albania VAT Value Added Tax

Vice President: Johannes LinnCountry Director: Christiaan J. Poortmnan

Team Leader: Kathryn Funk

FOR OFFICIAL USE ONLY

COUNTRY ASSISTANCE STRATEGYALBANIA

Table of Contents

EXECUTIVE SUMMARY ............................................................................... 1I

INTRODUCTION ................................................................................ 1

I. COUNTRY CONTEXT .............................................................. 1

A. Political and Economic Developments .................................................................... 1B. Regional Context ................................................................................ 2

C. Macroeconomic Performance, Prospects, and Risks ............................................... 3

D. Albania's Development Agenda: The Growth and Poverty Reduction Strategy .... 5II. BANK GROUP COUNTRY ikSSISTANCE STRATEGY ................................................................... 7

A. Progress under Last CAS and Lessons Learned ................... ................................... 7

B. Country Assistarice Program for FY03-FY05 ........................................................ 11Improve Governance and Strengthen Institutions .......................................... 13

Promote Sustainable Private Sector Growth .................................................. 16Foster Hum;n Development .......................................................................... 23

Role of IFC and MIGA ............................................................................... 24

C. Lending and Nortlending Scenarios ....................................................................... 25Nonlending Services ............................................................................... 27

D. Portfolio Management ............................................................................... 28IH. IMPLEMENTING THE CAS .................................................................. 29

A. Partnerships ............................................................................... 29

B. Monitoring of Ouitcomes ............................................................................... 31C. Risks ............................................................................... 33

ATTACHMENT 1: CAS CONSULTATIONS WITH STAKEHOLDERS .................. ............................. 35

ATTACHMENT 2: GENDER ISSUES ............................................ ................................... 41ATTACHMENT 3: PARTNERSHIP MATRIX ............................................................................... 43ATTACHMENT 4: CORE LABOR STANDARDS ............................................................................ 44ATTACHMENT 5: FINDINGS OF FIDUCIARY ASSESSMENTS ........................................................ 45A TTACHMENT 6: FUND RELALTIONS NOTE ............................................................................... 46ATTACHMENT 7: DATA ON AIILLENNruM DEVELOPMENT GOALS AND RELATED INDICATORS.. 49

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

COUNTRY ASSISTANCE STRATEGYALBANIA

Table of Contents, continued

BOXES:Box 1: Power Outages: A Symbol of Albania's Development Challenges ................................................. 2Box 2: Poverty in Albania ............................................................. 6Box 3: OED Country Assistance Evaluation .............................................................. 7Box 4: Client Feedback Survey ............................................................. 8Box 5: Lessons Learned from the Institutional and Governance Reform Program ............... ................... 10Box 6: Voice and Transparency at the Local Level: The Tirana Transparency Project ............ ............... 16Box 7: Foreign Direct Investment Diagnostic Study ............................................................. 17Box 8: Albania's Rural Strategy ............................................................. 20Box 9: Building Capacity in Parliament ............................................................. 30Box 10: Albania's Progress Towards the Millennium Development Goals ............................................. 32

TABLES:Table 1: Lending and Nonlending Program ............................................................. 26Table 2: Triggers to Stay in the Base Case ............................................................. 27Table 3: Core Diagnostic Economic and Sector Work ............................................................. 28Table 4: Core CAS Monitoring Benchmarks ............................................................. 31

ANNEXES:Annex A2: Albania at a GlanceAnnex B2: Selected Indicators of Bank Portfolio Performance and ManagementAnnex B3: Bank Group Program Summary

IDA Lending ProgramIFC & MIGA Program

Annex B4: Albania-Summary of Nonlending ServicesAnnex B5: Albania Social IndicatorsAnnex B6: Albania-Key Econornic hidicatorsAnnex B7: Albania-Key Exposure IndicatorsAnnex B8: IDA Credits in the Operations Portfolio

Statement of IFC's Held and Disbursed PortfolioAnnex B9: Country Partner Strategy MatrixAnnex B10: Summary of Development Priorities

MAP OF ALBANIA: IBRD 284672

EXECUTIVE SUMMARY

i. Background. Albania has achieved macroeconomic stability and high growth, albeit from alow base, during almost every year since its transition from a centrally-planned to a market-basedeconomy, despite periodic bouts of domestic and regional instability that required the country to focuson its immediate problems. Yet Albania remains one of the poorest countries in Europe: based on mostrecent data, about one out of three Albanians is poor, and even more lack access to basic services.Albania's initial reform program enabled strong private sector activities, especially agriculture, whichhave been the engine of growth. High levels of external financing and workers' remittances have alsobenefited Albania. In the face of declining access to concessional financing, Albania needs to moveaggressively toward establishing creditworthiness and eventually gaining access to internationalfinancial markets. To achieve this goal by mid-decade, Albania must address macroeconomicimbalances; move quickly to complete the reform agenda, especially to underpin improvements in thebusiness environment; and improve debt management.

ii. The remaining reform agenda is challenging, because it requires tackling the root developmentproblems, especially weak governance and institutions, tenuous rule of law, and enormousinfrastructure deficiencies, including those in the power sector. The prospect of closer ties to Europeanstructures-through the negotiation of a Stabilization and Association Agreement, which is expected tobegin in 2002-is a powerful incentive for reform, creating a national consensus on a long-term vision.This Country Assistance Strategy (CAS) is being presented at a time when Albania has an opportunityto move from short-term crisis management to a long-term vision of sustainable development. Over thenext three years, if Albania maintains stability and consensus, it can implement far-reaching structuralreforms and achieve sustainable growth that benefits the entire population.

iii. The Government's Program. In this context, the preparation of Albania's Poverty ReductionStrategy Paper, known in Albania as the Growth and Poverty Reduction Strategy (GPRS) wasimportant, enabling Albania to clevelop its first national development strategy that explicitly addressespoverty-outlining medium-term actions to reach long-term goals. The GPRS, which was completed inNovember 2001, rests on two pillars: governance and strong economic growth. It also emphasizespolicy interventions to improve education, healthcare, and infrastructure. It further calls for strongerpublic accountability and increased public participation in decision making to empower the poor. TheGPRS creates a better enviromnent for advancing reforms and reducing poverty, by strengtheningcountry ownership of the reform program; reinforcing a long-term vision; focusing on results; andencouraging partnerships.

iv. Objectives. The overarching objective of the CAS is to reduce poverty by supporting Albania'sGPRS. To this end, specific CASS objectives are to support the government to:

(a) Improve governance and strengthen institutions: build efficient and inclusive publicinstitutions; increase transparency and accountability at all levels; strengthenmonitoring and evaluation; and use community-based approaches that build institutionsfrom the bottom up;

(b) Promote sustainable private sector growth: maintain macroeconomic stability; improvethe investment environment; continue to reform the financial sector, and complete

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enterprise privatization; sustain agricultural growth and foster broad-based ruralgrowth; improve infrastructure, especially through community or private sectorparticipation; and promote environmental sustainability and sustainable use of naturalresources; and

(c) Foster human development: improve access to and quality of education and healthcarein both urban and rural areas, with sector-specific reforms coordinated with thecountry's public sector and decentralization reformn programs; strengthen thesustainability and equity of the social insurance system; and improve targeting andefficacy of social assistance and community social services.

v. The GPRS creates conditions conducive to strengthening transparency and accountability;increasing the contestability of the policy formulation process; and improving policy monitoring andevaluation. These are important themes of the CAS. Institution building is a cross-cutting CAS themeand will be imbedded in all operations..The CAS increases Bank support for infrastructure-especiallyinstitution building to ensure sustainability-because infrastructure deficiencies constrain privateinvestment and limit opportunities for the rural poor. The CAS continues the Bank's strong support fordeveloping rural areas, where poverty is highest. Under the CAS, the Bank will also build on previoussuccesses with community-based approaches that build institutions from the bottom up.

vi. The GPRS also affects how the Bank does business. There will be an increased focus ongovernment ownership and more emphasis on partnerships, allowing greater Bank selectivity.Nonlending services will-more than ever-be undertaken jointly with government and stakeholders.And there will also be greater attention to outcomes, assessing the success of the CAS using bothintermediate and final indicators specified in the GPRS.

vii. Lending Program. The FY03-05 base-case lending scenario provides for up to US$131million in lending, consisting of about four projects per year to support the GPRS, leverage theremaining reform agenda, and move Albania toward financial sustainability necessary forcreditworthiness. A series of Poverty Reduction and Support Credits (PRSCs) would anchor the Bank'slending program, maintain GPRS momentum, and support key reforms, especially cross-cuttingreforms best addressed through programmatic adjustment lending. The PRSCs will not displaceinvestment lending, which has proven effective in building capacity and pioneering innovativecommunity-based approaches.

viii. A low-case scenario, not to exceed US$70 million, would be triggered by poor macroeconomicperformance, failure to implement the GPRS, or a sustained decline in portfolio performance.Alternatively, Albania could be eligible for a higher IDA allocation (up to 30 percent more than thebase case) in the second half of the CAS period in the event of an outstanding track record in meetingGPRS targets and measurable improvements in areas such as governance, rule of law, and access tosocial services. A move to a higher IDA allocation would be detailed in a CAS Progress Report.

ix. Nonlending Program. Analytical and advisory activities will strengthen the GPRS,analytically underpin Bank operations, and provide important policy advice. The Bank has completedthe set of core diagnostic economic and sector work, including a Country Procurement AssessmentReport (FY01), Public Expenditure Institutional Review (FY01), and a Country FinancialAccountability Review (FY02). The Bank will systematically address fiduciary issues, incorporatingthem into the PRSCs and other operations.

x. CAS Risks. CAS implementation faces three main risks: (i) domestic or regional instability;(ii) chronic power shortages; and (iii) unsound governance and weak institutional capacity. Asdescribed in the CAS, the Bank mitigates these risks by supporting the GPRS reform program,focusing on transparency and accountability, playing a major role in backing power sector reforms,embedding institution building in all Bank operations, and using a mix of adjustment and investmentlending to both support reforms and build administrative capacity.

xi. The following issues are suggested for Board discussion:

* Poverty reduction measures: Do the proposed Bank actions best support the goals of theGPRS? Is the cross-cutting focus on institution building-especially through increasingtransparency and accountability-appropriate?

* Instrument mix: Is there an appropriate balance between adjustment and investmentlending? Is the role of the PRSCs-which complement but do not displace investmentoperations-appropriate?

* Business environment: Given the centrality of private investment, especially foreign directinvestment, to sustainable growth and future creditworthiness, are the proposed actions forimproving the investment climate (including strengthening governance, addressingadministrative barrie-rs, and improving infrastructure) appropriate?

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MEMORANDUM OF THE PRESIDENT OF THIEINTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A COUNTRY ASSISTANCE STRATEGY

OF THE WORLD BANK GROUP FORALBANIA

INTRODUCTION

1. Albania's Interim Poverty Reduction Strategy Paper (I-PRSP) was endorsed by theInternational Development Association (IDA) Board of Directors in June 2000. The I-PRSP laid out aroad map for a full PRSP, known in Albania as the Growth and Poverty Reduction Strategy (GPRS).1

In November 2001, the goverrnment finalized and launched its GPRS, following a broad participatoryprocess that included central ancl local government, civil society, private sector, and donors. The GPRSand the IDA-International Monetary Fund (IMF) Joint Staff Assessment (JSA) will be presented to theBoards of the Bank and the IMF in June 2002.

2. This CAS is designed as the Bank's business plan for FY03-05 to support Albania's GPRS.This is Albania's third full CAS. The 1993 CAS responded to Albania's emergency situation during itsearly transition years. The second full CAS was discussed by the Board in July 1998 (18161-ALB),following Albania's civil crisis of 1997. A CAS Progress Report was discussed by the Board in March2000 (IDA/R2000-20), following the Kosovo crisis in 1999. This CAS is presented to the Board at atime when Albania has an opiportunity to move from short-term crisis management to a long-term vision of sustainable development, as articulated in Albania's GPRS.

I. COUNTRY CONTEXT

A. Political and Economic Developments

3. Albania has made substantial political and economic progress since the period of near-anarchy in 1997. Albania has restored and maintained macroeconomic stability, increased publicorder, and furthered structural and institutional reforms. In particular, Albania has achieved highgrowth while containing inflation, privatized strategic enterprises (including the state-owned NationalCommercial Bank), initiated conmprehensive civil service reform, and, most recently, taken bold stepsto increase the sustainability of the pension system. Even during the 1999 Kosovo crisis, Albaniahandled over 450,000 temporary refugees while maintaining macroeconomic stability and acommitment to reforms. Political stability is also increasing: local government elections in October2000 and parliamentary elections in Summer 2001-resulting in a victory for the ruling SocialistPartly-were generally calm and orderly, although the results were still challenged by the DemocraticParty.

4. Yet Albania's domestic politics remain relatively divisive and confrontational, bothbetween and within the Socialist Party and the opposition Democratic Party. Divisions within theSocialist Party surfaced shortly alter the 2001 elections, resulting in the resignation of four ministers in

The Growth and Poverty Reduction Strategy was publicly launched in Albania in November 2001 under the titleNational Strategy for Socio-Economic Development (GPRS).

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Box 1Power Outages: A Symbol of Albania's Development Challenges

Since the second half of 2000, Albania-once a net exporter of electricity-has faced frequent and prolonged load-shedding (power outages). Last winter, power outages reached 7 hours a day in Tirana, 9 hours in other cities, and 13hours in rural areas. The main cause is the impact of drought on the largely hydropower-based system, combined withexcessive demand due to a decade of failure to curb illegal electricity use and non-payment of bills. KESH, Albania'spower company, has resorted to emergency electricity imports, but they are limited by the dilapidated transmissionnetwork. Recognizing the magnitude of the crisis and its potential repercussions, the government has demonstratedintent-for the first time-to address the underlying problems. In December 2000, the government adopted a two-yearAction Plan (revised in January 2002 to cover 2002-2003) to reverse the deterioration in sector performance. So far thegovernment has exceeded all quarterly targets for collections and controlling losses. Nevertheless, the precarious powersituation remains the major threat to continued macroeconomic stability, sustained growth, and poverty reduction. Thesituation, if unimproved, could even lead to political and social instability, because power outages are a daily reminderof the government's inability to deliver basic services. The government needs to stay committed to difficult actions-disconnecting illegal connections, enforcing payment of bills, and eliminating corruption in KESH. The underlyingissues are weak governance, feeble institutions, and tenuous rule of law-the same issues faced in other sectors. Thepower crisis is emblematic of both Albania's past short-term outlook and current development challenges.

December 2001 followed by the resignation of the Prime Minister in late January 2002. The politicalinfighting diverted attention from the reform process, temporarily slowing its momentum. However,political disputes have been worked out within the Constitution, and a new government was formed inlate February 2002. Tensions have somewhat calmed: the Democratic Party ended its boycott ofParliament, Socialist Party factions agreed to suspend internal feuding, and a bipartisan parliamentarycommission was formed to implement international recommendations for electoral reform. However,the presidential election in June 2002 could resume frictions between and within political parties.Albania will need to maintain the stability and consensus necessary to focus on its main challenge: toconsolidate the gains made in recent years and to resolve its most serious problems, including weakgovernance, institutions, and rule of law; organized crime and trafficking; an unattractive investmentclimate; and enormous infrastructure deficiencies, especially in the power sector (see Box 1).

B. Regional Context

5. The regional environment presents both opportunities and risks. The 1999 Kosovo crisisspurred a coordinated international effort to bring peace, prosperity, and stability to SoutheasternEurope, giving rise to the Stability Pact and, most importantly, to the prospect of closer ties betweenSoutheast European countries and European structures through Stabilization and AssociationAgreements (SAAs) between the European Union (EU) and countries in the region. The Stabilizationand Association Process (SAP) is a major incentive for political consolidation and reform in Albaniaand other Southeast European countries. However, the 2001 outbreak of ethnic conflict in the FormerYugoslav Republic of Macedonia-the first Southeast European country to complete the negotiation ofan SAA-underscores the lingering power of ethnic nationalism and the region's continued politicalfragility. Albania can benefit substantially from the external "pull" of closer ties to the EU, and so farAlbania's constructive role in the region has moved it closer to Western Europe. But renewed ethnicstrife on Albania's borders remains a destabilizing possibility.

6. Turning toward Europe - or toward renewed instability? The European Commission andthe Government of Albania are expected to start negotiating an SAA in 2002. The GPRS and SAP arecomplementary: the GPRS outlines a comprehensive and country-owned medium-term program thatmoves Albania towards its long-term vision of EU association. Yet Albania remains vulnerable to bothinternal and external shocks. If Albania can maintain stability and successfully tackle its most pressing

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problems, especially in the energy sector, the next three years-corresponding to the period covered bythis CAS-present an opportunity to implement far-reaching structural reforms and achieve growththat benefits the entire population.

C. Macroeconomic Performance, Prospects, and Risks

7. Since the 1997 crisis, Albania has achieved strong growth with low inflation. Albeit from alow base, real GDP growth exceeded 7 percent per year from 1998-2000; inflation was kept at lowlevels of 2 to 4 percent; and external reserves remained at the comfortable level of 4 to 5 months ofimports. Overall financing was secured through high levels of external assistance, workers' remittances(amounting to 10-12 percent of GDP), and strong private sector activity fueled by Albania's initial setof structural reforms. Agriculture, stimulated by rapid privatization of land and complete price andtrade liberalization, continued to account for about half of GDP. Construction and services have alsocontributed to high GDP growth. GDP growth in 2001 decelerated to about 6.5 percent because of thedeteriorating electricity situation and weak agricultural growth, both affected by adverse weather,although construction and private sector manufacturing remained strong. Despite continuing electricityshortages, economic performance during the first quarter of 2002 was mostly favorable, althoughinflation inched upward.

8. But there is an urgent need to reduce macroeconomic imbalances and structuralweaknesses. Albania has large fiscal and external imbalances that will need to be reduced to underpinsustainable growth as the volume of concessional financing and other non-debt creating flows declinesover the medium term. This will require strong measures to reduce structural weaknesses. The qualityof growth needs improvement to generate employment for higher skilled, better paid workers, and tocurb emigration of the most educated Albanians. Despite progress in financial sector reform, enterpriseprivatization, and public administration reform, there is limited financial intermediation, a narrowexport base, a relatively poor investment climate, and weak governance and administrative capacity.From 1992 to 1999, Albania'; foreign direct investment was among the lowest in the region,amounting to merely US$51 million in 1999. In 2000 and 2001, large-scale privatizations boosted thelevel of foreign direct investment to US$143 million and US$204 million, respectively. Sustaining ahigh level of foreign direct investment depends on keeping privatization on track in the short term andimproving the investment climate over the medium term.

9. Albania's medium-termn prospects indicate continued growth and macroeconomicstability, provided that aggressive policy reform leads to increased private investment. Externalassistance will decline from its high post-Kosovo conflict level. Therefore, increased privateinvestment-especially foreign investment-and continued high levels of workers' remittances will beessential for sustaining high GI)P growth of 6 to 7 percent per year and bringing about financialsustainability. Inflation is expected to remain in the 2 to 4 percent target range, assuming prudentfiscal and monetary policies under a flexible exchange rate regime. The current account deficit, whichmay worsen in 2002 due to increased electricity imports, is expected to decline to about 5.4 percent ofGDP by 2005. To support the medium-term framework, the government has agreed with the IMF on athree-year Poverty Reduction and! Growth Facility (PRGF) arrangement.

10. High growth depends on increasing exports and private sector activity. Export growth isexpected to strengthen following the transfer of remaining key enterprises to strategic foreign investors.Industrial growth is expected to increase, and growth is expected to remain high in the construction,services, and transport sectors. Agricultural growth will also remain high, but will require concertedefforts to complete land registration to create a functioning land market. Energy sector reforms to

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reduce demand and supply imbalances and to prepare the sector for privatization are also critical forgrowth performance.

11. Further fiscal consolidation will keep a sustainable debt burden and provide adequatebudgetary resources for priority areas. Maintaining fiscal sustainability and reducing poverty at thesame time requires fiscal consolidation to reduce the level of domestic debt, and to restructureexpenditures to reach the poor more efficiently. Budget revenues-which are significantly belowpotential-are expected to increase by over 3 percentage points of GDP from 2001 to 2005 as a resultof continued efforts to improve tax and customs administration. Also informal businesses need to beprogressively integrated into the formal economy to widen the tax base. Reduced interest expenditureswill provide increased resources for priority areas without increasing overall expenditures. On balance,therefore, the fiscal deficit is projected to decline from 8.5 percent in 2001 to 6 percent in 2005 (seeAnnex B6). This will allow a significant reduction in the reliance on domestic borrowing to under 2percent of GDP, which will reduce the domestic debt burden from 41 percent of GDP at end-2001 to35 percent of GDP by end-2005. Extenial borrowing (mainly on concessional terms) is expected toremain the major source for financing high-return public investment.

12. Despite the favorable economic outlook, medium-term prospects-and futurecreditworthiness-are fragile, subject to external shocks, and depend on further reforms.Although Albania's per capita income has recently surpassed the IDA threshold, Albania relies heavilyon concessional borrowing due to its structural fragilities. Projections indicate that Albania couldbecome creditworthy by mid-decade, enabling it to gradually take on commercial borrowing. However,to become creditworthy by mid-decade, Albania must address macroeconomic imbalances; movequickly to complete the reform agenda outlined in the GPRS, especially to underpin improvements inthe business environment; and improve debt management. Failure to aggressively tackle these threeareas would delay Albania's access to international capital markets. The high-growth and sustainabilityscenario is also susceptible to shocks from elements over which Albania has less control: includingreduced export demand from a slowing global economy; a regional post-conflict environment thatdiscourages investment; weather-related electricity shortages; and potentially volatile workers'remittances.

13. Maintaining external debt sustainability in the near term depends on continued access toconcessional funds, in addition to attracting other non-debt flows, such as foreign direct investment.Given the fragility of Albania's external accounts, premature borrowing on commercial terms couldcause a deterioration in debt servicing indicators, pushing them to critical thresholds. Under the PRGF,the government will observe ceilings on medium-and long-term nonconcessional borrowing. In theabsence of external shocks, if Albania moves decisively to address macroeconomic imbalances,complete structural reforms, and improve debt management, Albania could start limited borrowingfrom the International Bank for Reconstruction and Development (IBRD) during the last year of thisCAS period (FY05), but more likely during the next CAS period (IDA 14). During this CAS period,Albania will be subject to hardened IDA terms (20 years rather then 40 years maturity), becauseAlbania's per capita GDP exceeds the operational cut-off for IDA. During preparation of the next CAS,the Bank will reassess Albania's creditworthiness, outline an appropriate path for IDA graduation, andsuggest timing for blending IDA and IBRD resources.

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D. Albania's Development Agenda: The Growth and Poverty Reduction Strategy

14. The GPRS rests on two pillars-improving governance and sustaining high economicgrowth-and emphasizes education, health care, and infrastructure as priority areas for policyintervention. The GPRS identifies Albania's main development challenges: weak law enforcement;corruption; an unattractive invesiment climate; low quality and inaccessible social services, especiallyeducation and health; poor infrastructure; and a shortage of basic necessities, including electricity,water, sanitation, and heating. The GPRS recognizes that weak govemance and institutions are at theroot of Albania's developmental problems. It also acknowledges that economic growth will be themain instrument to reduce poverty in Albania. Maintaining macroeconomic stability and adequatesocial protection are cited as preconditions for implementing the strategy. The GPRS builds on thegovemment's ongoing structural reform program, placing increased emphasis on improving socialservices and infrastructure to reduce poverty and achieve growth. The GPRS also emphasizes strongerpublic accountability and increased public participation in decision making to empower the poor.

15. The GPRS has five main goals for the three-year period: (i) achieve real GDP growth of 18to 21 percent; (ii) reduce the number of poor (people with income less than US$2 per day) by 19percent (from 47 percent in 1998 to 38 percent); (iii) make tangible improvements in infrastructure andrelated services, such as electric power, potable water supply, and sewerage, increasing the poor'saccess to these services; (iv) reduce the infant mortality rate by 15 percent, the maternal mortality rateby 25 percent, and the incidence of infectious diseases; and (v) increase the elementary schoolenrollment rate by 4 percent, the secondary school enrollment rate by 25 percent, and the averageschooling period by 5 percent. (GPRS intermediate and final indicators and targets are shown in AnnexB9.)

16. The GPRS process enabled the country to articulate-for the flrst time-a medium- andlong-term development vision that explicitly addresses poverty. The GPRS proved timely: itreinforced the shift from a short-term outlook to a longer-term vision of development. It also sparkedincreased press coverage and public discussion of poverty and set a precedent for civil societyparticipation in formulating policy. The Government of Albania and its civil society partners putconsiderable work into producing the GPRS, which represents a significant improvement over the I-PRSP. Although the strategy has areas to, be improved-as outlined in the JSA and summarized below(para. 18) the GPRS represents a successful first attempt to formulate a comprehensive nationaldevelopment strategy.

17. The GPRS is based on a poverty diagnosis that highlights the multidimensional nature ofpoverty (see Box 2). Albania drew upon recent household surveys and a qualitative povertyassessment to improve the reliability of its poverty profile. Income poverty has a high incidence anddepth, is more pervasive in rural areas, disproportionally affects families with three or more children,and is strongly correlated with low education. Remittances play a key role in alleviating poverty,especially for female-headed houlseholds. The GPRS also emphasizes the importance of nonincomedimensions of poverty: many families lack access to basic services-including water, sanitation,education, health care, and electricity-and weak infrastructure limits the opportunities of the poor. Inremote rural areas, especially mountainous areas such as northeastern Albania, there is sense ofisolation and abandonment. There are also indications of large and growing income inequality, whichcould further weaken Albania's social cohesion. Given the absence of a regular and nationallyrepresentative household survey, the quantitative data have serious limitations and poverty trendscannot yet be identified. For this reason, the government has developed a comprehensive plan tostrengthen policy monitoring and evaluation, including the completion of a national census in 2001 that

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Box 2Poverty in Albania

The GPRS poverty diagnosis is based on an array of quantitative and qualitative data, which, although incomplete, yield amultifaceted picture of poverty.* In the last decade, Albania has undergone an acute political and economic transitionpunctuated by periodic domestic and regional crises and accompanied by high levels of internal and external migration,both seasonal and permanent. While rural inhabitants, large families, the poorly educated, and vulnerable groups havefound it most difficult to cope, the impact on the entire population has been profound. Many of those with median incomealso lack access to important basic services.

* Income poverty in Albania is high in incidence and depth. Almost one out of three Albanians is poor, with over500,000 Albanians falling into extreme poverty (e.g. living on less than $1/day).

* Four out of five poor live in rural areas, and there are significant regional variations in income levels.

* Income inequality is quite high (0.43 Gini) by regional standards.

* Income poverty is higher in those households where the head of household has a low level of education-theprobability of being poor for a household where the head has a secondary education is reduced by half, and dropsto 5 percent for households with a head with higher education.

* Children are disproportionately effected by poverty-almost 40 percent of households with three or more childrenare poor compared to 25 percent of total households.

* Remittances from abroad provide an important informal safety net, reaching one out of every five householdsnationally (one of three in rural areas), and are especially helpful to female-headed households.

* Overall, poverty does not appear to depend on whether the head of household is male or female (perhaps due tofemale-headed households receiving income from husbands working abroad). However, some female-headedhouseholds-widows with children and women living alone-have a higher incidence of poverty, andunemployment is higher among women. (See Attachment 2)

* Income poverty is compounded by weak, deteriorating, or absent infrastructure and services throughout thecountry. Forty percent of households lack access to two or more necessities such as basic education, water,sanitation, and heating.

* Health services are of low quality, with access for the poor limited by high formal and informal payments. Thehealth status of children in particular is worrisome: 31.7 percent of children under age 5 are moderately stunted, ameasure of chronic malnutrition (11.1 percent under age five are moderately wasted, a measure of acutemalnutrition). The infant mortality rate is a high 28 per thousand, and the under-five mortality rate is 33 perthousand.

The country strategy focuses accordingly on measures to sustain high growth, while strengthening the capacity of thepublic sector to develop, administer, monitor, and evaluate pfiority refonns in the social sectors.

* The GPRS poverty diagnosis draws upon: a Living Conditions Survey (1998); Multiple Indicators Cluster Survey(2000); Qualitative Poverty Assessment (2001); pilot administrative data mapping (2001); and a number of stand-alone studies. The quantitative data are not fully representative. However, the 1998 Living Conditions Surveyconfirms levels of poverty similar to those derived from the 1996 Household Budget Survey.

sets the stage for fully representative household surveys to be conducted on a regular basis, startingwith a Living Standards Measurement Survey (LSMS) in 2002.

18. Although the GPRS is an impressive effort, there are elements that need improvement. Asdescribed above, the government needs to address the poor quality of data by establishing regularhousehold surveys. The poverty diagnosis needs to be updated when new data are available, and GPRSgoals and actions need to be reassessed and better linked to the updated poverty diagnosis. Costing andprioritization of public actions need improvement. Future GPRS updates would benefit from a betteranalysis of the sources of future growth and the relationship between growth and poverty reduction.Cross-sectoral linkages-such as rural development and environment-will need strengthening during

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GPRS implementation. The government needs to establish a system of monitoring and evaluation andrefine indicators and targets, taking into consideration the Millennium Development Goals. Thegovemment needs to strengthen its capacity for aid coordination on the basis of the GPRS. Lastly, theparticipatory process needs to be deepened and institutionalized to sustain the good efforts to involvecivil society in GPRS preparation.

II. BANK GROUP COUNTRY ASSISTANCE STRATEGY

A. Progress under Last CAS and Lessons Learned

19. The Bank's assistance sltrategy has evolved based on experience, especially the lessonslearned from the 1997 civil crisis. The 1993 CAS addressed the emergency situation during Albania'sfirst years of transition, supportinj critical imports and physical rehabilitation of infrastructure. From1993 to 1996, Albania achieved macroeconomic stability, attained high growth, and initiated importantreforms, eaming praise as a "success story" in Central and Eastem Europe. However, the eruption ofnear anarchy in 1997, sparked by the collapse of fraudulent pyramid schemes, exposed the fragility ofAlbania's institutions and the hollowness of many reforms. The crisis pointed to critical lessons for theBank's future assistance strategy: (i) the overriding importance of govemance and institution building;(ii) the need to shift focus from adopting appropriate laws and regulations to implementing andenforcing them; and (iii) the effectiveness of community-based approaches, which continued toperform well during the 1997 crisis.

20. The 1998 CAS incorporated the recommendations of a Country Assistance Evaluation(CAE) by the Operations Evaluation Department (OED) (see Box 3). The 1998 CAS, prepared inthe wake of 1997's civil unrest, emphasized the need for a strong state, effective public institutions,and policy reforms. It presented an assistance program that focused on three strategic priorities: (i)govemance and institution buildling; (ii) promoting sustainable private sector growth; and (iii)promoting human development. The influx of Kosovar refugees in 1999 strained Albania'sadministrative capacity but did not derail reformns. Domestic and regional stability improved by 2000,when the government prepared an I-PRSP, committing itself to a full and participatory PRSP. Inresponse to the more favorable environment for poverty reduction, a 2000 CAS Progress Reportdeepened the Bank's cross-sectoral focus on poverty alleviation, with special attention to strengthening

Box 3OED Country Assistance Evaluation

The Findings. A 1998 Country Assistalice Evaluation (CAE) by OED assessed IDA's assistance to Albania from 1992to 1997. The CAE concluded that IDA's assistance was largely effective, especially in supporting agricultural growth,small- and medium-scale enterprise privatization, tax reform, and price and trade liberalization. However, the CAEfound weaknesses in IDA's prioritization of assistance efforts and the depth and focus of assistance to some sectors,most notably the financial sector. The CAE observed some progress in rehabilitating health and education facilities, butnoted the limited success in transforming the overall framework of these sectors. Furthermore, the CAE found onlymarginal improvements in the quality of infrastructure and the delivery of services because of the inability to strengthenthe public-sector institutions involved.

A Retrospective Look at the CAE's Impact; In April 2002, OED carried out a "tracer study" on 15 countries to assessthe extent to which CAE recommendalions have been incorporated into CASs and reflected in the assistance actuallydelivered to the country. The study found high consistency between the Albania CAE and the 1998 CAS, and noted thatconsistency has further increased as a result of the GPRS process, which has created conditions conducive toimplementing CAE recommendation regarding consultation, participation, donor coordination, country ownership, andpoverty monitoring.

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social cohesion and building inclusive institutions.

21. Albania has made progress towards the objectives of the previous CAS. From 1998 to2002, Albania demonstrated a strong commitment to reforms, meeting all high-case lending triggers inthe 1998 CAS and the 2000 CAS Progress Report. There were notable achievements toward all threeCAS objectives. Under the previous CAS, the Bank supported Albania's efforts to improve publicexpenditure management-by introducing a medium-term expenditure framework (MTEF)-and laidthe foundation for reforming the judiciary and the public administration, including initiating civilservice reform (See Box 5 for lessons learned in institutional and governance reform). Support by IDAand the International Finance Corporation (IFC) for financial sector reform-an area criticized by theCAE (see Box 3)-was particularly successful, resulting in the privatization of the NationalCommercial Bank and the preparation of the Savings Bank for privatization. In the area of humandevelopment, the Bank helped develop policy frameworks and introduce community-basedmechanisms to deliver social services to vulnerable groups.

22. What worked well:

* Community-driven development. Projects that use participatory techniques to enhanceaccountability have succeeded in Albania, as vividly demonstrated in 1997 whencommunity-based organizations continued to perform well despite difficult conditions. TheBank built on its early successes with community-driven development (CDD) by expandingsuccessful pilot projects; introducing CDD in new sectors, such as social service delivery;and taking steps to build sustainability, such as converting village credit funds tosustainable savings and credit associations.

* Financial sector technical assistance operations. The Recovery Program TechnicalAssistance Project (which will close at the end of FY02) and the ongoing Financial SectorInstitution Building Technical Assistance Project were well timed and designed to addressthe most crucial elements of financial sector reform. They were highly effective incontributing to Albania's noteworthy achievements in this area.

* Filling knowledge gaps through nonlending services. The previous CAS emphasizedanalytical and advisory services (AAA) to underpin lending and provide key policy adviceto the government. Although there is still room for improvement in this area, AAA hasincreased understanding of sectoral issues, improved project design, and helped broaden

Box 4Client Feedback Survey

In spring 2001, a client survey-the first such survey in Albania-was sent to individuals knowledgeable about theBank's program: central and local Government officials, NGOs, private sector representatives, and donors. It wascompleted by 168 people, one third of whom work for the Govemment. The survey asked respondents to rate-on ascale of I to 5-areas of activity (for example, development of the private sector) both in terms of importance and theBank's effectiveness. Ratings were above average for all items. The category of questions that scored the highest ineffectiveness was "Interaction with World Bank officials," reflecting good and productive professional relationsbetween Banks staff and their counterparts. Issues ranked as important, but ranked lower than other issues in terms ofBank effectiveness were: "Giving appropriate priority to poverty reduction," "Responding quickly to submissions andrequests during project implementation," "Incorporating the knowledge and expertise available in Albania in Bankstudies," "Helping to bring about economic growth," and "Providing practical recommendations in Bank Studies."(However, these ratings were still above average.) The client survey suggests a need to (i) work more closely withstakeholders, especially in the context of studies; and (ii) establish and publicize intermediate and final targets toobjectively measure progress toward development goals.

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the reform agenda (see also Box 5). Most recently, AAA has supported preparation of theGPRS.

Flexibility in CAS implementation. The Bank responded quickly to the government's needsduring the Kosovo crisis in 1999 when it processed and disbursed within 30 days a PublicExpenditure Support Credit and tailored a number of projects to address post-conflictneeds. More recently, the Bank has adjusted its lending program to be more responsive tothe GPRS, especially by postponing the planned Structural Adjustment Credit II and SocialProtection Adjustment Credit and substituting a proposed Poverty Reduction SupportCredit (FY02), which will be presented to the Board with this CAS.

23. What worked less well:

* Education and healthcare outcomes are still lagging. This is despite the previous CAS'semphasis on social sector policy frameworks. A comprehensive education sector studyunderpinned the ongoing Education Reform Project, but there has been weak ownership ofthe reform program, partly due to high turnover of top ministerial staff. In the health sector,in retrospect, the Bank: undertook insufficient sector work to underpin reforms supported bythe ongoing Health Recovery Project. The Bank put renewed focus on these issues as a partof its dialogue on the GPRS, MTEF, and Poverty Reduction Support Credit program, andthe government has tLken some recent measures that suggest increasing commitment toeducation and healthcare reforms.

* Donor coordination needs improvement. Sector donor meetings-the main instrument forcoordination at the technical level-were interrupted during the Kosovo crisis. Efforts toresume sector donor rneetings in May 2000 were only partially successful. Overall, sectordonor meetings were not held as frequently as warranted. The Bank will work to improvedonor coordination during this CAS period (see para. 74 and 75 on donor coordination).

* Addressing fiduciary issues requires a systematic approach. The previous CAS focused onproject-specific fiduciary controls. Although such controls can be effective in minimizingfiduciary abuses in Bank-financed projects, they fail to address the broad fiduciary issuesthat undermine sustainable development. The Bank has started taking-and will continueto take under this CAS-a more comprehensive approach to fiduciary safeguards, inaddition to project-specific fiduciary controls (see para. 66 on core diagnostic economicand sector work).

* Monitoring of outconmes can be strengthened. Monitoring of project-specific inputs andoutputs has improved in recent years due to a greater emphasis on log-frame. Some projectshave helped install computerized management information systems linked to monitoringindicators. Still, there is much room for fur-ther improvement. The government needs toestablish indicators and targets that will objectively assess progress toward developmentgoals (see also "What worked less well" in Box 5). The Bank needs to better link project-specific monitoring to development outcomes and systematically measure the Bank'scontribution to Albania's development goals (see also Box 4, Client Feedback Survey). Inthis CAS, the Bank emphasizes support to Albania for monitoring and evaluation (seeparas. 35 and 36) and also seeks to improve monitoring the effectiveness of the Bank'sprogram (see para. 79) .

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Box 5Lessons Learned from the Institutional and Governance Reform Program

Following Albania's civil crisis of 1997, the World Bank and other donors have helped the govemment formulate and implement a broadinstitutional and govemance reform program. Over the past five years, the govemment has made progress in a number of key areas.

* Anti-Corruption. The govemment adopted and revised a comprehensive Anti-Corruption Plan (ACP), appointed a Minister of Stateto oversee ACP implementation, and created an inter-ministerial Anti-Corruption Monitoring Unit. Albania's civil societyorganizations, media, and private sector formed the Albanian Coalition Against Corruption in early 2001 to build public pressure forreducing corruption. Most recently, the issue of corruption has galvanized an unprecedented multipartisan effort to prepare a Law onthe Declaration and Audit of Assets and Financial Obligations of Elected Officials.

* Public Administration. The Department of Public Administration completed the legal framework for a stable and professional civilservice and began implementing the legislation. There is a General Secretary in every ministry. The govemment established a newPublic Administration Institute and the Civil Service Commission, an independent review body, although the Civil ServiceCommission is not functioning effectively at this time. In early 2002, the govemment adopted a new salary structure for publicservants, doubling civil service salaries on average. The govemment introduced a medium-term expenditure framework budgetprocess.

* Tax and Customs. The government is now using a performance evaluation system for customs' officials and staff. Registration oftax payers is accelerating, and VAT collections are computerized in six offices. A new fiscal procedures law has simplified theappeals process.

* Legal and Judicial System. The Constitution of November 1998 and its subsequent organic laws for all key legal institutions providea strong foundation for a more professional and independent judicial system. A Magistrate School, established in 1998, isfunctioning well. The State Publication Office is issuing a National Gazette on a regular basis, publishing all laws and key legaldecisions. Quality and enforcement of judicial decisions is improving.

Overall, Albania has laid the foundation for improved governance, although capacity remains weak. An assessment of the Bank's supportover the last five years points to a number of lessons.

What worked well

* Using analytical work to underpin and broaden the reform program. A continuous flow of analytical work helped reinforce theongoing reform efforts and, most importantly, continually expanded the range of issues to be addressed. Most recently, a CountryFinancial Accountability Assessment raised awareness of financial accountability issues, which are now being incorporated in thePRSCs. The Bank will continue to broaden and deepen the institutional and govemance reform program through additionalanalytical work during this CAS period, including a Fiscal Decentralization Study in FY03, Country Economic Memorandum inFY04, and Public Expenditure Review in FY05.

* Using complementary adjustment and investment operations to advance reforms. The availability of both adjustment and investmentoperations provided flexibility and leverage to help Albania overcome points of resistance. For example, the Public AdministrationReform Project helped Albania establish a legal framework for a depoliticized civil service, but Structural Adjustment Creditconditionality, backed by the Prime Minister, was instrumental in overcoming the reluctance of line ministries to implement the newlegislation. The Bank's FY03-05 program continues to emphasize mutually reinforcing adjustment (PRSC) and investmentoperations.

What worked less well

* Demonstrating visible results. Notwithstanding the successes in Albania's broad institutional and governance reform program,improving governance is a complex and lengthy process, and Albanians continue to rank corruption as the country's most importantproblem. Reforms need to be carefully prioritized, and intermediate indicators should be identified to demonstrate early progress.The Bank has helped the Government develop detailed indicators to monitor the impact of the Public Administration ReformProject. The GPRS process increased the Government's receptiveness to monitoring. During FY03-05, the Bank will further increaseits emphasis on monitoring and publicizing indicators that measure progress in governance reforms.

* Complementing center-led reforms with capacity building of line ministries and local governments. To yield results, publicadministration reforms need to be accompanied by capacity building. The government has made some effort to build line ministrycapacity, especially in the Ministry of Education and Science, but without much success so far. During FY03-05, the Bank willbetter integrate institutional reforms and capacity building into its sector-specific investment projects.

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B. Country Assistance Program for FY03-FY05

24. This CAS is designed to support Albania in implementing its GPRS. The GPRS confirmsthe validity of the broad objectives of the 1998 CAS and the 2000 CAS Progress Report. Therefore, theobjectives of the FY03-05 CAS are largely the same as those of the previous CAS. These are to supportthe government to:

(a) Improve goverivance and strengthen institutions: build efficient and inclusive publicinstitutions; increase transparency and accountability at all levels; strengthenmonitoring and evaluation; and use community-based approaches that build institutionsfrom the bottom up;

(b) Promote sustasinable private sector growth: maintain macroeconomic stability;improve the environment for private investment; continue to reform the financialsector, and complete enterprise privatization; sustain agricultural growth and fosterbroad-based rural growth; improve infrastructure and create institutional environmentsconducive to infrastructure sustainability, especially through community or privatesector participation; and promote environmental sustainability and sustainable use ofnatural resources; and

(c) Foster human development: improve access to and quality of education and healthcarein both urban and rural areas, with sector-specific reforms coordinated with thecountry's public sector and decentralization reform programs; strengthen thesustainability and equity of the social insurance system; and improve targeting andefficacy of social assistance and community social services.

Poverty reduction is the overarching objective of the Bank's assistance strategy. The Bank willcontinue the efforts started in 1998 to deepen the cross-sectoral focus on poverty alleviation-consistent with the GPRS.

25. The Bank will increase its emphasis on areas where there are new opportunities formaking progress. As a result of the GPRS process, the government has now a stronger commitment tostrengthen transparency and accountability; improve policy monitoring and evaluation; and increasethe contestability of the policy, formnulation process. The GPRS also affects the way the Bank doesbusiness and assesses outconnes. Investment projects will be-more than ever-designed andimplemented within a broader strategic framework. Analytical and advisory services (AAA) will beundertaken jointly to the exteni possible with the government and other stakeholders, including otherdonors active in the sector, to ensure ownership. There will be more attention to external partnerships,using the GPRS as a common framework. The Bank will give more attention to outcomes, assessingthe success of Bank support by using both intermediate indicators and outcome indicators specified inthe GPRS. Most importantly, the GPRS creates a better environment for advancing reforms andreducing poverty by strengthening country ownership of the reform program; reinforcing a long-termvision; focusing on results; and encouraging partnerships.

26. A mix of adjustment and investment lending will best support the GPRS. A series of threePoverty Reduction Support Credits (PRSCs), the first of which will be presented to the Board with thisCAS, will keep GPRS momentum on track by supporting multisectoral policy reforms essential forimplementing the GPRS and best addressed through programmatic adjustment lending. The PRSCs

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will provide a strong core for the Bank lending program and will complement-but not displace-investment lending, which has proven effective in building institutional capacity, pioneering innovativecommunity-based programs, and improving Albania's infrastructure. Discrete sectoral policy reformswill be supported by specific investment operations that will "drill down" to address needs of particularsectors. The proposed PRSCs and the investment operations will be mutually reinforcing: the PRSCswill support reforms crucial for line operations, while line operations will help build the capacityneeded to implement and sustain the reforms. The PRSCs will amount to 15-20 percent of the lendingprogram.

27. PRSC components address four key cross-cutting issues of the GPRS. The components are:(i) promote sustainable growth and support private sector development (e.g. increase the equity andfinancial sustainability of the public pension system, improve the business environment, and improvethe enabling environment for rural development); (ii) strengthen capacity to monitor and evaluate thepolicy agenda (e.g., establish systems for regular quantitative and qualitative surveys, and strengthenanalytical capacity and institutional arrangements to feed information into policy decision-making);(iii) improve service delivery and social safety net effectiveness (e.g. address chronic underfunding ofeducation and healthcare, improve quality of expenditures, and ensure funding of GPRS priorities suchas immunization programs; and (iv) improve core public sector functions and institutionalarrangements (e.g. improve policy formulation, strengthen human resource development, improvepublic sector accountability, and improve intergovernmental fiscal relations). The first PRSC (FY02)focuses on setting up systems for policy monitoring and evaluation, measures to increase transparencyand accountability of the public sector, and a first round of reforms to the pension system. SubsequentPRSCs are expected to place greater emphasis, in line with the GPRS, on improving the environment,for private sector activities, broad-based rural development, and fiscal decentralization. During themidpoint of the CAS period, the Bank will assess progress in implementing the GPRS and the Bank'sprogram, and would consider the possibility of a fourth PRSC in FY05.

28. The GPRS enables greater Bank selectivity through enhanced partnerships. The CAStakes into account the Bank's comparative advantage, views of the country (see Attachment I on CASconsultations), and division of labor with other donors. The Bank's comparative advantage is toprovide analytical assistance and support key policy, institutional, and structural reforms necessary forachieving the GPRS objectives. The Bank will continue to work in a range of sectors, because Bankinvolvement helps ensure that different parts of the reform agenda come together and are mutuallyreinforcing, and because many operations build on the Bank's earlier work. The CAS reflects greaterselectivity across sectors: the Bank will increase financing for infrastructure, which will receive lesssupport from other donors. Under the CAS, new investment lending is not foreseen for publicadministration and the judiciary because ongoing Bank-financed projects will continue to cover theCAS period, and because the EU, in the context of the SAP, will be taking a greater role in those areas.Nor is new IDA lending foreseen for the financial sector, because the proposed Financial SectorAdjustment Credit (FY02) and an ongoing technical assistance project cover the CAS period, andbecause the most important financial sector reforms are nearly completed. The main areas of emphasisof the govermment, Bank, and other donors are summarized in a Partnership Matrix in Attachment 3.More detailed information about the work of the Bank and other donors in the framework of the GPRSis shown in Annex B9, the Country Partner Strategy Matrix.

29. The CAS emphasizes the principle of selectivity within sectors, carefully complementingthe work of others. In the area of governance, the Bank will intervene selectively-and especially in

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close coordination with the EU--within the broad governance program defined and supported by theFriends of Albania.2 The IFC, European Bank for Reconstruction and Development (EBRD), and anumber of bilateral donors play key roles in private sector development. (The IFC's activities aredescribed in detail in para. 59.) IDA will complement their activities by supporting, through proposedPRSCs, key reforms to improve the environment for private investment. In the financial sector, IDAand the IFC will support reforms and privatization of the remaining state-owned bank and the state-owned insurance company. In in:frastructure, the Bank will focus on policy reforms and strengtheninginstitutions necessary for infrastnrcture delivery and sustainability, using community-based approachesand private sector participation when appropriate. The Bank will continue to take the lead in helpingthe government address the power crisis, which, if unchecked, poses a principal risk for both growthand stability. In the social sectors, the Bank will concentrate on strengthening policies and institutions.Better donor coordination will ensure clear divisions of labor in the framework of the GPRS (see para.74).

30. Bank lending operations reflect a cross-sectoral emphasis on reducing poverty-and onstrengthening institutions and increasing transparency and accountability. These are the dominantthemes of the CAS. A Poverty Assessment (FY03) will draw on the 2002 LSMS and other data todevelop a more reliable poverty profile, outline the impediments to poverty reduction, and makerecommendations to strengthen the government's poverty reduction strategy. The Poverty Assessmentwill include a Country Gender Assessment to improve understanding of gender issues (see Attachment2). The Poverty Assessment will be an important input for updating the GPRS and for subsequent Banklending operations. An assessment of the Roma, one of the poorest groups in Albania according to theGPRS, will be undertaken in FY04 to identify interventions that can be supported by other donors.Planned education (FY04) and health (FY05) investment projects that build on the Bank's previousoperations and proposed PRSCs '[I and III will strengthen the quality, accessibility, and accountabilityof the education and healthcare systems. Policy reforms to create a more sustainable and equitablepension system-and to reduce pension subsidies, freeing resources needed for poverty reducingexpenditures-will be supported by the PRSCs. The PRSCs will also help further improve publicexpenditure management, increasing the participation of civil society in the policy formulation andbudget process, and ensuring that public resources are used more efficiently and allocated towardalleviating poverty. In infrastructure, the Bank will emphasize building transparency and accountabilityin the use of public funds, through public disclosure of planned infrastructure investments and throughparticipatory monitoring exercises. Given the GPRS focus on rural poverty, the Bank will make greaterefforts to address rural development as a cross-cutting theme. A number of planned operations willdirectly address the rural econonmy. In addition, PRSCs II and III will support key reforms for ruraldevelopment, and the social sector investment operations will give special attention to the accessibilityand quality of rural education and healthcare.

Improve Governance and Strengthen Institutions

31. Strengthening governance and' building inclusive institutions are the centerpiece of theFY03-05 CAS. Since the virtual collapse of the Albanian state in 1997, the Bank-in closecoordination with other donors-has focused on building critical central capacities, including publicadministration and the civil service, public expenditure management, and legal and judicialinstitutions. (Albania's progress in institutional and governance reform and lessons learned from the

2 The Friends of Albania is an informal group established in October 1998 by a wide range of multilateralorganizations and bilateral donors.

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Bank's support are summarized in Box 5). Although the foundations for reform are now in place, poorgovernance, weak institutions, and insufficient rule of law remain major deterrents to Albania'seconomic development, as recognized by the GPRS. Under the CAS, the Bank will extend institutionbuilding efforts to selected priority sectors-education, health, power, water, and transport-throughsector-specific operations, which will emphasize capacity building to complement center-led publicadministration reform (see "What worked less well" in Box 5). Bank operations will also be designedwith flexibility to support Albania's decentralization process, and to build capacity at local levels. Asmentioned earlier, institution building will be a central, cross-cutting objective embedded in all FY03-05 operations.

32. Fighting corruption-both a symptom of and a contributor to weak institutions-remainsan integral part of the Bank's strategy. Since 1998, as part of a broad govemance and anticorruptionagenda defined and supported by the Friends of Albania, the Bank has helped the government developand implement its Anti-Corruption Plan (ACP), which includes 150 specific actions affectingeconomic policy, rule of law, public administration, public finance, customs administration,procurement, audit, and public awareness. The government is in the process of updating its ACP,which is reinforced by the Stability's Pact's Anti Corruption Initiative, launched in early 2000. Afterfour years of ACP implementation, results are mixed. There are signs of reduced corruption in someareas-for example, revenues increased by about 3 percentage points of GDP from 1998 to 2001-indicating that the government, when determined, can achieve results. Yet, overall, corruption remainssubstantial and complex, requiring long-term efforts. An April 2002 report produced under theauspices of the Southeast European Legal Development Initiative indicates once again that Albaniansrank corruption as the country's top problem. Public perception of persistent and extensive corruptionunderscores the importance of prioritizing anti-corruption actions, achieving visible results in key areaswhile also pursuing systemic reform, and tracking progress using neutral monitoring indicators (see"What worked less well" in Box 5). Under this CAS, the Bank intends to continue supportinganticorruption efforts through a number of operations (including the proposed PRSCs II and III) andnonlending activities (Anticorruption Technical Assistance). In particular, building on the GPRSprocess, the Bank's FY03-05 operations will focus on increasing transparency and accountability as ameans to strengthen institutions and reduce corruption.

33. The foundations are in place for strengthening key state institutions-publicadministration and the judiciary-and the Bank will build on them. Adjustment operations-thePRSCs nI and m-will support policy reforms, complemented by the ongoing Public AdministrationReform and Legal and Judicial Reform projects, which provide goods, works, training, and technicalassistance to implement reforms. Both investment projects are carefully coordinated with other donors,especially the EU and Council of Europe. The foundations for public administration reform,particularly human resource reform, are in place, following the adoption of the Civil Service Law inNovember 1999 after some difficulty.. The Bank can be effective in helping overcome points ofresistance in implementing the law, by using mutually reinforcing adjustment and investmentoperations (see "What worked well" in Box 5). Together with the UK Department for InternationalDevelopment (DFID), the Bank is supporting better public expenditure management-a cornerstone ofpoverty reduction. The government is improving budget formulation by implementing a medium-termexpenditure framework (MTEF)-now in its third iteration-which injects a strategic focus into thebudget process. The Bank is also supporting improved budget execution and financial accountabilityby strengthening treasury, accounting, and intemal audit, and working with the Supreme AuditInstitution and Parliamentary committees, incorporating the recommendations of the Country Financialand Accounting Assessment (FY02) into the PRSC and other operations, and coordinating with otherdonors. The PRSCs and the Public Administration Reform Project will help strengthen procurement

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capacity, in line with the recommendations of the Country Procurement Assessment Report (FY01).(See para. 66 and Attachment 5.)

34. The foundations for legal andjudicial reform are also in place: the Constitution of November1998 provides for judicial independence, strengthened through the 1998 Law on Judicial Organization,amended in 1999. However, there is a need for continued institutional strengthening as well as clearprocedures to implement the 1993 Constitution, as indicated by recent political clashes regarding theProsecutor General, President, and Constitutional Court. There are some modest signs of improvementin the judiciary-in the high courts, the quality of decisions has improved and decisions are published.Also, the first graduates from the Magistrate School-established with the help of the Council ofEurope and other donors, including the Bank-are starting to improve the quality of decisions in lowercourts. Still, there is slow progress in law enforcement, including enforcement of property rights.Corruption and incompetence in the judiciary remain serious problems and a major impediment toeconomic growth.

35. The Bank will help improve monitoring and evaluation to increase the effectiveness,transparency, and accountability of public policies-thereby strengthening Albania's institutions andaddressing a main weakness of the GPRS (see para. 18). The GPRS recognizes the need for reliabledata and monitoring and evaluation (M&E) systems to increase the effectiveness of public expendituresand assess progress towards the country's development objectives. The CAS builds on the GPRS tosupport major improvements in data collection and M&E over the next three years. The governmentcompleted a census in 2001, and a representative LSMS will be completed in summer 2002, part of afive-year program to build capacity for regular household surveys, supported by DFID and the Bank(the ongoing Social Service Delivery Project). There is a parallel initiative to undertake qualitativepoverty studies to complement quantitative data. These efforts will result in reliable baseline data, andwill enable the government to monitor the impact of policies on desired outcomes over time.

36. The government, supported by PRSC I, has prepared a preliminary M&E plan that laysout a roadmap for a more perfonnance-oriented public administration. The PRSCs, which include aspecific component on M&E, will also help improve GPRS indicators and strengthen their linkage tothe Millennium Development Goals (see Box 10). The planned PRSCs II and m will help thegovernment meet key benchmarlks in implementing the M&E plan, complementing sector-specificinvestment operations that will build performance management capacity throughout the public sector.The ongoing Public Administration Reform Project will help launch M&E capacity building efforts inkey line ministries, while the MTEF process will reinforce this by ensuring that budget deliberationsgive greater consideration to past and promised performance. This should lead to better prioritizedgoals, especially in the health, education, social protection, and rural sectors-the pilot ministries inthe M&E plan. Improving prioritization will address a current weakness of the GPRS (see para. 18). Inaddition, the Bank will help the government test ways to increase transparency and involve the publicin M&E, by introducing participatory M&E in the health sector and by piloting a municipalinformation center and citizens' report card in Tirana (see Box 6).

37. Albania has taken major strides in establishing a basic legal framework fordecentralization, using a particijpatory process, assisted by USAID and local institutes. However,Albania has a long way to go to complete the basic regulatory framework and efficiently implementfiscal decentralization, taking into account an appropriate balance between central governmentoversight and local fiscal autonomy and the limited administrative and technical capacities for servicedelivery at the local government level. A planned Fiscal Decentralization Study (FY03) will analyzeAlbania's intergovernmental fiscal relations and identify institutional and capacity building needs. It

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Box 6Voice and Accountability at the Local Level: The Tirana Transparency Project

When Mayor Edi Ramna entered office in 2000, he pledged to build transparency and accountability in Albania'scapital. The Mayor approached the Bank's public sector group with a proposal to improve public service delivery byproviding the citizens of Tirana with a municipal information center where they could lodge complaints and seekanswers to questions.

The Bank's public sector group took up the challenge as part of its anticorruption work and as a pilot for monitoringand evaluating the GPRS. They obtained funding for the project through a US$614,000 grant from the Government ofthe Netherlands and a consultant trust fund (US$25,000) from the Government of Norway. Conditions in Tirana makethis project particularly necessary. Tirana's population has grown threefold in the past eleven years, mushroomingfrom 250,000 to approximately 750,000. The city's infrastructure has not been able to meet the increased demand forwater, sanitation, roads, business licenses, and building permits. The city also lacks basic facilities-there is not even awaiting area for people seeking services and permits. As a result, Tirana residents do not know where to go for basicneeds.

The two-year Tirana Transparency Project, modeled on similar approaches used successfully in India, the Philippines,and the Ukraine, has two components for addressing these issues. The first component is to establish a municipalinformation center where citizens can go for information on public services, pick up standardized forms (which arecurrently being developed), and lodge complaints. They can also make payments for public services and get a receipt,thereby combating petty corruption.

The second component is a citizens' report card, a monitoring mechanism that will allow the city to track whichservices are effectively delivered, which are not, and why. The city can use the report card to make changes necessaryto improve performance, and citizens can use it to monitor municipal progress and influence the process by providingfeedback.

Project implementation started in January 2002 and is proceeding well. If this approach proves effective in improvingpublic service delivery and increasing the transparency and accountability of Tirana's government, Albania couldextend it to other municipalities and communes and link it to activities to monitor the GPRS.

will help the government implement its decentralization strategy and provide important input for thedesign of Bank-financed projects.

38. The Bank will continue to support community-based activities that build institutions fromthe bottom up. About one third of the existing Bank portfolio and planned FY03-05 operations arebased on community-driven development (CDD). Guided by past success in this area (see para. 22),the Bank will scale up successful experiences of CDD and focus on the sustainability of communityinstitutions through ongoing irrigation and microcredit operations and the planned Natural ResourcesProject (FY05). The Bank will continue to introduce CDD to new sectors, such as rural water. TheBank will also explore how to "institutionalize" CDD-by using CDD to increase the effectiveness andaccountability of local governments. The Bank will also introduce a community-based approach in across-sectoral post-conflict grant for northeastern Albania, which will improve vulnerable children'saccess to early care and also raise awareness of nonviolent conflict resolution.

Promote Sustainable Private Sector Growth

39. The GPRS recognizes the private sector as the driving force behind growth. Relativepolitical stability and commitment to reforms since 1998 have led to robust growth in private sectoractivity. However, to sustain private sector growth leading to poverty reduction, it is necessary toimprove the business environment; complete the structural reform agenda (especially enterprise andfinancial sector privatization); maintain agricultural growth and pursue broad-based rural development;

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Box 7Foreign Direct Investment Diagnostic Study

At Government request, the Foreign Investment Advisory Service (FIAS) reviewed the environment for foreign directinvestment (FDI) in Albania. The reviemw is based on a May 2000 field study that included interviews with 40 investors-across many sectors-who had investments in Albania or had considered investing in Albania.

The diagnostic study points out that Albania offers foreign investors proximity to the EU market and access to theMediterranean Sea, low-cost and well-educated workers, and rich natural resources and minerals. The study concludesthat Albania has the potential to increase the level of FDI by several times, excluding extraordinary income fromlarge privatizations, provided that key Issues in the Investment climate are addressed. According to the study, theoverarching problem deterring FDI is poor governance. Investors cited the following obstacles:

* Lack of consistent and transparent implementation of law, the single most important obstacle to higher FDI.* Corruption, which raises the ccst of doing business.* Poor enforcement of laws and contracts, resulting from unreliability of the judicial system.* Inconsistent application of tax laws and customs procedures, and ineffective tax and duty reimbursement

mechanisms.* Deficient infrastructure, especially lack of sufficient and reliable power, water, and transport, causing higher

cost structures.* Difficult access to land and cortstruction permits.* Lengthy procedures to comply with business regulations.

Based on the study, FIAS recommends improving the investment climate before dedicating large amounts of resources topromoting FDI. To this end, FIAS is further assisting the Government by undertaking-with cofinancing from the SorosFoundation-an Administrative Barrier; to Investment Study, leading to a workshop and formulation of an "actionagenda."

improve infrastructure, including reforms for private sector participation; and ensure sustainableenvironmental and natural resource management. The Bank Group-IDA, the IFC, and the MultilateralInvestment Guarantee Agency (MdIGA) will work together to help Albania further improve theconditions for sustainable private sector-led growth. A Country Economic Memorandum (CEM),planned for FY04, will increase urtderstanding of sources of future growth and strengthen future GPRSupdates (see para. 18).

Improve the Business Environmejit

40. Improving Albania's diflicult business climate is a key requirement for sustaining highgrowth. Accordingly, the Bank Group will sharpen its focus on the investment climate, and especiallyon facilitating, in the spirit of the GPRS, a more productive dialogue between the government andprivate sector. The IFC, Foreign Investment Advisory Service (FIAS), and Southeast Europe EnterpriseDevelopment (SEED)3 are working with the government and business community to formulate acomprehensive action plan to improve the investment environment. A FIAS study identified poorgovernance and weak institutions as the overarching problem deterring investment (see Box 7),underscoring the importance of the CAS's cross-cutting focus on creating more accountable andtransparent institutions. The Bank Group will support the government's efforts to improve theinstitutional and legal frameworl: by assessing administrative barriers to investment (FIAS) andsubsequently streamlining administrative procedures (PRSC II, FY03); improving the legal framework

3 SEED is a new, multi-donor initiative managed by IFC to strengthen small and medium enterprises in the region. Theprogram was originally known as the Balkan Enterprise Facility.

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for bankruptcy, resolution of debt, and commercial disputes (Financial Sector Adjustment Credit,FY02; PRSCs I and II in FY02 and FY03, respectively); and establishing with the assistance of MIGAan investment promotion agency. Microenterprises and small enterprises dominate Albania's economy.A number of donor initiatives, including SEED, are specifically working to assist micro, small, andmedium enterprises. The need for a sound business climate extends to rural areas, where many ofAlbania's poor live, highlighting the need for a sound rural strategy (Box 8). Improving infrastructure,especially in rural areas, is also essential for an enabling business environment (para. 49).

Complete Financial Sector Reforms and Enterprise Privatization

41. Albania continues to make tangible progress in financial sector reforms, especiallyprivatization. Since 1997, the government has liquidated the insolvent state-owned Rural CommercialBank, privatized the National Commercial Bank to an investor consortium that included the IFC andEBRD, and put the Savings Bank-the last remaining state-owned bank and Albania's largest bank-under a governance contract in preparation for its privatization, which is well advanced at this point.Two IDA credits, the Recovery Program Technical Assistance Project (to be closed in FY02) and theongoing Financial Sector Institution Building Technical Assistance Project, have provided substantialsupport for these actions. Close IDA-IFC cooperation has been instrumental in helping Albania moveforward with financial sector privatization. The IFC is taking a lead role in helping the governmentmarket the Savings Bank and plans to invest in the Savings Bank, continuing its role as a catalyst inkey privatizations. The ongoing Financial Sector Institution Building Technical Assistance Project andthe proposed Financial Sector Adjustment Credit (FSAC, FY02), which will be presented to the Boardwith this CAS, will also support the government in privatizing the Savings Bank, as well as INSIG, thestate-owned insurance company, marking the final exit of the state from any major ownership role inthe financial sector. The IFC and EBRD have agreed in principle to make a pre-privatization equityinvestment in INSIG.

42. The Bank will continue to support improvements in financial sector infrastructure. TheFSAC will help develop a deposit insurance system, establish an automated real-time gross settlementssystem, strengthen the bankruptcy framework and collateral enforcement, and improve accounting andauditing practices. It will also strengthen both bank and insurance regulation and supervision whichwill also assist the govemment's anti-money laundering efforts. An anti-money laundering law,prepared with IMF assistance, was passed in 2001, and the US Treasury is providing anti-moneylaundering assistance to the Ministry of Finance. The Bank has helped the Bank of Albania prepareanti-money laundering regulations and, together with the IMF, will build capacity to implement it. Thegovernment has pledged to further improve its anti-money laundering legislation in 2002 andstrengthen its implementation.

43. Financial intermediation and service quality are improving, especially for small andmedium enterprises. Since 1998, financial intermediation to the private sector has increased, althoughfrom a low base. Private banks are expanding their retail banking activities, opening new branches inkey cities and providing better services, including e-banking. Still, financial intermediation remainslow, because it will take time for the above-mentioned reforms-in combination with an improvedjudicial system-to produce a fully functional banking system. In parallel to structural reforms, theBank Group has directly supported improved access to credit, .focusing on microenterprises and smalland medium enterprises (SMEs). The lFC has invested in FEFAD bank, which targets microenterprisesand SMEs, and is using its partial credit guarantee product to help the American Bank of Albaniaincrease its SME portfolio. Since 1993, IDA has helped pilot and scale up urban and ruralmicrofinance programs that are among the most successful in the region. The ongoing Microcredit

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Project helps develop rural savings and credit associations, expand Albania's first local privatemicrofinance institution, and establish an appropriate regulatory and supervisory framework formicrofinance.

44. Enterprise privatizatioiu is advancing. The first phase-SME privatization--is completed.The second phase-strategic sector privatization-included the successful privatization of the mobiletelecommunications company in July 2000 and the award of a second license in May 2001, both ofwhich were competitive and transparent. The government also established the legal framework forprivatizing Albania's chrome mining company, and restructured Albania's petroleum company intothree companies-exploitation and production; marketing; and services-each with a different path forprivatization. The government and its financial advisors are now focused on privatizing AlbTelecom,the fixed-line telecommunications company, although the privatization schedule has been postponeddue to a weak fixed-line international market. The Bank, which administers Italian finding for thefinancial advisers, will continue to monitor the privatization program-especially to ensure itscontinued transparency.

Sustain Agricultural Growth and' Promote Rural Development

45. The GPRS emphasizes development of rural areas, where four out of five poor Albanianslive. Increased productivity and employment opportunities in rural areas, along with improved accessto markets and social and financial services, are necessary for poverty reduction. A large number ofBank operations already contribute to rural development. The ongoing Irrigation Rehabilitation andDrainage Project and Agricultural Services Project finance investments to improve agriculturalproductivity, market linkages, arid land registration. The ongoing Forestry Project improves forestmanagement and includes a successful pilot component for community forest and pasture management.A Pilot Fisheries Development Project, approved in FY02, will introduce fishery associations to bettermanage marine resources. In addition, the ongoing Rural Roads Project and Community Works Projectaddress rural infrastructure deficiencies; and the ongoing Microcredit Project is developing asustainable rural savings and credit association system. Most of the Bank's rural operations usecommunity-based approaches, which have proven highly effective in building local ownership andaccountability (see para. 22, "What worked well").

46. During FY03-05, the Bank will give greater attention to rural development as a cross-cutting objective. About one third of FY03-05 operations will focus exclusively on rural areas, andnearly all other operations will include important rural elements. The planned PRSCs II and III (FY03and FY04, respectively) will address issues raised in the FY02 Rural Strategy (see Box 8), and willalso support a review of the govemment's proposals to reform the rural pension system. A RoadMaintenance Project (FY02), which will be presented to the Board with this CAS, will improve ruralroads and introduce more efficient methods for road maintenance. An additional Transport Project(FY04) will finance-subject to the results of a feasibility study-part of the Durres-Morine Road,which is expected to bring considerable benefits to remote northem Albania (see para. 53).Community-driven development will continue to be a dominant theme of Bank investment operationsin rural areas. The Bank plans to continue supporting small-scale infrastructure improvements in ruralareas through a Community Works II project (FY04). A Rural Development/Water Project (FY05) willbuild on the experience of pilot community-based rural water schemes. The rural savings and creditassociation system may require fwuther support in FY05 or FY06. An Agriculture/Irrigation III Project(FY05) will ensure the sustainability of water user associations, complete the restructuring of waterenterprises, and support other GPRS priorities such as facilitating cultivation of fruit trees andvineyards. The Forestry Project's successful community forest and pasture management component

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Box 8Albania's Rural Strategy

Recognizing the importance of the rural economy to both economic growth and poverty reduction, the Bank-withGovernment and key stakeholders-undertook a Rural Strategy in FY02 as an input to both the GPRS and the CAS. Thestudy identifies seven pillars of a rural strategy:

(i) Improve the environment for private investment. Complete the necessary legislative framework-particularly theLaw on Bankruptcy-and then shift focus to ensuring consistent application and enforcement of laws and regulations. Inparticular, strengthen the judiciary.

(ii) Develop the land market. Complete first time registration of private farm land, develop effective and convenientland registration services, and review transaction fees and transfer taxes to ensure they do not inhibit land transactions ordrive them underground.

(iii) Strengthen rural services. Restructure and streamline agriculture research to make it more cost effective andresponsive to the needs of smallholder farmers. Continue to develop multi-faceted advisory services. End directGovernment involvement in seed production. Improve seed certification services to support the development of privateseed producers.

(iv) Encourage financial services in rural areas. Finalize regulations for savings and credit associations, improveregulations for non-bank financial institutions, and strengthen regulation and supervision capacity. Encourage amanageable expansion of microfinance services, but resist urging aggressive expansion that would threaten financialsustainability.

(v) Rehabilitate and improve management of rural infrastructure, including rural roads, irrigation and drainage,rural water supply, and rural energy. In particular, use community participation to develop institutional environments thatensure cost recovery and maintenance.

(vi) Develop the non-farm economy. Most importantly, improve the enabling environment, including betterinfrastructure and access to financial services (see i, iv, and v above). Use demand driven and community basedapproaches for small targeted interventions.

(vii) Ensure sustainable resource management. Use community participation to improve forest, pasture, andwatershed management; strengthen coimmunity planning and management capacity. Reforest degraded and bare lands inwatershed areas and rehabilitate so-called "refused" lands.

A Rural Human Capital Development Study (FY04) will build on the Rural Strategy to better understand the humancapital dimensions of poverty reduction in rural Albania and to identify ways to improve the accessibility and quality ofkey social services.

will be scaled up under a planned Natural Resources Project (FY05). A Rural Human CapitalDevelopment study will focus on ways to improve accessibility, quality, and sustainability of socialservices and will inform the Education III (FY04) and Health III (FY05) projects.

Ensure Sustainable Environmental and Natural Resource Management

47. A growing concern for the environment-an area badly neglected in past years-isanother sign of a new focus on long-term outcomes. During the transition, there has been severeenvironmental degradation which, if unchecked, could undermine the country's tourism potential andincrease poverty. There is recent evidence of increasing public support for environmental protection,including the removal of illegal buildings to restore public parks and waterways in Tirana. Thegovernment made an effort to highlight environmental-poverty linkages in the GPRS, whichemphasizes the need to reverse environmental degradation, rehabilitate heavily polluted areas thatjeopardize health, and ensure the sustainable use of natural resources (see below). The National

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Environmental Agency was upgraded in August 2001 to a Ministry of Environment, and an updatedNational Environmental Action Plan was approved by the government in January 2002. Within thiscontext, there is an opportunity to strengthen the government's regulatory capacity, help thegovernment demonstrate its commitment to the environment through visible actions, and furtherincrease public environmental awareness. These areas will be addressed by a planned EnviromnentProject (FY03), which will also serve as a catalyst for additional donor funding.

48. As the GPRS points out, natural resource degradation threatens rural development andpoverty alleviation. Since the transition, total forest cover has decreased by an estimated 15 percentand about one million hectares of pastures have been degraded from overgrazing. Soil erosion fromdeforestation affects an estimaled 60 percent of agricultural land. The ongoing Forestry Project,financed by the Bank, Italy, and Switzerland, developed a successful new approach, centered oncommunity forest and pasture management. A planned Natural Resources Project (FY05) would buildon this experience, supporting sustainable productive activities to both reduce poverty and pressure onenvironmentally sensitive areas.

Improve Infrastructure

49. The CAS increases the iBank's emphasis on infrastructure, which is a major bottleneck forprivate sector growth and also identified by the poor-especially in rural areas-as one of their mainconstraints. The EU, a major financier of infrastructure in previous years, is shifting resources frominfrastructure to other areas. Given emphasis on infrastructure in the GPRS and the financing needs,the CAS provides major support for infrastructure-accounting for over 50 percent of FY03-05lending. Policy and institutional reforms necessary for improved sector performance, privatization, andsustainability will be a central component of all infrastructure projects. The Bank will designoperations to include public participation and disclosure activities that instill transparency andaccountability in the use of public funds, providing opportunities for citizens to increasingly hold theirgovernment and representatives accountable for using public funds effectively. The Bank also proposesto continue support for small-scale community infrastructure through a Community Works II Project(FY04), which will be reoriented to further improve transparency and sustainability. The Bank issupporting infrastructure improvements in informal urban settlements through the ongoing Urban LandManagement Project.

50. Power. Despite past failure to address the fundamental issues affecting the sector, thegovernment is now making a determined effort to reverse the deterioration in sector performance. Tothis end, the government adopted in December 2000 a two-year Action Plan (revised in January 2002to cover 2002-2003) outlining measures to improve sector performance. So far KESH, Albania'selectric company, has met all quarterly targets for collections and reductions in losses. Despite thisencouraging start, the sector's problems are so deep-rooted that sustained efforts will be needed for aconsiderable period of time, supported by critically needed investments. The government has alsoadopted a Power Sector Policy Statement-providing a clear and well-developed road map for powersector reform. It will take time to Limplement the legislative and regulatory framework needed to attractprivate investment to the sector. Consequently, donor assistance will be required for several years,subject to continued good perfoimance in meeting Action Plan targets and implementing reformsoutlined in the Policy Statement.

51. The Bank has so far taken the lead role in the sector, and is well placed to continue this role. APower Transmission and Distribution Project was approved in 1996, but suspended in 1997, mainlybecause the government failed to reduce illegal electricity use and improve collection of electricitybills. The Bank lifted the suspension of disbursements in June 2001, after the government and KESH

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met the first quarter 2001 Action Plan targets. At the same time, the Bank decided to prepare a newoperation to support the government's efforts to resolve the crisis. The proposed Power SectorRehabilitation and Restructuring Project, which will be presented to the Board at the same time as thisCAS, will support technical assistance, procurement and installation of meter boxes, and rehabilitationof priority components of the transmission and distribution networks in the Durres, Elbasan, andKucova regions. At government request, the Bank will also support efforts to add critically-neededthermal generation capacity. The CAS includes a planned Thermal Power Project (FY03), which willfinance part of the construction cost of a new 100 MW thermal power station. The Bank will help thegovernment raise additional financing from other donors for the construction of the new thermal powerplant and will continue to play a key role in sector dialogue.

52. Water. Albania's water sector is plagued by many of the same problems facing the powersector: high consumption, wastage and misuse, illegal connections, below-cost tariffs, inadequaterevenue collection, and insufficient investment in physical infrastructure. Consequently, despiteAlbania's abundant water resources, water supply in urban areas is intermittent and less than half of therural population has access to piped water. The lack of reliable water supply hampers privateinvestment and endangers public health, especially that of the poor. Without sector reform andinvestment in physical infrastructure, the ongoing deterioration will lead to crisis situations in manyurban and rural areas. The Bank, in close cooperation with other donors, is taking the lead in helpingthe government tackle policy reforms, focusing on cost recovery and private sector and communityparticipation. The government is preparing, with Bank assistance, a Water Supply Action Plan and acomprehensive Water Supply and Sanitation Strategy (FY03). The Municipal Water and WastewaterProject (FY03) will test private sector participation in water supply and sanitation through amanagement contract for four cities-Durres, Fier, Lezhe, and Saranda. The management contract willcontain specific provisions to improve water supply to the poor, who are receiving less than two hoursof water per day. The project will include a rural water component to pilot the government's RuralWater Supply and Sanitation Strategy, which is based on community participation. If the pilot issuccessful, a planned Rural Development/Water Project (FY05) will scale it up. Also, a GlobalEnvironmental Facility-financed Integrated Water and Ecosystem Management Project, in closeassociation with the Municipal Water and Wastewater Project, will improve wastewater managementto protect biodiversity in coastal areas. Bank support to Albania's water sector incorporates the lessonslearned from the Durres Water Project, an unsatisfactory project that closed in 2000, by emphasizingsector reform and private sector participation.

53. Transport Despite visible progress in improving parts of Albania's road network, majordeficiencies remain. A proposed Road Maintenance Project (FY02), which will be presented to theBoard with this CAS, will support improved maintenance of national and rural roads through gradualcontracting of routine road maintenance, also ensuring adequate policies for financing roadmaintenance. Roads will be selected on the basis of access to essential services (such as hospitals) inaddition to economic criteria. The project will aim to instill transparency and accountability in the useof public funds through participatory monitoring exercises and public local disclosure of allocatedfunds. The CAS includes an additional Transport Project (FY04), which would support part of theimprovement of the Durres-Morine road, subject to the results of a feasibility study, includingeconomic analysis. The Durres-Morine road, which was emphasized in the GPRS, is widely perceivedin Albania as a critical investment to open the impoverished northeastern Albania to economic growth(see Attachment 1 on CAS Consultations). In addition to road improvements, the Bank is alsosupporting the port sector through the ongoing Durres Port Project. The ongoing Trade and TransportFacilitation in Southeast Europe Project-part of a regional program joining eight Balkan countries-aims to reduce non-tariff costs of trade and transport and reduce corruption and smuggling at border

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crossings. A planned Transport Strategy (FY05) will take stock of overall transport sector issues andneeds, especially in the context of Albania's alignment with EU structures.

Foster Human Development

54. The Bank will continue strong support for the government's efforts to improve education,healthcare, and social protection. Recognizing the links between poverty, low education, and thepoor health of children, the GF'RS and the govemnment's MTEF increase budgetary allocations foreducation and healthcare and outline a program for improving access and quality of education andhealthcare and for increasing the effectiveness of social protection. The Bank will continue to supportthe government's efforts by employing complementary and mutually-reinforcing instruments: throughnonlending services that improve understanding of key reform issues, specific investment projects(including education and health projects that build on the Bank's previous investment operations), andadjustment lending (PRSCs in FY02, FY03, FY04). The PRSCs support pension system reformis andinclude a component to support improved social service delivery and social safety net effectiveness.The PRSCs will support cross-cutting reforms crucial for line operations (such as the development ofthe institutional prerequisites for the Education Reform Project to proceed with envisaged investmentsin textbooks), while the investment projects will build capacity to implement the reforms.

55. In the education sector, the Bank will continue to focus on improving management andaccountability. Education trends are alarming: since the transition, gross enrollment rates for basic andsecondary education have declined. Reversing these trends depends on improving management andaccountability. Bank interventions in the education sector are grounded in a comprehensive educationsector review: Albania's Education Sector: Problems and Promises (FY00). The ongoing EducationReform Project aims to improve tie capacity of the Ministry of Education and Science (MOES) to planand manage the delivery of education services. The MOES is a pilot ministry for civil service reform,supported by the ongoing Public Administration Reform Project. Crucial reforms for improvingplanning and management and inc:reasing the access of the poor to quality education are also supportedby the PRSC program (FY02 through FY04). Consistent with the sector work and the government'seducation objectives expressed in the GPRS, an Education III Project (FY04) will build onstrengthened MOES management capacity to further improve the quality of education and theaccountability of schools to parents. The project will focus on four key inputs to improve educationquality: curriculum, textbooks, teacher training, and learning assessments. The project will placespecial emphasis on rural areas-vhere poverty is higher and educational demand appears lower-andon activities at the community level to increase school accountability, building on Soros Foundation-funded activities to establish parent-teacher associations. In advance of preparing the Education IIIProject, the government needs to update-together with key stakeholders-its sector strategy toincorporate new data, including LSMS data and GPRS/MTEF monitoring feedback.

56. The Bank will help the government translate its health goals into actions that protect thebasic health needs of the most vuilnerable population. Although Albania entered the transition witha relatively healthy population, liFe expectancy has since fallen and infant and under-five mortalityrates remain relatively high, especially in rural areas. The country also faces emerging health issues,including road accidents, a higher incidence of chronic diseases, and HIV/AIDS, which-althoughcurrently uncommon (72 reported cases, 20 new cases in 2002)-could rapidly spread. Albania is onlynow taking the first steps towardl comprehensive health care reform. The Ministry of Health hasprepared, with the assistance of the World Health Organization, a ten-year strategy that articulatesoverall objectives and identifies major constraints, but work is needed to translate the broad goals intospecific actions. The GPRS and MTEF initiated a process of narrowing the priorities. With the support

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of the PRSCs, the Ministry of Health will undertake key studies and prepare detailed implementationplans to operationalize the strategy. The ongoing Health System Recovery and Development Project,approved in FY98 to focus on the secondary and tertiary health care system, is being adjusted duringimplementation to better align the project with GPRS priorities-for example, by including healthservices and resources mapping exercises to improve access to and quality of health services. A Healthm Project (FY05) will-in line with the GPRS-support the government to: (i) establish aperformance-based remuneration system to retain qualified staff, especially in rural areas; (ii)rationalize the decentralized health delivery system at the regional level, with emphasis on providingquality services to the under-served population, including rural and peri-urban populations; and (iii)improve monitoring and evaluation of public health programs. The government will undertake a healthsector assessment in the context of Health III project preparation.

57. The Bank will support the government's efforts to create a fiscally sustainable socialprotection system that effectively targets the poor and vulnerable. The government'scomprehensive pension reform program aims to create an affordable and equitable pension systemwhile reducing reliance on budget subsidies-currently about 1 percent of GDP, and unduly absorbingscarce resources needed for other critical social services. The PRSCs will support the implementationof Albania's pension reform package, as well as improved targeting of cash economic assistance(ndhime ekonomike). A planned Social Safety Net Review (FY03) will assess the impact of ndhimeekonomike and pension programs for employees, rural self-employed workers, and urban self-employed workers, and will improve understanding of the extent to which the pension programsfunction as social assistance for retirees. Where appropriate, the PRSCs will also support thegovernment's development of a sustainable framework for community-based social services, which areprimarily being developed under the ongoing Social Service Delivery Project. Attention will be paid tothe need for consistency between policies on social safety nets and decentralization.

58. Labor market issues are not well understood. Informal labor markets play an important rolein Albania's economy, but the underlying information that will allow us to develop a comprehensivepicture of the labor market is only now becoming available (see paras. 35 and 36). A planned LaborMarket Assessment (FY05) will deepen understanding of labor market issues. It will also assess thestatus of core labor standards and recommend actions to improve their enforcement (see Attachment4).

Role of IFC and MIGA

59. The IFC has substantially increased its portfolio in Albania. From 1998 to 2001, the IFCapproved seven projects amounting to about US$90 million: a loan to a cement bagging company nearthe port of Durres; an equity commitment and loan to the Patos Marinza Project for enhanced oilrecovery; and equity investment in FEFAD Bank, which lends to microenterprises and SMEs; anequity investment in the National Commercial Bank, where the IFC is a key participant in the investorconsortium that purchased the bank; a loan to the Elbasan Cement Factory, Albania's only operatingcement plant; and a partial guarantee facility to the American Bank of Albania to expand its SMEportfolio. The IFC will continue to focus on strengthening the financial sector and supporting SMEdevelopment. In particular, the IFC will continue its highly effective collaboration with IDA toadvance banking privatization, acting as a catalyst in key privatizations. The IFC is currently assistingthe government, in cooperation with IDA and the IMF, to privatize the Savings Bank, Albania's largestfinancial institution, and INSIG, Albania's largest insurance company. The IFC also invested in theSoutheast Europe Enterprise Development (SEED), formerly the Balkans Enterprise Facility, whichprovides technical assistance to SMEs and works to improve the SME business environment. SEED

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recently opened an office in lirana and is building a pipeline of technical assistance and institutionbuilding projects. SEED operal:es on a commercial basis, with the aim to spin off its services to localbusinesses within five years. The activities of SEED are complemented by the Trans-Balkan Fund,established by the IFC and other development finance institutions, to make equity and quasi-equityinvestments in private SMEs in the region. The IFC is also looking for opportunities to invest in powerand telecommunications.

60. In the past two years, AMIGA issued its first two guarantees for projects in Albania. The firstguarantee-US$1.6 million issued in February 2000-covers an Italian investment in a tourismproject: a marina on Albania's Adriatic coast. The second guarantee-US$7 million issued in June2001-covers the Commercial iBank of Greece for its investmnent in the Intercommercial Bank. As ofthe end of February 2002, MIGA's total exposure for projects in Albania was $8.6 million. WhileMIGA is not currently underwriting any projects in Albania, it stands ready to provide coverage forinvestments in private sector projects, particularly in supporting the process of privatization. MIGA isalso assisting Albania though its Investment Marketing Service. MIGA expects to provide capacitybuilding for an investment proraotion agency, once Albania's parliament passes the law to establishthe new agency. Possible areas for MIGA assistance to the new agency include: strategydevelopment, staff capacity building/training, information technology and Internet strategydevelopment, and development: of promotional materials (including Web presence) and outreachcapacity.

C. Lending and Nonlending Scenarios

61. Albania's strong performance in FY99-02 placed it in the high-case scenario of the 1998CAS and 2000 CAS Progress Iteport. The FY03-05 CAS presents two lending scenarios: low caseand base case (the status quo). (See Table 1.) The base-case IDA allocation for FY03-05 is US$131million. In the event of exceptioiial country performance, the Bank would consider an increase in theIDA allocation in FY05 (see para. 64).

62. Base-case lending would consist of about four projects per year-two adjustment credits andten investment operations-to support GPRS policy reforms and priority actions to reduce poverty. Thebase-case scenario is designed to maintain the momentum of the GPRS, leverage the implementationof the remaining policy reform agenda, and move toward medium-term financial sustainability. To stayin the base case, Albania must meet the triggers shown in Table 2. The base-case triggers comprisethree categories: (i) maintain macroeconomic stability and a path toward creditworthiness (barringexternal shocks); (ii) make satisfactory progress in implementing the GPRS reform agenda, includingthe specific measures indicated iiQ Table 2; and (iii) maintain satisfactory portfolio performance. Inaddition, the base-case lending program is self regulating: if reform progress in key sectors is notsatisfactory, corresponding operations will be dropped.

63. Low-case lending would not exceed US$70 million, consisting of two to three investmentoperations per year that would hellp strengthen institutions and reduce poverty despite an unfavorablemacro or policy environment. Given that nonlending services are designed to support the GPRS, thereis little variation between the base-case and low-case scenarios. A low-case scenario would betriggered by Albania's failure to meet the base-case triggers shown in Table 2, barring external shocks.

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Table 1Lending and Nonlending Program

Low Case Base Case

Lending: Lending:

2-3 investment projects per year, comprising lower-risk 4 projects per year, comprising low-case lending plusprojects that can directly impact poverty. investment and adjustment operations that support reform

efforts in key areas.

Total lending up to US$70 million. Total lending up to US$131 million

FY03: FY03:Thermal Power I (US$20 million) Thermal Power I (US$20 million)Environment (US$5 million) Environment (US$5 million)

Municipal Water/Wastewater (US$15 million)PRSC n (US$10 million)

FY04: FY04:Education III (US$8 million) Education ID (US$8 million)Community Works II (US$ 10 million) Community Works II (US$ 10 million)

Transport (US$20 million)PRSC III (US$10 million)

FY05: FY05:Rural Dev./Water (US$8.0 million) Rural Dev./Water (US$8.0 million)Health III (US$10 million) Health III (US$10 million)Agriculture/Irrigation III (US$8.0 million) Agriculture/Irrigation III (US$8.0 million)

Natural Resources (US$7 million)

Nonlending Services: Nonlending Services:

Poverty Assessment; Social Safety Net Review, Same as low case plus Fiscal Decentralization Study andNational Water Strategy;, Roma Study; Rural Human CEM: Competitiveness and Sources of GrowthCapital Development; Labor Market Assessment; PER;Anti-corruption TA. (See Annex B4)

64. Albania could be eligible for a higher IDA allocation in the second half of the CAS period (upto 30 percent more than the base case allocation) in the event that Albania demonstrates a strong trackrecord in implementing the GPRS and moving toward creditworthiness, as evidenced, for example, bymeasurable improvements in all of these areas: (i) transparency, accountability and corruption in thepublic sector; (ii) rule of law (including property rights); (iii) quality of public administration; (iv)access to better quality social services; and (v) monitoring and analyzing poverty outcomes andimpacts. In the event of exceptionally strong performance in FY03 and FY04 that justifies a higherIDA allocation in FY05, the Bank would prepare a CAS Progress Report that would discuss Albania'sperformance and the possible incremental lending operations. These could consist of a Thermal PowerII Project to address Albania's growing power needs in a scenario of high growth; and/or an adjustmentoperation to support additional policy reforms for more intensive efforts to reduce poverty.

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Table 2Triggers to Stay in the Base Case

Macroeconomic Sustainability and * Satisfactory macroeconomic framework (barring extemal shocks), asMovement toward Creditworthiness evidenced, for example, by implementation of the IMF PRGF program.

Growth and Poverty Reduction * GPRS updated annually.

Strategy * Satisfactory progress in implementing the GPRS refonn agenda, includingthe following:

Investment climate * Agreement on a plan and timetable for addressing key findings ofthe Administrative Barriers to Investment Study, followed bysatisfactory implementation of the plan.

Govemnance/Anti-Corruption * Satisfactory implementation of the "good govemance" agenda ofthe Anti-Corruption Plan.

Efficiency, transparency, and * Satisfactory efforts to seek stakeholder views and incorporate them intoaccountability of public sector strategies that underlie MTEF budgetary proposals.expenditures * Agreement on a plan and timetable to improve M&E, and satisfactory

implementation of the plan, including completion of a 2002 LSMS.

Access to better quality social * Operational budgets increased for education and healthcare as a %services of GDP, consistent with the MTEF.

Portfolio performance * No more than 20% of projects (by number) with unsatisfactory IP or DOratings and disbursement ratio at least 15%.

Nonlending Services

65. The Bank's nonlending program aims to strengthen the GPRS, underpin lendingoperations, and provide important policy advice. The Bank's most recent economic and sector work(ES W)-the Qualitative Poverty Assessment and the Rural Strategy-directly supported thegovernment's GPRS. Planned ESW is discussed in Section II.B and all analytical and advisory servicesare shown in Annex B4. In addition to formal ESW, some sector studies-such as health, naturalresources, and urban developmenl-will be undertaken by the government in the context of projectpreparation or implementation.

66. The Bank has recently completed the set of core diagnostic economic and sector work. Itincludes a Poverty Assessment (FY97), CEM (FY99), Public Expenditure Institutional Review (FYO1),CPAR (FYO1), and CFAA (FY02). The CPAR and CFAA indicate that Albania has made progress inestablishing a legal and institutional base for a sound financial accountability environment. However,the studies also point out the need for some further legal steps and, most importantly, for continuedcapacity building (the findings of the CPAR and CFAA are summarized in Attachment 5). The Bankwill address fiduciary issues systematically, by more effectively integrating the recommendations ofthe fiduciary work into the lending program (see para. 23: "What worked less well"). Fiduciaryrecommendations have been incorporated into the PRSC I, which has a component for improving corepublic sector functions and institutional arrangements. Also, the ongoing Public AdministrationReform Project supports capacity building for fiduciary improvements (see para. 33). Following therecent completion of the CFAA, there are currently no gaps in core diagnostic ESW. To keep theBank's knowledge in the core areas up to date, the CAS plans updates in several areas: a PovertyAssessment in FY03, CEM in FYC4, and PER in FY05 (see Table 3). So far, the Bank has undertakendiagnostic work in consultation with-but not full partnership with-other development agencies.

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During the CAS period, the Bank will explore ways to strengthen partnerships, given the interestamong donors to support the Government's efforts to strengthen the financial accountabilityframework.

Table 3Core Diagnostic Economic and Sector Work

Type Most Recent Next PlannedCompletion Date Completion Date

Poverty Assessment* FY97 FY03

Country Economic Memorandum FY99 FY04

Public Expenditure Review FYOI FY05

Country Procurement Assessment Report FYOI FY06

Country Financial Accountability Assessment FY02 FY07

* The Government, with the support of the Bank, prepared poverty updates in FY00 and F Y01.

D. Portfolio Management

67. The Bank has lent US$554 million to Albania over the last decade, of which US$412million (72 percent) were disbursed as of April 30, 2002. Seven IFC operations and 43 IDA creditshave been approved since FY92. Of the 43 IDA credits, 38 have been investment projects and 5 havebeen fast-disbursing adjustment or emergency operations that amount to about 24 percent of totallending. The current IDA portfolio comprises 21 projects totaling US$265 million, of which US$107million were disbursed as of April 30, 2002. The number of active operations and the amount of theactive portfolio have been generally constant since FY98, and the portfolio is expected to remain stableat the current level over the next few years. Three IDA credits are expected to close by the end ofFY02. Since the March 2000 CAS Progress Report, IDA has delivered 8 lending operations for a totalof US$70 million, of which five were FY00 deliveries, and three were FY01 deliveries. IDA intends topresent five additional operations to the Board in FY02, including four operations that will beconsidered by the Board with this CAS.

68. Overall, IDA-financed operations have performed well, owing to careful project supervisionand use of conmmunity-based approaches that foster ownership and accountability. Portfolio qualitycontinues to improve, although slow disbursements have been a persistent issue. Annual CountryPerformance Portfolio Reviews (CPPRs) have reduced implementation bottlenecks, resulting in higherdisbursements, and they are likely to further improve as the portfolio matures. Through CPPRs, theBank is also working closely with the donor community in Tirana to share experiences and find jointsolutions to common project implementation problems. The Bank has also been proactive in eitherrestructuring unsatisfactory projects or closing them on schedule. Currently, only one project (5 percentof the portfolio) is rated as unsatisfactory and at risk, reflecting a 100-percent realism index. OED datashow a steady improvement in project outcomes and sustainability, and the government has steadilystrengthened its capacity to prepare and implement projects.

69. Despite steady gains in recent years, portfolio performance needs careful monitoring. Theseventh annual CPPR, completed in April 2002 found the portfolio to be in good standing, but notedcontinued low capacity for procurement and delays in project start-up and timely project closing. The

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CPPR reviewed issues facing Project Implementation Units (PIUs), with a view toward graduallyreintegrating PIUs into the public administration on a case-by-case basis. The CPPR focused especiallyon transparency, and the issue ol corruption was fully discussed with all line ministries implementingBank-funded projects.

III. IMPLEMENTING THE CAS

A. Partnerships

70. The Bank will work to strengthen internal and external partnerships, which have alreadygrown stronger as a result of the GPRS. Building on the GPRS participatory process, the Bankundertook CAS consultations with government, civil society, the private sector, parliament, and donors(see Attachment 1). More than ever, the Bank will prepare and implement lending and nonlendingoperations in close collaboration with stakeholders.

71. It will be particularly essential to work with the EU to ensure continued complementarityand consistency between the CAS and the Stabilization and Association Process. The EU CARDSMulti-Annual Indicative Program for Albania foresees an allocation of EUR 143.9 million for 2002-2004, with five areas of support: (i) justice and home affairs, including judicial reform, police and thefight against organized crime, integrated border management, and asylum and migration issues (EUR71 million); (ii) administrative capacity building, including public procurement, competition and stateaids, customs, taxation and statistics (EUR 16 million); (iii) economic and social development,including trade, local community development, and education (EUR 53.9 million); (iv) environmentand natural resources (EUR 11 million); and (v) democratic stabilization (through NGOs) (EUR 3million). Italy is the largest bilaiteral donor, with an envisaged 2002-2004 assistance program ofUS$150 million.

72. There has been close Bank-IMF collaboration, especially during the GPRS process. Theproposed PRSC I (FY02) was prepared in parallel with the IMF's PRGF-the two staffs coordinatedclosely at headquarters and in the field to ensure consistency and coordinate contents. The PRGF willbe presented to the IMF Board in June 2002. (See Attachment 6, Fund Relations Note.)

73. Donor coordination in Albania takes place at various levels. Overall coordination at apolitical level takes place mainly in the framework of the Friends of Albania (FoA), an informal groupof multilateral organizations and bilateral donors. The FoA meets on an ad hoc basis under thechairmanship of the Presidency of the European Union and the Presidency of the Organization forSecurity and Cooperation in Europe (OSCE). The FoA meets about once a year at the intemationallevel-in Vienna or another European capital-to evaluate Albania's progress toward reform. Mostrecently, a FoA meeting was held in Vienna in mid-April 2002. The Government of Albania anddonors are currently discussing whether it would be more appropriate at this stage to bring Albaniasquarely under the Consultative Group (CG) framework. The FoA also meets frequently in Tirana todiscuss political developments and to coordinate various areas of reforms.

74. Sectoral donor meetings in Tirana are the main instrument for technical cooperation.Sectoral donor meetings, chaired by the Bank, the EU, and key bilateral donors, functioned well in1997 and 1998, but were interrupted for one year during the Kosovo crisis. An attempt was made inMay 2000 to revive sectoral donor meetings, but meetings have often been delayed and sporadic.During this CAS period, the Bank and the EU intend to work together to improve coordination at thetechnical level and to help the government gradually assume a leading role.

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Box 9Building Capacity in Parliament

The Parliament was only marginally involved in the preparation of the first GPRS, mainly because the Parliament wasdissolved during the most important stage of GPRS formulation. Moreover, although the Parliament has proven effectiveat timely adoption of legislation, it has limited capacity to formulate policies, analyze the national budget, and monitorpublic expenditures. The Parliament has no permanent technical staff. It has also been mired in both personal andpolitical feuding, including frequent boycotts by the opposition party. The Democratic Party ended its most recentboycott of Parliament in January 2002.

During the start of the GPRS process, the Bank initiated discussions with parliamentary leaders on how to build theParliament's capacity to engage more constructively in national policy and the budget process. Following thesediscussions, the Government of the Netherlands approved a grant to be implemented by OSCE to (i) provide long-termtraining to Members of Parliament (MPs) on issues of governance, economic development, and public resourcemanagement; (ii) create a permanent research and advisory unit for MPs and parliamentary commissions; and (iii)support outreach activities to inform the electorate, get feedback, and strengthen the a&countability of MPs towards theirconstituents. This project-Modernizing the Capacity of the Assembly of the Republic of Albania-will start in mid-2002. In addition, a multipartisan group of MPs and senior Government officials participated in a PRSP workshop inMay 2002 organized by the World Bank Institute in partnership with the Parliament of Finland.

The project will foster links between Albania's national assembly and parliaments in Europe. The project is expected tobuild the Parliament's capacity to amend and approve increasingly complex legislation. The project will also help theParliament play an active role in monitoring and updating the GPRS. It will deepen the GPRS participatory process andhelp the country reach a broader consensus on development priorities and strategies.

75. Recognizing that sustainable development must be an Albanian-led effort, the Bank willsupport an increasingly stronger Albanian role in donor coordination, possibly beginning with aCG meeting to take place in Tirana in the second half of 2002 or the first half of 2003. This would bethe third CG meeting for Albania, following the 1999 Emergency Joint G24/CG meeting for budgetaryand balance of payments support after the Kosovo crisis, and the March 2001 CG chaired jointly by theBank and the EU. Future CG meetings will be particularly useful to better align donors' support withthe GPRS. The government will also be encouraged to take a leading role in sectoral donor meetings.

76. Additional donor coordination initiatives take place as need arises on specific issues.Effective cooperation with multilateral institutions, bilateral donors, and NGOs has also beenestablished in the context of specific lending and nonlending operations. Successful partnerships at theproject level are demonstrated by a high number of cofinancing arrangements. So far, the Bank hasworked with 14 different cofinanciers.

77. The Bank will build on the GPRS process to strengthen partnerships with civil society. Anumber of ongoing Bank operations already involve NGOs or community groups. In the spirit of theGPRS, the Bank is now more systematically involving stakeholders in project design andimplementation.

78. The Bank is reaching out to keep Parliament better informed of the Bank's work. Bankteams visiting Albania are providing regular briefs to relevant parliamentary commissions on sectorissues. Also, Parliament was included in the CAS consultations (see Attachment 1). AlthoughParliament was not extensively involved in preparing the first GPRS due to elections, the GPRSprocess is expected to strengthen Albania's democratic institutions by encouraging open policy debateand increasing transparency. The OSCE is implementing a project that specifically aims to buildParliament's capacity to better participate in policy formulation and the budget process (see Box 9).

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B. Monitoring of Outcomes

79. The Bank places increased emphasis on monitoring, consistent with the GPRS process, thelessons learned from the previc,us CAS (para. 23), and client feedback (Box 3 and Attachment 1).Under the CAS, the Bank will help the government strengthen monitoring and evaluation of the GPRSand public expenditures (see para. 35). A broad range of performance indicators and targets are shownin the Country Partner Strategy Matrix (Annex B9), which is based on Albania's GPRS matrix. TheMatrix includes GPRS final indicators/targets (in bold) and intermediate indicators/targets (in italics).According to the GPRS, indicators will be disaggregated by region, socioeconomic group, and gender,where possible. GPRS priorities are broadly consistent with the Millennium Development Goals(MDGs). (See Box 10 for Albanzia's progress toward meeting the MDGs.) Under the PRSC program,the Bank is helping Albania improve indicators and targets, and better link them to the MDGs.

80. Under the CAS, monitoring the Bank's effectiveness will take place at two levels: (i) at theproject level, the Bank will continue to strengthen project M&E frameworks to better evaluate theeffectiveness of specific operations in achieving desired outcomes; (ii) at the level of the overallassistance program, the Bank will monitor how successfully the CAS supports GPRS objectives, usingthe Country Partner Strategy Matrix, and especially the core CAS benchmarks shown in Table 4. Atthe midpoint of the CAS period--in FY04-the Bank will review the indicators and targets to assessprogress in implementing the assistance program; adjust the Bank's strategy if necessary; and improveindicators and targets where better data is available.

Table 4Core CAS Monitoring Benchmarks

GPRS/CAS Objective CAS Progress Benchmark

1. Improve Govemance and * Continue to implement the Civil Service Reform Law, demonstrated by improvingStrengthen Institutions ratios of performance indicators (Part I of Country Partner Strategy Matrix).

* UJpdate the GPRS on a regular basis, using a participatory process.

* Continue to use the MTEF to allocate the budget, progressively widening itscoverage and strengthening its linkage to the GPRS.

11. Promote Sustainable Private * Conclude the sale of the Savings Bank and INSIG.Sector Growth * Implement a plan to address the findings of the Administrative Barriers to

Investment Study.* Complete first-time registration of agricultural land.

* Meet quarterly targets in Power Sector Action Plan. Implement the first phase ofthe Power Sector Reform Program.

III. Foster Human * Increase expenditures annually for education and healthcare, in conformity with theDevelopment MTEF.

* Develop and implement a detailed plan to reach education enrollment targets,based on empirical analyses of supply of and demand for education in rural andurban areas.

* Develop and implement a detailed plan to reach public health targets.

* Submit to Parliament an acceptable pension policy package to address long-termproblems of coverage, affordability, and equity, including changes in parameterssuch as indexation, early retirement, and urban-rural differentials. Reduce pensiondeficit as a percent of GDP.

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Box 10Albania's Progress Towards the Millennium Development Goals

The Millennium Development Goals (MDGs)-formally endorsed by 189 United Nations member countries inSeptember 2000-aim to increase access to education and healthcare; preserve the environment; and halve, from 1990 to2015, the proportion of people in extreme poverty worldwide. There are 8 goals and 48 indicators to measure countryprogress toward the goals. Although the MDGs are formulated for all signatory countries, it is recognized that MDGsneed to be adapted to country-specific circumstances. In the case of Albania, there are efforts to: (i) verify theavailability and quality of MDG-related data; (ii) set appropriate intermediate and final targets for indicators mostrelevant for Albania; and (iii) assess how well the Govemment's GPRS and supporting external aid are positioned tohelp Albania meet the broad MDGs. Supported by the PRSCs, the Government has started to align its monitoringpriorities with the MDGs. In parallel, the Bank team has compiled an inventory of data related to MDGs, which will beused to establish baselines and identify data gaps to be addressed by the PRSC monitoring program (see Attachment 7).

Albania boasted relatively good performance on a number of social indicators when the transition began. However,economic, social, and political upheavals during the last decade of economic transition have impacted the population'swelfare. The country inherited social and physical infrastructure that it cannot afford to maintain, especially in regionswith high levels of outmigration. Setting baselines at 1990 can therefore be misleading, because that year roughlycorresponds to the beginning of Albania's economic transition, when the population's welfare started to decline.

Furthermore, Albania's current status vis-a-vis some MDGs needs to take into account underlying trends. For example,although the reported incidence of HIV/AIDS is low, there is a rapid increase in risky behaviors such as drug use andprostitution, compounded by the deterioration of the public health system, which could lead to a rapid spread of thedisease. Preventing HIV/AIDS is therefore a healthcare priority.

The following represent a preliminary analysis of Albania's progress toward the MDG's, which will be further assessedas the country's monitoring program progresses:

Income poverty: The MDG target of halving the proportion of people whose income is less than one dollar aday will be measured beginning in 2002, when the LSMS yields the first reliable data of this kind. Albania willalso monitor the number of people with incomes less than two dollars per day, estimated at almost one-half ofthe population in a 1998 Living Conditions Survey (which was not fully representative).

Social Sectors: Albania is currently moving away from the MDG target of full primary education for all boysand girls. Net primary enrollment rates have dropped to 81 percent. As a result, the CAS supports-through thePRSCs and education reform programs-the Government's efforts to improve sector management. Under theGPRS and MTEF, the Government is conmmitted increase resources to the education and health sectors.Although Albania has made progress toward the MDG target to reduce the under-five mortality rate, there arewide regional disparities that could undermine further progress. The MDG target to reduce maternal mortalityby 75 percent would unrealistically decrease Albania's ratio to near that of industrialized countries, and is alsocomplicated by the poor state of the public health system. As with HIV, both child and maternal mortality arehealthcare priorities.

Gender: The MDG target to eliminate gender disparity in education does not appear to be a major concem forAlbania at present. However, there may be a problem of boys leaving school early, which the LSMS will verify.The CAS's response to broader gender issues is described in Attachment 2.

Environmental Sustainability: The rural water strategy is likely to improve access to safe water, but the MDGis ambitious and may be difficult to achieve. There is still much to be done to improve access to water andsanitation especially in rural areas. Deforestation and land degradation are concems, and environmentalmanagement institutions remain weak.

Global Partnership: Albania has made progress toward developing an open, rule-based, predictable, and non-discriminatory trading and financial system and is committed to good governance and poverty reduction.

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C. Risks

81. The CAS is subject tto largely the same risks as the GPRS, which are outlined in the JSA.CAS implementation faces three main risks: (i) domestic or regional instability; (ii) chronic powershortages; and (iii) unsound goverhance and weak institutional capacity.

82. Albania remains vullnerable to domestic or regional instability that could delay-orderail-reforms. Albania's political stability and domestic security have improved since 1997, andthere are signs that parliamentary democracy is gaining a hold. But Albania's political culture remainsmired in personal feuding, and the presidential election in June 2002 could rekindle friction. Renewedcivil unrest-such as that which occurred in 1997-is unlikely given the more mature politicalenvironment. A more possible scenario is political feuding or temporary periods of instability,diverting attention from the reform program. Continued commitment to reforms is reinforced,however, by the odds at stake: the prospect of alignment with European structures through theStabilization and Association P'rocess. The GPRS also helps establish a broad consensus for reforms.The Bank will help build social. cohesion by supporting the GPRS, focusing especially on transparencyand accountability and increased civil society participation in public policy formulation and financemanagement. Regional instabil:ity also remains a destabilizing possibility. The Stabilily Pact for SouthEast Europe and the Stabilization and Association Process create incentives for resolving conflictspeacefully and maintaining stability, but ethnic nationalism lingers.

83. The electricity crisis l)oses a major risk to growth and stability. The crisis has multipleadverse impacts. The government's subsidy for electricity imports (US$31.5 million in 2001) divertsfunds from other critical neecls and could undertnine further fiscal consolidation and sustainablegrowth. Extensive power outages harm businesses and decrease the quality of life and health,especially of the poor. Failure to stay the course of power sector reform could even contribute to socialunrest and political instability. For these reasons, the CAS places great emphasis on helping thegovermment reverse the situation in the power sector, through the proposed Power SectorRehabilitation and Restructuririg Project (FY02) and a planned Thermal Power Project (FY03). Asecond Thermal Power Project would be considered under a high-case lending scenario. The Bank willalso mitigate power sector risks by playing a leading role in sector dialogue and donor coordination.

84. Failure to improve governance, curb corruption, and strengthen institutions wouldundermine the implementatioi of the GPRS and CAS. Criminality has been on the rise since thetransition from socialism, and became particularly entrenched during the power vacuum that prevailedduring the 1997 civil crisis. Although law and order has greatly improved since 1997, organized crimeand human trafficking remain serious concerns. There is also public concern about the rise of"monopolies." Vested interests are likely to impede progress towards good governance. Continuedinternational support-especially by the EU in the context of the Stabilization and AssociationProcess-will mitigate the risk of insufficient progress toward sound governance. The Bank will workwith the international communiity to support Albania's anti-corruption efforts. Most importantly, theBank will try to mitigate this riskc by placing cross-cutting emphasis on institution building, which willbe embedded in all lending operations. Increasing transparency will create more accountable-andtherefore stronger-institutions. The Bank will employ complementary adjustment and investmentlending to both support key policy reforms and build capacity to implement reforms. Lendingoperations will also be designed with flexibility to support Albania's decentralization process and tobuild capacity at local levels. Given Albania's limited institutional capacity, it will need substantial andwell-coordinated external support to meet the challenge of implementing and monitoring the GPRS.

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The Bank will work to improve donor coordination, encouraging use of the GPRS as a commonframework, and helping the government gradually assume a leading role.

James D. WolfensohnPresident

by Shengman Zhang

Washington D.C.

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ATTACHMENT 1: CAS CONSULTATIONS WITH STAKEHOLDERS

1. Background and process. The Government of Albania welcomed the opening of the CASconsultation process to all stakeholders, including the government, the Parliament, the civil society, theprivate sector, and external paxtners. Indeed, the government considered this approach as being fullyconsistent with the participatory nature of Albania's Growth and Poverty Reduction Strategy (GPRS),which underpins the CAS. The consultations took place during the period of March 15 to April 15,2002. They were based on the Final GPRS launched by the government in November 2001, as well ason a CAS Discussion Note which introduced the Bank's program and role in Albania, explained theCAS process, and summarized the proposed assistance strategy for FY03-05. Consultations with thecivil society were facilitated by The Carter Center, which had also facilitated the participation of civilsociety in GPRS preparation.

2. CAS consultations were held primarily in Tirana, as well as in Shokdra, the most important cityof Northern Albania, a region with the highest incidence of poverty in Albania. The consultations tookmainly the form of round tables with the Inter-ministerial Committee for Economic Policies (chairedby the Prime Minister, and including most of the Cabinet); the leadership of the Parliament, includingthe Speaker, the Parliamentary B3ureau, the leaders of all parliamentary groups, and the chairpersons ofkey commissions in charge of economic and social affairs; the leaders of the two main political parties;private sector representatives, including key organizations and associations in industry, construction,and banking; several groups representing the civil society, including the GPRS National Civil SocietyAdvisory Group and rural development, economic growth, and anti-corruption groups. All these groupsincluded representatives of academia, think-tanks, media, professional associations, the businesscommunity, and non-governmental organizations active in the field of economic and socialdevelopment. Field consultations took place with farmers and members of farmers' associations. TheCAS was also discussed with Albania's key external development partners.

3. In addition to the rounct tables, the consultations built on extensive exchanges with variousgroup of stakeholders on the GCPRS (including hospitals, schools, water users' associations, micro-credit associations, and others), on feedback received from beneficiaries on Bank-financed projects, onthe discussion of the ECA report on Transition in Eastern Europe and the Former Soviet Union, aswell as on feedback provided by stakeholders through a special Albania CAS website. The CASwebsite was set up in Albanian and English. It posted GPRS documentation, the CAS Discussion Note,minutes of consultations, detailled informnation on Bank activities in Albania, and comments andproposals from participants. The consultations were well covered by the national media. The mostimportant newspapers and radio and TV stations covered the meetings with stakeholders. The CASDiscussion Note was published in full in the most important economic publication. And the Bank'sassistance program, current and proposed, was discussed in numerous articles and TV presentations.

4. The CAS consultations rnarked a premiere in Albania's relations with the Bank, and for thatmatter, with external development partners. The participants to consultations expressed highappreciation for the transparency of the process, and compared it favorably to the interface with otherpartners. The civil society representatives expressed particular satisfaction with the opportunity tohave their voice heard by the government, and they encouraged the Bank to continue facilitating suchdebates within cross-cutting segnients of Albania's society.

5. The consultations provided an important validation of the primary goals of the GPRS-and, byimplication, the CAS. The sheer mass of requests and proposals advanced by participants highlightedthe value attached by all stakeholders to the Bank's contribution to Albania's development. Many

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participants stressed the fact that it is not necessarily the Bank resources they are looking for, but ratherthe objectivity and quality brought in by Bank-financed projects or policy advice. By the same token,the needs expressed by stakeholders exposed the limitations of the Bank assistance program, and theimportance of streamlining the GPRS into the assistance programs financed by other donors. At thesame time, the consultations exposed the limited capacity of the Albanian stakeholders to participatemore effectively in the dialogue, the gap remaining between the perceptions of the public and privatesectors, and the need for more consensus building within different groups of the civil society.

6. General comments. Most if not all participants to consultations highlighted a number ofgeneral themes, stressing the need to:

* carry out an overall evaluation of the impact of Bank assistance to Albania over the past tenyears, with special emphasis on poverty reduction and govemance objectives;

* strengthen monitoring and evaluation mechanisms for Bank-financed projects, to associateNGOs and beneficiaries in providing information on the impact of projects, and to providepublic information to the civil society;

* improve the sustainability of Bank-financed projects, including emphasis on strengtheninginstitutions and capacities, especially at local level, and/or representing directly thebeneficiaries;

* broaden consultations to other partners, such as, for example, the trade unions, especially asconcems policies affecting employment, retirement, professional education and training, aswell as conceming the social cost of reforms in general;

* focus more Bank operations in areas with the highest incidence of poverty, especially NorthemAlbania. In this context, all participants attached great importance to the involvement of theBank in the rehabilitation of the Durres-Morine road;

* support the rehabilitation of infrastructure, especially in the light of the reorientation of otherdonors' assistance towards institution building. Most participants stressed the importance ofadding new thermal power generation capacities, helping rehabilitate water supply andsanitation facilities, continuing the program for road rehabilitation and maintenance, andassisting with urban renewal and management;

* strengthen aid coordination, with a view to improving the balance between financing ofinfrastructure and capacities, avoiding overlaps, and ensuring proper sequencing ofinvestments; and

* coordinate GPRS implementation (and the associated assistance strategies, the World BankCAS included) with the strategy for association and eventual integration in the EuropeanUnion.

7. The government discussed the draft CAS in the Inter-ministerial Committee for EconomicPolicies, which is chaired by the Prime Minister, and includes all sector departments responsiblefor economic and social development, as well as cross-cutting departments such as Finance,Economy, Justice, and local government. The initial discussion of the CAS was followed by thecreation of a working group chaired by the Minister of Finance (and Bank governor), whichreviewed in detail with each department the proposed CAS, and presented to the Council ofMinisters a consolidated feedback, for its approval. The consultations were completed through asecond series of meetings with key ministers and the Prime Minister.

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8. The consultations with the government highlighted both the importance of the World Bankas main lender to Albania, and the high regard of the Albanian Authorities for the quality of theprojects and policy advice provided by the Bank. The consultations confirmed the generalconsistency of the proposed assistance program for lending and non-lending services with theGPRS, and suggested a numbeT of specific changes aimed at targeting poverty alleviation. Thesingle most important request was to include a Bank contribution towards the rehabilitation of theDurres-Morine road, and take the lead in mobilizing other donors' assistance. The government alsoexpressed the wish to accelerate the proposed thermal power generation project, and supported anew community works project, as well as an environmental protection project.

9. The discussion of the CAS with the government offered the opportunity of high-leveldialogue on numerous policy issues. They included privatization of strategic sectors (banking,telecommunications), reforms in health, education, and social protection (e.g., privatization ofsome health services, reform of the health insurance system, decentralization of health andeducation, outsourcing of technology introduction in schools to private enterprises, reform of thepension system). The consultations emphasized the need to strengthen monitoring and evaluation,with a view to assessing the impact of sector policies and actions on poverty reduction.

10. Consultations with the Parliament were hosted by the Speaker, and well-attended by theleaders of all parliamentary groups, the Bureau of the Parliament, and the chairpersons of the keycommissions in the field of development. The two rounds of consultations with the legislature werevery much appreciated by participants, and marks a first in the Parliament's exposure todevelopment issues. Traditionally, the members of the parliament find out about policy decisionsand assistance programs only when the Executive submits pertinent legislation. Theparliamentarians feel that upstream information on evolving policy discussions and assistanceprograms will help them play a more constructive role in advancing Albania's development in thecontext of a poverty reduction strategy. They encouraged the Bank to continue informing theParliament regularly about Bank-financed activities and projects, and expressed their wish to play amore active role in overseeing the implementation of public expenditure programs and enforcementof legislation enacted by legislature.

11. The Parliament stressed the importance of upgrading Albania's infrastructure, in particularelectrical energy generation, tran,smission and distribution, and roads. The participants emphasizedthe need to favor rural development, to stem rural migration, to make a more intense use ofcapacities in the Parliament, the academia and national research institutions, to help speed up theprivatization of strategic sectors such as banking and electricity, and to help improve governance,especially support for anti-conuption efforts, and for implementation of property restitutionlegislation. They highlighted the importance of the Bank's policy advice, and expressed a numberof concerns, including the need to assess better the impact of Bank-financed projects on growth andpoverty reduction, and take into account the social impact of reforms supported by the Bank.Finally, they expressed conceni with the proposed reduction in IDA resources and with thedifficulty of graduating to IBRD bofrowing.

12. The consultations with political leaders demonstrated strong bi-partisan support for boththe GPRS, and the CAS. The chairmen of the Socialist and Democratic parties shared their belief ina strong medium- to long-term poverty reduction strategy, the need to focus efforts on developingthe poorer Northern Albania, the emphasis to be put on upgrading infrastructure, the pursuit of

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further liberalization of the economy, and the need to improve governance in general, and fightcorruption in particular. They expressed their wish to cooperate in the Parliament on adoptinglegislation needed for development, and the fight against poverty.

13. The consultations with the private sector pointed to the need for a more proactiveresponse of the business community, and a better dialogue with the government and withinternational partners. The participants, who included leaders of key trade associations, think tanks,consulting firms, as well as prominent businesspersons, asked the Bank to take the lead in adialogue with the government on removing bottlenecks for private investors, including legislativeaction on property, bankruptcy, and commercial law, better implementation of fiscal legislation toeliminate abuses and discretionary actions, development of capital markets, enforcement ofcompetition, and increased participation of local business in the privatization process, and in publicprocurement activities. The participants advised the Bank to emphasize improvement ofinfrastructure, especially roads and electricity.

14. The participants to consultations expressed their determination to work towards articulatinga common position of the private sector on the key barriers to investment, and take the initiative inorganizing a national conference on private sector development in Albania. They are counting onthe advice of the Bank (including IFC, FIAS and SEED), and on leveraging a reform agenda forprivate sector development through further policy-based Bank lending. They encouraged the Bankto disseminate information on best practice concerning business legislation and administrativeprocedures, help strengthen the capacity of public administration, especially fiscal administration,and help build managerial skills in the private sector, as well as in public administration. Onespecific suggestion was to establish a Public Administration Institute. Such an Institute has actuallybeen created with the support of the Bank-financed Public Administration Reform Project, and isalready operational. Finally, they advised the Bank to ensure that public investment in general, andBank-financed investment in particular, is considered only when the possibilities for privateinvestment were exhausted.

15. Consultations with a mixed group representing the business community as well as the civilsociety addressed the specific topic of promoting Albania's economic growth. In addition to theissues mentioned above, the participants stressed the need to alter the government's anti-businessperception, which stems from the widespread suspicion of corrupt business practices. Theyproposed to improve the transparency of business transactions by introducing internationally-acceptable standard accounting norms, and by reviewing discretionary transactions such aslicensing, VAT reimbursement and other administrative procedures. The participants proposed theestablishment of a business watchdog group, dedicated in particular to monitoring publicprocurement. They advised the Bank to make more efforts to consult local authorities on decision-making about investment in areas which will increasingly be of the competence of localgovernment, e.g., water supply and sanitation. While supporting further Bank investment in theenergy sector, the participants advised the Bank to support the privatization of the national powercompany (KESH), or at least its co-management with private partners. Like all other stakeholders,the private sector representatives strongly supported Bank assistance for the rehabilitation of theDurres-Morine road, as a means to fostering economic opportunities in Northern Albania, andregional integration.

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16. The consultations witlh the civil society were the most intensive. They included severalrounds of discussions with the GPRS National Civil Society Advisory Group, organizations andassociations active in rural development, academia, media, professional associations, trade unions,think tanks, foundations, NGDs, businesspeople, organizations and personalities dedicated tofighting corruption, and local representatives of the civil society and farmers in Northern Albania.The discussions with these groups were uniformly open, animated, and constructive. Withoutexception, the participants welcomed the opportunity of conveying their views and needs to theBank, and this additional possibility of indirect dialogue with the government. The consultationsdemonstrated the strides in the assertiveness and capacity of the civil society to participate in thedialogue on development and poverty reduction. Given Albania's little or no history of civil societyparticipation, and its very recent democratic institutions, the participation of the civil society to theGPRS and CAS processes has been remarkable.

17. The feedback provided by the civil society ranged from specific advice on the content,design and implementation of the Bank's assistance program, to advice on policy issues to beraised by the Bank in its dialogue with the government, and to suggestions on how to enhance theparticipatory process and the role of the civil society in strategy formulation and programimplementation.

18. Concerning the content, design and implementation of the Bank program, the participantssuggested that the Bank should:

* ensure the needed "breathing space" for the private sector, by considering public projectsonly when private financing is not available;

* continue permanent consultations with the civil society and beneficiaries on the content anddesign of proposed operations, starting with the very initial stages of project preparation;

* emphasize the role of private investment in general, and small and medium enterprises inparticular, in creating the jobs and incomes essential for effective and sustainable povertyreduction;

* give a higher priority to rural development and to stemming rural migration;

* favor community-based projects;

* factor in the needs of most vulnerable/marginalized groups (including youth), and involvethem in the design of future operations;

* build more synergy among projects, and with the projects financed by the government orother donors;

* focus more its assistance on high poverty areas, especially Northem Albania, and considerin particular participating in the rehabilitation of the Durres-Morine road as a means toopening the North to investment and trade with the rest of Albania, and to Kosovo andbeyond;

* set up a monitoring and evaluation system to assess the impact of Bank-financed projectson poverty reduction, by evaluating access to and quality of services provided to Albaniansthrough these projects, and associate the civil society, local authorities, and beneficiaries, tothe M&E process; and

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* act more as a development institution, rather than as a Bank. This comment was meant toconvey the need to focus Bank funds primarily to visible achievements in ruraldevelopment, education, health, infrastructure, energy, etc., rather than provide untiedbudget support.

19. The participants highlighted several policy issues they consider critical for the success ofthe GPRS, and which they hope the Bank could pursue in its dialogue with the government:

* systematic elimination of the obstacles to private sector development, including business,trade and fiscal legislation, property, bankruptcy and accountancy laws, improvedresolution of commercial disputes, removal of administrative barriers, and increasedinvestment in critical infrastructure, especially energy and roads;

* more aggressive anti-corruption efforts, including speeding up actions intended to increasetransparency of public procurement and public expenditure in general, improving thefunctioning of the judiciary, accelerating the reform of public administration, strengtheningthe capacity and credibility of the investigative media, and introducing a monitoring andevaluation system to assess the results of anti-corruption efforts and make them available tothe civil society. A common theme was the need to combine systemic reform withimmediate actions which could yield visible results, and build up broader support infighting corruption; and

* increased attention to enhancing competition and eliminating de facto monopolies in theAlbanian economy. The participants highlighted the "State-capture" aspect of this issue,characterized by monopolistic arrangements intertwining politics, business, and mediacontrol.

20. The participants were unanimous in voicing the wish to further strengthen the participationof the civil society in economic policy formulation, the articulation of a national strategy forpoverty reduction, and the implementation of programs and projects in the context of this strategy.There were no specific suggestions on how to accomplish these objectives. It is expected that TheCarter Center will continue its mission of helping build a more cohesive response of the varioussegments of the civil society, and facilitating its dialogue with the government and externalpartners.

21. The consultations with the key external partners included the main donors active inAlbania, and in particular a donors' core group monitoring the GPRS under the aegis of the Friendsof Albania. It should be noted that the CAS consultations built on regular meetings of the coregroup, which provided an opportunity for more in-depth discussions of the GPRS, donors' role insupporting its implementation, and modalities for strengthening donor coordination in this regard.The donors voiced strong support for the GPRS approach, and stated that they will seek togradually align their respective strategies to the GPRS, according to their specific cycle of countrystrategy formulation. Some donors indicated that they would support capacity building forimplermentation, and M&E of the GPRS, including support for both the GPRS secretariat, and forthe policy and programming units in sector departments.

22. The consultations confirmed the generally stable or declining trend in projected externalassistance, and the increased emphasis to be put on some major donors, and in particular the EU,on institutional development. The participants stressed the need to coordinate closer and avoid

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duplications or gaps in externally-financed programs. Many of them supported a greater role of theEU in donor coordination, in line with the stabilization and association process. There wassubstantial interest in the idea of promoting a more operational structure for senior-level policyanalysis and recommendations within the government, and eventually mirroring this structure witha similar donors' group carrying out a more regular policy dialogue with the Authorities. The needfor a joint M&E system was emphasized by many participants.

23. The discussion of proposed assistance programs indicated that by and large they match thepriorities of the GPRS. Substantial financing will be provided for institutional development andcapacity building in public administration and the judiciary, including support for e-govemment(Albania is one of four pilot coumtries to be eligible for special financing under the e-governmentprogram sponsored by Italy and other donors). Financing of infrastructure, including energy and roads,and of education and health, would be primarily provided by Italy, EBRD, EIB, and the World Bank.The participants stressed the need to increase support for environmental protection, but there were nospecific pledges.

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ATTACHMENT 2: GENDER ISSUES

Albania social, economic, and political transformation over the last decade has had importanteffects on both males and females. Although quantitative and qualitative data are still limited (see para.17 and Box 2), the 2002 Living Standards Measurement Survey (LSMS), the Poverty Assessment(FY03), and other planned analytical work will show how both genders are faring under the transition.

Gender inequality can affect both economic growth and poverty by reducing labor productivity;for example, employers pay inefficiently high wages to men, and women under-invest in theacquisition of skills and spend an inefficiently high proportion of their time doing householdactivities.' Reliance on a partner's income can also lead to economic vulnerability. The Bank's PRSCprogram and social sector investment operations aim to address sector-specific gender related issues,such as ensuring access to high-quality social services for both genders. The Poverty Assessment willinclude a Country Gender Assessment (CGA) for Albania, which will use the LSMS, the 2001Qualitative Poverty Assessment, and other data to shed light on concerns relating to gender, includingissues that cut across sectors. The CGA will also provide recommendations on how the country'sreform program and the Bank's portfolio might better address gender-related issues.

The following information on the current situation in Albania is drawn from the limitedinformation available, to be further elaborated in the CGA:

* Labor market. In Albania, compared to countries with a similar GDP, women enjoy arelatively high labor force participation rate, although they are disproportionately representedin secondary professions. This is partly the legacy of the state-run labor market. Activity ratesremained roughly constant from 1990 to 1996 (latest available data), at about 90 percent formen and 73 percent for women. In 1998, women represented about 42 percent of the laborforce. The 2001 Qualitative Poverty Assessment suggests that many women experienceincreased responsibilities when men leave the household to migrate abroad.2 Little isunderstood about the informal labor market, and a proposed Labor Market Assessment (FY05)will address the gender dimensions of labor market issues.

* Other income dimensions. Households headed by single parents and elderly women are morelikely than other social groups to be poor. In Albania, women benefit disproportionately fromnon-labor income such as pensions (where women are entitled to retire five years earlier thanmen, despite their longer life expectancy). They can also qualify for other benefits, such as afull year of maternity leave at 50 to 80 percent of their salary. Female-headed households alsodisproportionately receive remittances from abroad, which play a major role in povertyalleviation. There is little data available on access to credit by gender.

* Education. Overall basic education enrollments declined from over 90 percent prior to thetransition to 88 percent in 1997. Secondary enrollment rates in 1989 were 79 percent, and theyfell to roughly 40 percent by 1997. However, female/male ratios increased from 1990 to 1997:(i) in secondary education from 0.89 to 1.01; and (ii) in higher education from 1.14 to 1.39.

'See Paci, Pierella, "Regional Gender Study: Europe and Central Asia," [World Bank, draft], February 20, 2002.

2 See De Soto et. al., "A Qualitative Assessment of Poverty in 10 Areas of Albania," World Bank, June 30, 2001.

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The policy dialogue will accordingly need to focus on why boys are staying out of school athigher rates than girls.

* Health Status. In 1999 the gap in life expectancy between women and men was 4.7 years,down from 6.1 in 1990 Maternal and infant mortality rate trends remain to be assessed. Thereis an increase in risky behaviors that could contribute to a higher prevalence of sexuallytransmitted diseases and HIV/AIDS. Albania's fertility rate dropped from 3.4 in 1982 to 2.1 in1999.

* Violence Against Wonmen and Human Trafficking. Although quantitative data is limited,violence against women is a serious concern. The United Nations Interregional Crime andJustice Research Institute (1998) included questions on sexual violence in its 1995-1996 CrimeVictimization Surveys, iinding that about 6 percent of women in Tirana reported being raped.The ongoing Social Seivices Delivery Project includes support to programs for women andchildren at risk. Albania also suffers from a major human trafficking problem. Girls andwomen are the primary rictims, but some boys and young men are also affected. This issue hasbecome a major component of the European Commission's dialogue with Albania.

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ATTACHMENT 3: PARTNERSHIP MATRIX

Development Macro Govemnance and Institution Building Sustainable Private Sector Growth Human DevelopmentChallenges Stability

0~~~~~~~~~

_ > I Ii ! 2 E 8

G~~~ovenete>;~......... - ' | - 0

IMF - - - k L ': i , C -,l...

Partner/Activity _ 0 0OtherMulUlaterals _. , ,. co

E r- .9~~~ -

Othe~~~~~~~r Biaerl > l j:W

- U .~~0 .0-a :

~~~ ~~~~~ -~~ r- -,cn~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

Gavemment

IDA

IFC

EU

htaly_ _ _

Other Multilaterals ____

Other B|laterals 7 F

Little or No Focus 1~Some Focus L~~'JSignificant Focus High Focus

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ATTACHMENT 4: CoRE LABOR STANDARDS

The four core labor standards are: elimination of all forms of forced or compulsory labor;effective abolition of child labor; elimination of discrimination in employment; and freedom ofassociation and the right to collective bargaining.

* Forced Labor. The Law on Major Constitutional Provisions and the Labor Code prohibitforced or compulsory labor in general, and forced or bonded labor by children in particular.However trafficking in women and children for sexual exploitation, and trafficking in childrenfor begging, are serious problems. Albania is both a country of origin and a transit country.Legislation in January 2,001 made trafficking in persons a criminal offense.

* Effective Abolition of C'hild Labor. The Labor Code sets the minimum age of employment at16 years and limits the amount of work that can be performed by children under 16 years.There were no reports, however, of related enforcement through the courts.

* Elimination of Discrimination in Employment. Albanian law prohibits discrimination basedon sex, race, ethnicity, language, or religion. Regarding discrimination in employment, womenare not excluded from any occupation or profession by law, and the Labor Code mandates thatwomen receive equal pay for equal work.

* Freedom of Associatioii and the Right to Collective Bargaining. Workers exercise theirright to form independent trade unions. Many unions belong to one of two main federations ofunions. Almost all employees have the right to strike, although, by law, political strikes areforbidden. Collective bargaining is legal but it is often ineffective because of highunemployment.

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ATTACHMENT 5: FINDINGS OF FIDucIARY ASSESSMENTS

A Country Procurement Assessment Report was completed in FY01, and a Country FinancialAccountability Assessment (CFAA) was completed in FY02. The key findings of these studies aresummarized below.

Country Procurement Assessment Report (CPAR). Albania has made significant advancesin the development of its public procurement system, including a Law on Public Procurement, which isclose to intemational best practice. The Law on Public Procurement establishes a Public ProcurementAgency, reporting to the Council of Ministers. However, the effectiveness of the Public ProcurementAgency has been limited by its weakness, caused by underfunding, high staff turnover, andsusceptibility to political influence. The CPAR recommended the following: (i) a comprehensiveamendment to the Law on Public Procurement to strengthen the position of Open Tendering as thebasic method of public procurement, clarify the conditions for using restrictive procurement methods,increase the use of the Request for Proposals method, and more effectively control the current overuseof the Direct Procurement method; (ii) improve transparency and access to information, using intemettechnology, regular publication of the Public Procurement Bulletin, and other measures; (iii) increasecompetition by abolishing the arbitrary differentiation between domestic and intemational OpenTendering and lengthening the periods for bid preparation; (iv) improve procurement procedures andpractices through selected procedural changes and promulgation of good practices; (v) combatcorruption and strengthen enforcement; and (vi) build capacity of the Public Procurement Agency andprocurement staff.

The Country Financial Accountability Assessment (CFAA). The CFAA identified thefollowing issues: (i) weak capacity in several institutions; (ii) weak internal controls includinginadequate cash management and weak intemal audit function; and (iii) absence of a solid legal basisfor internal audit in the public sector. In the area of private sector accounting and auditing, the CFAAidentified: (i) the need to differentiate between the banks, insurance companies, listed companies, non-listed companies, and other entities for determining applicable accounting standards; and (ii) weakaudit capacity and lack of experience in implementing intemational standards of accounting.

As discussed in the CAS, the Bank is addressing and will continue to address these fiduciaryrecommendations through the ongoing Public Administration Reform Project and the proposed PRSC I(FY02), PRSC II (FY03), and PRSC Im (FY04) (see para. 33 and 66). In addition, the Bank will workclosely with other donors who are providing related support.

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ATTACHMENT 6: F uND RELATIONS NOTE

International Monetary FundPublic Information Notice (PIN) No. 01/ 74 700 19th Street, NW

Washington, D. C. 20431 USAJuly 27, 2001

Albania: Public Information Notice

On July 13, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IVconsultation with Albania.'

Background

Sound macroeconomic management, supported by structural reform, has characterized Albania'sperformance under the current PRGF arrangement, although poverty and emigration remain pervasive.Policies have resulted in a significant easing of inflationary pressures and sizable reductions in the overalland domestically financed fiscal deficits. Strong economic activity continued in 2000, with GDP growthestimated at 73/4 percent. However, electricity shortages disrupted activity during the winter of 2000-01 andcontinue to threaten growth prospects. The external position strengthened further during 2000, reflected inhigher official exchange reserves, as a worsening of the trade balance was offset by strong inflows ofremittances. The effective exchange rate, which appreciated against the euro during most of 2000, has beenstable in recent months

Fiscal policy remains on track, tlanks mainly to a strong revenue performance. The overall deficit(excluding grants) declined to 9.1 percent in 2000 and targets for the domestically financed deficit-at 3.2percent of GDP-and for total tax revenues were met. Fiscal performance so far in 2001 has been in linewith the budget. Improved revenue collection has largely reflected the implementation of measures agreedunder the program, with reductions in corruption and smuggling. Despite the fiscal efforts of the past threeyears, the domestic component of public debt remains relatively high, although overall debt is below theaverage for developing countries.

Monetary policy has eased considerably since the beginning of 2000, as T-bilt rates have fallen by 6-7percentage points since the beginning of 2000. Inflation has edged up since mid-2000, mainly on account ofrising energy and housing costs, but it is within the authorities' 2-4 percent target range. In mid-2000, theBank of Albania switched to indireci. instruments of monetary policy, with weekly repo auctions.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usuallyevery year. A staff team visits the country, collects economic and financial information, and discusses withofficials the country's economic developments and policies. On return to headquarters, the staff prepares a report,which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the ManagingDirector, as Chairman of the Board, sunmnarizes the views of Executive Directors, and this summary istransmitted to the country's authorities. This PrN summarizes the views of the Executive Board as expressedduring the July 13, 2001 Executive Board discussion based on the staff report.

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Significant progress has been made in privatization of state-owned enterprises; and much-needed reforms inthe electricity sector have been initiated. T'he tender for privatization of the Savings Bank was announcedon June 29. Privatization is moving forward in the telecommunication sector and has largely beencompleted in the mining sector. In agriculture, the end-December 2000 target for land registration was met.The Law on Executive Offices has been implemented and a registry for collateral property started operatingin January 2001. On the other hand, delays have occurred in the submission of the revised Bankruptcy Lawand the establishment of a mediation center.

Executive Board Assessment

Directors commended the authorities' sound macroeconomic management and structural reforms that havesupported continued strong growth and financial stability. Directors stressed, however, the need to build onthese considerable achievements with further structural reforms and improvements in govemance, in orderto sustain rapid growth and alleviate poverty.

Directors supported the fiscal policy framework for the remainder of 2001. They welcomed the ongoingimprovements in revenue collection, supported by the authorities' efforts to strengthen tax and customsadministration. They emphasized the need to broaden the tax base. Directors also underscored the need forspending restraint, especially if revenues do not meet expectations. For the medium term, Directorsconsidered that raising revenues would continue to be a key objective of fiscal policy so as to permit theneeded expansion in social expenditures, while keeping the public debt within prudent limits.

Directors commended the authorities' monetary policy. Interest rates have been significantly lowered whileinflation has remained low, the exchange rate has stabilized, and official reserves have risen to acomfortable level. However, with inflation having edged up since mid-2000, Directors considered thatfurther monetary easing was not warranted. They recommended swift action in case inflationary pressuresintensified. Directors also noted that the exchange rate had appreciated in real terms in recent years andadvised the authorities to monitor developments closely to forestall any adverse effects on competitiveness.Directors observed that, although progress had been made, financial integration remains low anddollarization high. The effects of reintermediation would need to be taken into account in any eventual shiftto an inflation-targeting framework for monetary policy.

Directors emphasized the importance of financial sector reform. They encouraged the authorities to give thehighest priority to the successful and timely privatization of the Savings Bank and welcomed the recentannouncement of a tender. They also encouraged further efforts to promote financial sector competition, todevelop the banking sector in all parts of the country, to strengthen bank supervision, and to speed upimplementation of the Anti-Money Laundering Law. They encouraged the authorities to implement therecommendations of the Phase One Safeguards Assessment.

Directors were concerned by problems in the energy sector, which are a potential constraint on growth andwhich, because of the resultant need for subsidies, are a drain on the budget. They considered the rise thisyear in subsidies for electricity imports only a temporary expedient, pending urgently needed and morefundamental reforms in the energy sector, including measures to revise tariffs and improve collections.

Regarding other structural reforms, Directors encouraged the authorities to persevere with their program oflegal and institutional reforms to improve governance and the climate for business and investment.Enterprise privatization should be completed, including in the telecommunications and energy sectors. Thelegal framework for the provision of credit to the private sector should be strengthened, and a bankruptcylaw adopted. Directors commended the authorities for maintaining an open trade regime and for theirparticipation in recent initiatives toward regional free trade.

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Directors welcomed progress in preparing the authorities' Growth and Poverty Reduction Strategy Paper(GPRS) through a broad-based parlicipatory process. They observed that, despite recent progress, Albaniastill faces severe institutional and infrastructural weaknesses, requiring a bold reform agenda for thecoming years to secure rapid growth and to reduce poverty, which is especially prevalent in rural areas.Directors noted the role, that suppoiti from the international community could play in this regard.

Directors encouraged further improvements in economic data, including national accounts and priceindices, and in the accuracy and timneliness of data on foreign-financed capital expenditures, which affectthe monitoring of the fiscal position. They supported technical assistance in these areas.

Directors noted the progress Albania has made in regularizing relations with its creditors and encouragedall parties to work to resolve outstanding issues as soon as possible. They urged the authorities to promptlyeliminate remaining exchange restrictions subject to Article XIV of the Fund's Articles of Agreement, andlooked forward to Albania's intended move to Article VIII status.

Directors stressed the importance of a well-designed GPRS that identifies key expenditure priorities withinthe authorities Medium-Term Expenditure Framework (MTEF).

Directors looked forward to discussing a successor arrangement after the Annual Meetings and emphasizedthe need for close coordination with the World Bank in this regard. They generally considered that, in viewof Albania's economic progress, and subject to discussion with the authorities, a blend of concessional andnonconcessional resources could be appropriate under a successor arrangement.

Contact: Mr. S. Hossein Samiei, l)eputy Division Chief, Southeastern II, European I Department, IMF,ext. 36356

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Attachment 7: Data on Millennium Development Goals and Related Indicators

1990 1991 1992 1993 1994 1995 1996 1997 1999 199 2000 2001 CommentsPopudatlont.tOta (mll) 328 328 3.23 3 18 3 19 3.23 3 27 3 30 3.34 3 38 3. 09' * PrsllmrLnarydata from the 2001 censusGNP per capita. Atlas method (csTent US$) . 300 320 390 660 840 760 820 870 2 significant reduction In populationFaMtity ratetoatEd(blrlhsper womn) 3.0 .. 2.8 2 7 2 6 2 6 2 5 .. 2.4 .and as Such the poputationdata for theUt0mWeanyya t birth, tt(yeasr) 72.3 72.3 7,1.3 71 3 72.5 71 3 71 7 71.7 .72 1 . . st decade are unlikely tobe renable

1901901 1992 1993 1994 1995 1990 1997 1998 1990 2000 2001 ContinentsI PoPtdation behm $1 a day ~~~~~~~~~~~~~~~~~~~Currenly too few data to commernt on

LCS 1998 Si per capita per day 17 4 b ands The 200 LSMS mlay lead toLCS 199 S2 per capita per day . . 46.6 . . a major revIs ioIn the eittimates of

2 Poveity gap atSla day ... populatiolninpoverty as tiwil be the3 % share of Income or consumpton held by po . ..first nationally representativ survey4 Prev of underweight ctildren (5 5 yrs old) .8.1 . . In many years

MICS 2000 . 14Poverdy Rate anren Wartly 1 65 ym8i Wfage .

LCS 199 . . 20.6Poreil Rate aemno unemplyoyd

LCS 1998 50.8Poverty Rate anren chilren14 of children dap,ve of parental ewe

TMD (8) ~~~~~~~~~42.9 45.5 44.9 45.8 40I ~~~1990 1901 1I9 1993 1994 190 1998'1997 1908 1999 208002001 Conmments

6 Net plttmary erestament ratio 91 68 81 Ounesonatide data reiSlIIktyTWO lGrossrlte (b) 102 97 9 94 5 95.3 98.6 98 8 98.1 9486 9286 90GrossWB200l(Stato1fAJb&UNICEF) 102.3 97.8 94.2 95 2 9696 99 898 92.1 92 1 UNDP HOts (most recant fron 95-97) . . 100WDIt 2001 .. .. . 102GDF & WDI (Grmss) 100.2 19002 104,5 107.2EWS 1998 (5 of 7-14 yr (Ad children) -. 89.69Grons WB 2000 (b) 102.1 90.3 97.3 99A '100.4 100.3 99.5 97.1 93.9MOES -GfostErwotment raem . 91.0 90.0 89.0 87.0 85.0 81

6 Youth literacy rate (age 15.24) 95 3 99 6 90 0 96.3 99,8 96.9 97 I 97 4 97.6 97.8 889 Ratioof giftsto bopIn1 ry and 2ryeoducatlon .. 94.9 93 4 . 986 986e

Glnt6oy ratio of 1ry CornpRates (Gr 4) . .1040Q

Gh4;Boy rettof Iry ComlpRates (Gr 8) . . .112 0ivy Con#eitlon rates Grade S (UIS date from I.. 91fiy Coraptfeon rates Grade 8 (UIS date firn A 99 .100

Adult lllllsracy Rats (Edatata) . .

1990 1991 1992 1993 1894 1995 1996 1997 1998 119119 2000 2001 CommnentsLiteracyrml% aduff total (16oIpeople 15+) 77 4 78 2 79 0 79 9 80.7 81 4 82.1 82.7 83.5 84.0 Quesetlcabe datarellabltity

LEics 2000 88Privexpendon ivyedvc as of totel sduc SStudenteacher ratfo

GOF &WDI 19 1 - 18 7 17 8 17 8 ,Student/teacher ratio appearsStats COlfo Albanfa 22 9 22 .21 4 21 4 22 5 22.4 22 8 23 22.7 . . relatively conetant But qtuestioneble dataEdstets 19 1 17 8 . . 1768 retWiabty given high Intemfal and

Performance In intematalonal teat . .extemal mirtoSchool Aftndar,ce..

MlAGS 2000(a) 90 First PISA asticipated in 200316 ofchitldren without aconas to texftooks

1990 1991 1992 1993 1994 1996 1998 1997 1999 1999 2000 2001 Commemnts13 Under 5MortaltyRate (perl1.O00tivebtlnt 4165 44.5 46.9 497 44.7 37 30.8

TMD 41.9 44 5 40 9 49 7 44.7 37 30 6UNICEF MICS 210D . 33UNDP HOts 35.0UNICEF ... 31 0

14 Infant Mortality Pate (perl1.00Otlvebhifti) 28 3 32.9 30 9 33.2 35 7 34 25.8 258e 24 3 . . 1at(othw than EUPHIN) suggest dnatThID 28 3 32 9 30 9 33.2 35.7 34 25.8 22 5 20.4 I MRs are reducarg onlysftghtlyUNICEF MICS 2000 .. 28UNDP HODe s 29.0EUIPHIN 33.8 32 9 252 23 3 20 2 158 14 7MICS 2000 . . 21Altartia MOH . 22 2 15 12 2 12.1

15 Propnof 1-yr-olds immund againist measles ImmunIzato rates for both meassesGDF & WOI 80 87 78 90 91 92 95 89 85 and OPT3 are shoeirng slight IncresesTMD for under 28. 80 5 67 78 2 81 2 91 91,7 951 89

UNDP NOls (most reomnI fram 97-99) ... 5EUPHIN (age nfl speatied) 85 80 87 76 90 91 92 95 89 91 92PFtSP (GPRS) .. . . 90 . . 97UNICEF MICS 2000 el .. 6

Plopn of 1-yr-old chitiier kmmt with OP73WI-fO/INICEF esimate (c) (s12 mr7ths) 04 78 94 96 90 97 98 90 96 97 97

18 Maten-al mfortality (Sun bbthfts. adjusted) 38 30 25 Is 41 .

ThID 37 7 29 7 25.2 18 2 40 2 33,3 27.8 27 5 2186EUPJ`HN 31 22 5 20 5 18 12 5 117 81 15UNICEF oteldnfo .. 31____________

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199C 1991 199 1993 1994 1998 1999 1997 1999 1999 2000 2001 Commients

MICS 2000 . . 20AlbanifaMON .27.5 21.9 14 7 21.9

19 Prevalence ofHlV. female (age 15.24) .

ECEM AIDS (New dlgnosed casesJyr).a 12 7 3 5 4 10 2023 lncAlenoeofT78 per 100,000pecP1e).

794D 20 19.5 167 20 17 20 3 21 4 19.9UJNOP HDis.22EUPHIIN 19.9 19.3 16.6 20.1 22.1 20.4 21.5 19.7 20.7 21.7

29 Access to improved water source I% of popn,.76-UNICEPchdbt/o (Warbm4uraI.9/9GM. 99/95EV&S1996 (a).all91

30 Peops ofpoople ws4l access to Isrpevad sanA .

UNICEFch/ditol (urbarftraO 9gm . .. 99/8GOP/& IN5IEWS 1996 (16 ofh FEa it access to0.us44 25

Males AdLdt Morla4Ry rate (Oa /000W acfduls)GDF &IWDI175

Out ofpocket paymeantsasalliof oeaaHteam coar ut/Irz/Ion Mfte for those mpreuot/g..

1990 199 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Comments1 1Shareof Wonmen In wage ernployt/ee in nsons-

COnsitU4Of to WOi*ts age POPcdac ,at/O.The 2001 censwu arid the 2002 LSMSPt/meat of men arid woeten abowe 65 years. . . . will yIed further informatIon on most

I/WnS 1996. .. of these variablesUseffpkoymsent rate

WB 200- caowby adnlbn datea(d) 1 0 9 27 22 168 12 9 12.7 13.97940 10 9 27 22 198 12 9 12.7 13 9 17 8WB 2001 (Stats Ofte Albania) 9.5 9.1 . 4.5 5.4 7 6 891 6 7/IWS 1996 27.39 -

Labour, fboce parl/c/patisn rateFem .F AcvtyRafe (GDF N /). 29.4 29.7 40 40.3 40.6 40 9 41.2 41 4 41.7 41.9 42 2Ma/etFAciJfy Ratea(GDP WDI) 55 7 5568 56 56 1 56.3 56 5 56 6 566 56.9 57.1 57.2Fem LFPairftRato -WB 2000 (d) 64.6 64 5 63.4 63.3 65 6 66.9 6685 6 97Male LP Parsn Rate -WS 2000 (d) 8995 85 8 85 7 86 99 6 6968 89 3 996 .

EWE 1986 72.0

Perosit of powr dhfld,amr gettki woof assews i9O 54 76

Paern of th poor raC&k*fo social sit . . .... . _ _ _ _ _ _ _ _

Source. UNESCO, WHO, National statatca cilice DECaG.7TMD = T,ansMONEE DatabaseT54D(a) =Children ins e, cre(Ae per 1O00000 -1?jr oAts) - isctucfs oraty abilniti a hfshomes ard orphanagesUWDP HD)ts UNDP k*asn DeveA,pren bieattorsUNICEF MICE2000 UNICEF AnIRil IndIcatr ua atSwrvy: Altoan 2000(quoedbyT794)(b) 7-14 year-okts. PopulatIon998-09. IRC est/rate based onnsathanitdata by -year age groupsWS 2000 -country adinin data (d) = thalaniclri Prtction arid Opportunity -A abt/sag for sociat ProtectIo Is Translllo Cocabites (pg 58)WHO/UJNICEF estimate (c) = WHO/UNICEF Rrevie at Natonal lImmunlTtion CoverageEWS 1996 -Atasila EinrUoymenet arid Wettwer Swrveys daesetEWS 1990 (a) = 1601 HHs thai descrIbe their maln5 source of water as sillier piped public, own systems, pump oewwotLCS 1998 s 1998 ivIng Condition SurveyMICS 2000 = Multple indicator Cluster Survey conduct id by INSTAT with UNICEF Support-MICS 2000 (a) - tor school age dhlkdrer attnding conm xutsOy euatinEdStals = World Bhanki Education Staftisic DatabaseWB 2000 (b) = Albania's Educatin Sector. Problems ritd PremiseMOES =Alb/asian Ministry of Educallon anid ScIecesPRSP (GPRS) Poverty ReductIn St/stgy Paper (Growth Poverty Peduction Sbtratgy)

-51 -

Annex A2Page I of 2

Albania at a glance S14/02

Europe & Lower-POVERTY and SOCIAL Central middle-

Albania Asia Income Development diamrndd2001Populatlon, mid-year (mdllons) 3.4 475 2,046 Lie expectancyGNI per capita (Atas method, USS) 1.230 2,010 1,140GNI (Alas method, US$ billions) 4.2 956 2,327

Average annual growth, 1995-O1

Population (%) 0.9 0.1 1.0 GNLabor tore (6) 1.3 0.6 1.3 GNI Gross

per , , primaryMost recent estimate (latest year available, 1995401) capH . enrollment

Poverty (% of populatfon bteow natonal poverty line)Urban population (% of total populaton) 40 67 42Life expectancy at birth (yeats) 74 69 69Infant mortality (per 1,000 live births) 20 21 32Child malnutrition (% of chDdren under 5) 8 1 Access to Improved water sourceAccess to an improved water source (% of population) 90 80Illiteracy (% ofpopulation age 15+) 15 3 15Gross primary enrollment (% of school-age Population) 110 100 114

Male 109 101 116 Lower-mniddle-Income groupFemale 110 99 114

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1981 1991 2000 2001Economic ratios'

GDP (USS bilions) .. 1.1 3.8 4.1Gross domestic Investment/GDP 35 1 7.3 18.6 19.4Exports of goods and services/GDP 23.0 7.2 18.9 20.4 TradeGross domestic savings/GDP 38 6 -13.0 -2.9 -3.7Gross national savingstGDP -14.2 11.6 13.1

Current account balance/GDP -21.6 -7.2 -6.3 DomesticInterest payments/GDP 0.2 0.2 0.3 si InvestmentTotal debt/GDP 44.9 20.9 23.0Total debt service/exports 3.9 2.1 2.7Present value of debtVGDP 12.9Present value of debVexports 38.5

Indebtedness198141 199141 2000 2001 200145

(average annual growth)GDP -0.5 5.4 7 8 6.5 6.7 -AlbaniaGDP per capita -2.4 4.6 6.9 5.6 6 3 Lower-middle-Income groupExports of goods and services 11.7 5.8 24.8 5.5

STRUCTURE of the ECONOMY10s1 1901 2000 2001 Growth of Investment and GDP (%)

(% of GOP) 20Agricuiture 32.4 39.3 51.0 49.1Industry 43.0 42.7 26.3 27.3 3 o

Manufacturing .. 38,5 11.6 116ServIces 24.6 18.0 22.7 23.6 0

9 00 01Private consumption 54.9 90.9 92.0 90.9 -10General govemment consumption 8.5 22.1 10.9 12.9 GDI --*-GDPImports of goods and services 21.5 27.6 40.4 43.5

198141 190141 2000 2001 Growth of exports and Imports (%)(average annual growth)Agriculture 1.0 6.1 4.0 1.4 6Industry -0.5 5.0 11.4 10.7 40

Manufacturing .. -0.8 5.0 6.5 20

Services -3.0 5.1 13.3 13.6 a o f

Private consumption 5.4 2 8 6.7 -20 se 9 e 0oGeneral govemment consumption 3.1 7.4 12.0 0Gross domestic investment -1.0 20.1 17 9 11 1 EN vfts - Im sImports of goods and services 11.0 6.5 23.5

Note: 2001 data are preliminary estimates.

The diamonds show four key indicators in the country (in bold) compared with Its Income-group average. If data are missing, the diamond willbe Incomplete.

Annex A2Page 2 of 2

Albania

PRICES and GOVERNMENT FINANCE1981 1991 2000 2001 Inflation (%)

Domesdc prices(% change)Consumer prices . 49.4 0.1 3.1 30* Implicit GDP deflator -2.2 34.5 -1.2 2.8 20.

Government finance 10 S(% of GOP. includes current grants) 0 *Current revenue .. 34.3 22.4 23.0 -1o. 93 97 90 99 00 01Current budget balance .. -21.7 -2.4 -1.2 GDP deflator CPIOverall surplustdeflcit .. -27.8 -9.1 -8.5

TRADE

(US$ mrillions) 1981 1991 2000 2001 Export and Import levels (USS mill.)

Total exports (fbb) 419 101 256 305 IAooCommodity 1 .. .. 28 .. 120Commodity 2 .. .. 14 Manufactures .. .. 218

Total imports (ciM 384 409 1,070 1,332 '50

Food . .. 217 . 0Fuel and energy .. .. 71 250Captal goods .. .. 230 a

95 95 97 59 go 00 01Export price index (1995=100) ..Import price index (1995=100) .. .. .. Expo.t a ImportsTerms of trade (1995=100) ..

BALANCE of PAYMENTS

(US$ millions) 1981 1991 2000 2001 Current account balance to GDP (%)

Exports of goods and services 431 8 705 840Imports of goods and services 403 31 1,520 1,791 MN'Resource balance 28 -232 -815 -951

Net income 11 -22 108 148Net current transfers .. 8 439 543

Current account balance 45 -248 -270 -260 -*

Financing hems (net) -19 24 381 391Changes in net reserves -26 221 -111 -131 15 .

Memo:Reserves Including gold (US$ rnfmions) .. .. 638 767Conversion rate (DEC, locat/US$) .. 14.4 143.7 143.5

EXTERNAL DEBT and RESOURCE FLOWS1981 1991 2000 2001

(USS milions) Composition of 2000 debt (US$ mill.)Total debt outstanding and disbursed .. 512 784 945

IBRD 0 0 0 37IDA .. 0 346 405 37

Total debt service .. 4 27 41IBRD ** 0 0 0IDA .. 0 2 3 346

218Composition of net resource flows

Ofricial grants .. 320 161Official creditors .. 20 93 .. fPrivate credtors .. 28 -1 ..Foreign direct investment .. 0 143 ..Portfolio equity 0 0 Be

World Bank programCommitments .. 0 54 20 A- IBRD E -BilteralDisbursements .. 0 64 34 B - IDA D -Other rrbluateral F -PnvatePrincipal repayments .. 0 0 0 C -IMF G -Short-termNet flows .. 0 64 34Interest payments .. 0 2 3Net transfers .. 0 62 31

Development Economics 5/14/02

Annex B2Page 1 of 1

AlbaniaSelected Indicators* of Bank Portfolio Performance and Management

As of Date 04/15/2002

Indicator 1999 2000 2001 2002Pbrffoio Asseswiint

Number of Prects Lkcder Irren ntation a 21 21 20 21

AVerge Irnplerentajon Peliod (ws) b 2.8 22 2.3 3.0Pement of Problem Prcects by N ac 9.5 9.5 10.0 4.8Pecent of Prsem Prqects by AEnou a c 13.4 13.2 18.3 9.6Pert of Prcects at Risk by IhiXrrber a d 9.5 9.5 15.0 4.8Per of prjeCtS at Risk byAM a. d 13.4 13.2 23.6 9.6EisbursentRatio(%)0 21.4 19.4 22.4 15.5Porfdlio MaogwtmtCPPR dinrng the yer (es/no) Yes Yes Yes YesSupervision Resources (toWt, US$000) 1,359.90 1,866.20 1,807.90 1,723.90Averge Supervision (US$000/project) 65 89 90 82

M oradun Item Since FY 80 Last Five FYsProj Evdl byOEDbyNutber 21 19Proj EvS by OED by Amt (US$ rillions) 316 272% of OED Projects Rated U or HU by Nunber 14.3 15.8%of OED Proects Rted Uor HU byAnt 0 0

a. As shown in te Annual Peport on Porffalio Pefonanoe (except for curent FY).b. Average age of prqects in the BanWs oxnty portfolio.c. Perent of prqects rated U or HU on developTrent objectives (DO) ard/or irrmepientaton progress (IP).d. As defined under the Portfolio Inrr fvweent Progane. Ratio of disbsemt during the year to the undshzused balance of the BartWs porafolio at the

beginning of the yew Investrrent projects only.* All indicators are for projeds active in the PortFdio, wmth the exception of Disbursement Ratio,

which indudes al active projects as well as prcects whidh eadted dning the fiscal year.

Annex B3Page I of 2

Albaniia - Bank Group Program Summary

Actual aiid Proposed FY02 IDA Lending Programand Proposed FY03-05 IDA Lending Program

Strategic Rewards a/ Implementation a/Fiscal year Proj ID US$(" (Hl"M.) Risks (H4)

2002 Pilot Fishery Development (Actual) 5.6 M LRoad Maintenance 30.0 M MFinancial Sector Adjustment Credit 15.0 H MPower Sector Rehab. & Restructuring 29.9 H MPoverty Reduction StLpport Credit i 20.0 H M

Total FY02 94.9

2003 Municipal Water/Wastewater 15.0 H HEnvironment 5.0 M MThermal Power r 20.0 H HPoverty Reduction Support Credit II 10.0 H M

Subtotal FY03 50.0

2004 Transport 20.0 H MCommunity Works II* 10.0 M LEducaton i 8.0 H MPoverty Reduction Support Credit IlIl 10.0 H M

Subtotal FY04 48.0

2005 Health lII 10.0 H MRural Development/Water 8.0 H MAgrtculture/lrrigation 111- 8.0 M LNatural Resources 7.0 M L

Subtotal FY05 33.0

Total FY03-05 131.0

'Would remain In a lowcase scenario.a/ For each project, indicate whether the strategkc rewards and Implementation risks are expected to be high (H), moderate (M), or low (L)

Annex B3Page 2 of 2

Albania - IFC and MIGA Program, FY 1999-2002

1999 2000 2001 2002*

IFC approvals (US$m) 2.33 2.5 27.5 0.00

Sector (%)AGRICULTURE & FORESTRYCHEMICALSOIL, GAS & MINING 37EDUCATION SERVICESFINANCE & INSURANCE 48 100 8FOOD & BEVERAGESINDUSTRIAL & CONS PRODNONMETALLIC MINERAL 52 55PRIMARY METALSPULP & PAPERTEXTILES, APPAREL & LEPLASTICS & RUBBERTotal 100 100 100

Investment instrument (%)Loans 52 91Equity 48 100Quasi-EquityOther (Guarantee) 9Total 100 100 100

MIGA guarantees (US$m) 0.00 1.5 8.5 8.5

* Savings Bank (US$20M) currently in low probability is expected to be approved by June 20/2002.

Annex B4Page I of 1

Albania -Summary of Nonlending Services

Product Completion FY Cost (US$000) Audience a Objective b

Recent completionsAnticorruption TA 00 50 Gov/IDA/Don KG/PSRefugee Impacts/Prospects 00 25 Gov/IDA/Don KG/PSCountry Portfolio Performance Review 00 25 Gov/IDA/Don KG/PSEducation Sector Review 00 162 Gov/IDA/Pub/Don KG/PS/PDCountry Procurement Assessment 01 Gov/IDA/Pub/Don KG/PDAntlcorruption TA 01 50 Gov/IDA/Don KG/PD/PSQualitative Poverty Assessment 01 62 Gov/IDA/Don KG/PSPublic Expenditure Institutional Review 01 300 Gov/IDA/Don KG/PSGovemance Anticorruption Report 01 90 Gov/IDA/Pub PS/PDCountry Portfolio Performance Review 01 30 Gov/lDA/Don KG/PSCountry Financial AccountabilityAssessment 02 30 Gov/IDA/Don KG/PSFinancial Sustainability Note 02 138 Gov/IDA KG/PS

UnderwayRural Strategy 02 145 Gov/IDA KG/PD/PSPoverty Assessment 03 150 Gov/IDA/Don KG/PS/PDFiscal Decentralization Study 03 132 Gov/lDA/Don KG/PS

PlannedNational Water Strategy 03 92 Gov/IDA/Don KG/PD/PSPrivatization TA 03 30 Gov/IDAlDon KG/PSPCF Early Childhood Development TA 03 30 Gov/IDA KG/PSAnticorruption TA 03 50 Gov/IDAlDon KG/PD/PSSocial Safety Net Review 03 75 Gov/lDAlDon KG/PSCEM - Competitiveness and Sourcesof Growth 04 207 Gov/IDA/Don KG/PD/PSRural Human Capital Development 04 75 Gov/lDADon KG/PSPrivatization TA 04 30 Gov/IDA/Don KG/PSRoma Assessment Note 04 60 Gov/lDA/Don KG/PD/PSPCF Early Childhood Development TA 04 30 Gov/IDA/Don KG/PD/PSAnicorruption TA 04 50 Gov/IDA/Don KG/PD/PSLabor Market Assessment 05 120 Gov/lDA/Don KG/PDTransport Study 05 85 Gov/IDAlDon KG/PD/PSAnticorruption TA 05 50 Gov/IDA/Don KG/PD/PSPublic Expenditure Review 05 200 Gov/IDA/Don KG/PS

a. Govemment, donor, Bank, public dissemination.b. Knowledge generation, public debate, problem-solving.

Annex B5Page I of I

Albania Social Indicators

Latest single year Same regionrincome group

Europe & Lower-Central middle-

1970-75 1980-85 1994-00 AsIa income

POPULATIONTotal population, mid-year (millions) 2.4 3.0 3.4 474.7 2,046.0

Growth rate (% annual average for period) 2.3 2.0 0.9 0.1 1.0Urban population (% of population) 32.8 34.8 39.1 66.8 42.4Total fertility rate (births per woman) 4.4 3.2 2.1 1.6 2 1

POVERTY(% of population)National headcount index .. ..

Urban headcount index .. .. 15.0Rural headcount Index .. 28.9

INCOMEGNI per capita (US$) .. .. 1,120 2,010 1,140Consumer prce index (1995=100) .. .. 182 192 149Food price index (1995=100) .. ..

INCOMEICONSUMPTION DISTRIBUTIONGini indexLowest quintile (%6 of income or consumption)Highest quintile (% of income or consumption) . .

SOCIAL INDICATORSPublic expenditure

Health (% of GDP) .. .. .. 4.3 2.7Education (% of GNI) .. .. 3.1 5.1 4.7Social security and welfare (% of GDP) .. 6.0 8.8

Net primary school enrollment rate(% of age group)

Total .. .. 102 92 99Male .. .. 100 93 100Female .. .. 103 92 99

Access to an Improved water source(% of population)

Total .. .. .. 90 80Urban .. 95 95Rural .. .. .. 82 69

Immunization rate(% under 12 months)

Measles 96 85 97 87DPT 96 97 97 87

Child malnutrition (% under 5 years) . .. 8 .. 11

Life expectancy at birth(years)

Total 68 71 74 69 69Male 66 68 72 64 67Female 70 74 76 73 72

MortalityInfant (per thousand live births) 53 35 20 21 32Under 5 (per thousand live births) 82 57 31 26 40Adult (15-59)

Male (per 1,000 population) 190 .. 171 289 192Female (per 1,000 population) 113 * 86 127 133

Matemal (per 100,000 live births) 31Births attended by skilled health staff () .. 99

CAS Annex B5. This table was produced from the CMU LDB system. 05/29/02Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment ratios exceeding 100 indicate discrepanciesbetween the estimates of school-age population and reported enrollment data.

Annex B6Page 1 of 2

Albania - Key Economic Indicators

Estinnte ProjectedIndicator 1999 2000 2001 2002 2003 2004 2005

National accounts (as % of GDP)Grossdonesticproduct 100 100 100 100 100 100 100

Agriculture 53 51 49 47 46 44 43

Industry 25 26 27 28 29 29 30Services 22 23 24 25 26 27 28

Total Consunption 106 103 104 101 98 96 95Gross dornestic fixed investnent 17 19 19 21 23 23 24

Governiwnt investmnnt 6 7 7 8 8 8 8Private investmnnt 11 12 12 13 14 15 15

Exorts (GNFS) 16 19 20 20 20 20 20Inports (GNFS) 39 40 44 42 40 39 38

Grossdonesticsavings -6 -3 -4 -1 2 4 5Grossnationalsavings 9 12 13 13 15 17 18

Memorandun itemsGross donestic product 3676 3752 4114 4540 5013 5541 6097(US$ million at current prices)

Real amual growth rates (0/4 calculated from 1993 prices)Gross donrstic product at nrket prices 7.3 7.8 6.5 6.0 7.0 7.0 6.5

Real arnual per capita growth rates (%, calculated firn 1993 prices)Gross donmestic product at nmrket prices 6.6 6.9 6.0 5.5 6.5 6.5 6.0

Balance of Payments (US$ nillions)Exorts (GNFS)b 594 705 840 892 980 1087 1208

Merchandise F'OB 275 255 305 342 391 454 529

hnports(GNFS)b 1437 1520 1791 1893 2009 2165 2317Merchandise FOB 1121 1076 1332 1414 1507 1634 1758

Resource balance -843 -815 -951 -1001 -1029 -1078 -1109Net current transfers 510 439 543 510 554 598 643Current account balance -270 -270 -260 -374 -355 -344 -327

Netprivateforeigndirectinvestnent 51 143 204 153 215 205 172Long-termloans (net) 72 70 165 241 193 200 212

Official 73 70 162 236 188 196 208Private -2 0 3 5 5 4 4

Otier capital (net) 229 168 22 6 34 42 1Cange in reservesd -83 -111 -131 -26 -87 -103 -58

Memorandum itemsCurrent account balance (% of GDP) -7.3 -7.2 -6.3 -8.2 -7.1 -6.2 -5.4

(Continued)

Annex B6Page 2 of 2

Albania - Key Economic Indicators

Estle P cdIndictr 1999 2000 2001 2002 2003 2004 2005

Natical accads (as %of CD"

Gmd stic iv ixt 100 100 100 100 100 100 100AgricuLt 53 51 49 47 46 44 43hdIr y 25 26 27 28 29 29 30Savice 22 23 24 25 26 27 28

Total 1Ca on 106 103 104 101 98 96 95(i hdstic fixedinwstin 17 19 19 21 23 23 24

G tinm tinwsnit 6 7 7 8 8 8 8Piivate iwestnf 11 12 12 13 14 15 15

Eps ((NE;) 16 19 20 20 20 20 20hpits(GNFS) 39 40 44 42 40 39 38

Grm dstic avrw -6 -3 -4 -1 2 4 5Gormtina vawv 9 12 13 13 15 17 18

Akmwdhon temGrcpd dsichxpduct 3676 3752 4114 4540 5013 5541 6097(IM ni ion at cwun¢ics)

Rel aUm gdiiateS (D/(, cailtd fn 1993 pnce)G Edmr pct at r} pnce 7.3 7.8 6.5 6.0 7.0 7.0 6.5

Real arW per capita gothrates (C/% caloulated fx 1993 pxce)G ds c tatnmdpices 6.6 6.9 6.0 5.5 6.5 6.5 6.0

lime ofhPms (L$ nilEa)

Expcxls (GNF;) 594 705 840 892 980 1087 1208N BrdmniseFO 275 255 305 342 391 454 529

Annex B7Page I of I

Albania - Key Exposure Indicators

Estimate ProjectedIndicator 1999 2000 2001 2002 2003 2004 2005

Total debt outstanding and 707 784 945 1182 1378 1579 1789

disbursed (TDO) (US$m)a

Net disbursements (US$m)a 133 112 163 228 185 192 205

Total debt service (TDS) 23 27 41 65 65 67 74

(US$m)a

Debt and debt service indicators

(0/-)

TDO/XGSb 71.0 62.2 61.2 76.5 82.1 85.4 88.3

TDO/GDP 19.2 20.9 23.0 26.0 27.5 28.5 29.4TDS/XGS 2.3 2.2 2.6 4.2 3.9 3.6 3.7

IBRD exposure indicators (%)IBRD DS/public DS 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Preferred creditor DS/public 49.7 59.8 72.0 68.1 . 64.0 66.3 54.4

DS (%)cIBRD DS/XGS 0.0 0.0 0.0 0.0 0.0 0.0 0.0IBRDTDO(US$m)d 0 0 0 0 0 0 0

Of which present value of

guarantees (US$m)Share of IBRD portfolio (%)IDA TDO (US$m)d 296 346 405 489 565 634 694

a. Includes public and publicly gnLranteed debt, private nonguaranteed, use of EMF credits and net short-

term capital.b. "XGS" denotes exports of goods and services, including workers' remittances.c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the

Bank for International Settlements.d. Includes present value of guarantees.e. Includes equity and quasi-equity types of both loan and equity instruments.

Annex B8Page I of 2

Albania -Status of Bank Group Operations (Operations Portfolio)

Total Disbursed (Active) 107of which has been repaid 0

Total Disbursed (Closed) 305of which has been dpai 0

Total Disbursed (Acive + Closed) 412of wNcti has been repaid 0

Total Undisbursed (Active) 137Total Undlsbutsed (Closed) 0Total Undlsbursed (Active + Closed) 137

Adivbct s Diffterence Between

ELast PSRExpected and Actual

Supervision Rating Original Amount In USS Millions Plsburs4nts

Project ID Project Name D oloomnt lm oon Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Frm Revd

P054736 AG SERVICES S S 2001 9.9 9.3 -0.1P051309 COMMUNITY WORKS S S 1999 14 0.6 -5.3P040818 DURRES PORT S S 1998 17 8.7 8.4P069120 EDUC REF S S 2000 12 10 3 -0.2P068853 EMG ROAD REPAIR S S 2000 13 65 6.6 4.9 2.8P069079 FIN SEC IBTA S S 2000 6.5 4.6 1 7P069479 FISHERY DEVT 2002 5.6 5.5P008271 FORESTRY S S 1996 8 2.3 3 0.1P045312 HEALTH RECOVERY S S 1998 17 12.0 13.2P043178 IRRIG & DRAIN 11 S S 1999 24 9.3 -1P040975 LAND DEVT S S 1998 10 6.5 5.7P057182 LEG/JUD REF S S 2000 9 7.6 3.5P051310 MICROCREDIT S S 1999 12 5.0 -0.9P036060 NATL ROADS S S 1996 25 0.7 2 3P034491 POWERTRNSM &DIST U S 1996 29.5 4.5 11.4 20.1P051602 PRIV IND REC S S 1998 10.25 5.3 5.9P069939 PUB ADM REF S S 2000 8.5 7.4 2.2P054354 RCVRY PROG TA S S 1998 5 0.5 0.5 0.5P055363 SOC SERV DEVT S S 2001 10 9.5 -0.2P070078 TRADE & TRANS FACIL IN SE EUR S S 2001 8.1 6 7 2 3P066491 WS URG REHAB S S 2000 10 7 4 3.7Overall result Result 265 4.5 137.2 69.6 3.5

Annex B8Page 2 of 2

AlbaniaStatement of IFC's

Held and Disbursed PorfololioAs of February 2002

IFC Data Warehouse (Amounts in US Dollar Millions)

IFC Held IFC Disbursed

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1998/01 AAP 0.00 28.50 0.00 0.00 0.00 9.15 0.00 0.002000 NCBank 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.002001 Seament 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001999 SEF Eurotech 0.90 0.00 0.00 0.00 0.90 0.00 0.00 0.001999 SEF FEFAD Bank 0.00 0.98 0.00 0.00 0.00 0.98 0.00 0.00

Total Portfolio: 15.90 31.48 0.00 0.00 0.90 12.13 0.00 0.00

Approvals Pending Commitment

FY Approval Project Name Loan Equity Quasi Partic

1998 Patos Marinza 30.00 0 0 50.00

2001 Pastos Marinza In 10.00 0 0 0

Total Pending: 40.00 0 0 50.00

Annex B9Page I of 27

ALBANIA: COUNTRY PARTNER STRATEGY MATRIX (FYO3-05)'

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS I Performance Indicators/Targets and Timing | Donors

A. Governance and Institution Building

1. Strengthen the Public (i) Strengthen policymaking and inter- * Draft Law on Organization and Functioning of the Public Administration SIGMA (advising)Administration and institutional coordination. Council of Ministers reviewed by Govemment and Reform Project (ongoing); OSCE (advising)Professionalize the Civil resubmitted to Parliament. (PRSC condition) PRSC (FY02, 03, 04) UNDP (TA)Service. * Develop a coherent and sustainable * Percentage of policy proposals approved by the

mechanism for policy coordination for the Council of Ministers which the Ministry of FinanceEuropean integration process. formally reviewed and offered a formal opinion on

* Improve the operation of the Council of the projected fiscal impacts of the policy proposal.Ministers, and enhance its capability to (Percentage should approach I00°V over time.)provide strategic and analytical advice. * Percentage of proposals reviewed by the Ministry of

* Initiate periodic meetings of the General Finance which the ministry assessed to haveSecretaries. satisfactorily projected likely fiscal impacts.

* Improve monitoring of policies and (Percentage should approach 100% over tine.)programs.

(ii) Improve structure of public * Percentage of ministries whose structure is in Public Administration SIGMAadministration, compliance with the standard. (Percentage should Reform Project (ongoing) EU Phare/CARDS

approach 100% over time.)* Undertake a geneal study on Public

Administration structure* Compile a "Methodology for approval of

structure."* Approve a standard structure.

(iii) Improve civil service managenent * Percentage of open civil service positions advertised Public Administration(Percentage should approach I000/o over time.) Reform Project (ongoing)

* Complete job assessment process for civil * Percentage of civil service openings filled throughservice employees and training of direct competitive procedures. (Increase from 2001superiors in the process of assessing incidence of 52%.)individual work results. * Percentage of civil service positions filled by

* Complete the process of civil enployee "contract" enployees. (Reduction from 2001confirmation. baseline of 16.2%.)

* Improve recruitnment procedures in * Percentage of civil servants for whom formalaccordance with best practice. performance evaluations were performed. (Baseline

* Monitor and analyze the law enforcement to be established in 2002. Percentage shouldprocess. approach 100% thereafter.)

* Establish and develop a coherent control * Percentage of civil servants' performancesystem of personnel policies. evaluations falling in highest rating category

(Baseline to be established in 2002. Incidenceshould stay below 15%.)

* Quarterly tumover rates for civil servants do notspike during quarter of or immediately following

I quarter after a change in political leadership.

'This matrix is based on the GPRS matrix. GPRS final indicators are shown in bold, and GPRS intermediate indicators are shown in italics.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 2 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS | Performance Indicators/Targets and Timing Donors

1. Strengthen the Public (iv) Strengthen institutions involved in * Fraction of appeals of Civil Service Commission Public Administration SIGMAAdmninistration and reform imnplementation. decisions to the courts, in which the CSC decision Reform Project (ongoing) EU Phare/CARDSProfessionalize the Civil was overtumed. (Baseline to be established in 2002.Service (continued) * Strengthen the capabilities of the Civil Fraction should be lower than 0%o.)

Service Commnission., PublicAdministration Department, humanresource managcneent units in theministries, and the role of the GeneralSecretmies.

(v) Increase the professionalism of public * Average number of applicants for civil service Public Administration UNDPadministration. positions who meet minimum advertised Reform Project (ongoing) EU Phare/CARDS (likely)

qualifications. (Establish baseline in 2002. Number* Prepare a Public Administmtion Trmining i

Strategy.* Consolidate the Public Administration

Training Institute.* Prepare and implement training programs.

(vi) Improve the legal framework. * Law on Ethics in Public Administration completed. Public Administration SIGMA (likely)* Percentage of public administration positions Reforrn Project (ongoing);

* Prepare the law on Ethics in Public subject to recruitment, selection and dismissal PRSC (FY02, 03, 04)Administration. procedures comparable to those required for the

* Improve the legal framework on the basis civil service.of experience in law enforcement process.

* Adjust sector processes to AdministrativeProcedure Code.

(vii) Improve the wage system. * Ratio between average central govemnment wages Public Administration SIGMA (likely)and average enterprise wages. (1999 = 1.93; Ratio Reform Project (ongoing);

* Approve wage structure for civil should increase slowly over time.) Education Reforn Project;employees. * Ratio between average salary of Department PRSC (FY02, 03,04)

* Improve wage structure for emnployees of Director and average salary of executive position inthe education and healthcare system. private sector manufacturing. (2000 = 0.57; ratio

* Implement the new wage system in the should approach 0.75 over time)entire public administration. * Ratio between average salary of chief of sector and

average salary of middle level manager in privatesector manufacturing. (2000 = 0.41; ratio shouldapproach 0.75 over tinme)

* Ratio between average salary of specialist andaverage salary of non-financial managementspecialist. (2000 = 0.62; ratio should approach 0.75over time)

* Vertical pay compression ratios within subsets ofthe public administration (increase slowly over time)

Country Partner Strategy Matrix (FY03-05) Annex B9Page 3 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS _ Performance Indicators/Targets and Timing Donors

1. Strengthen the Public (viii) Develop information technology. * ndicators of the coverage and liability of Public Administration EU Phare/CARDSAdministration and information in the public administration employees Reform Project (ongoing)Professionalize the Civil * Implement the Strategy for Infomiation database. (Establish baseline in 2002; increaseService (continued) Technology Development. coverage and reliability indicators over time)

* Complete data base of publicadministration employees.

(ix) Strengthen rule of law in local SIGMA (likely)govemment.

* Strengthen cooperation with localgovemment units.

* Organize roundtable meetings with localgovemment units.

* Train elected local government officials.

(x) Strengthen public relations. SIGMA (likely)

* Improve system of public access to officialdocuments.

* Introduce idea that effective public serviceis a prionty.

* Erect public infomiation stands in allpublic administration institutions.

II. Reform the Judiciary (i) Improve the quality of the legislative * State Pubbcation Center fully operational and Legal and Judicial ReformnSystem process; increase publications and electronic data base completed. Project (ongoing)

dissemination of legal acts, court decisions,and other infomiation.

* Full operation of the state PublicationCenter and the installation of modemsystems for information dissemination.

* Improve quality of legal nomis.* Improve legislative process and its

unification, keeping in mind the role of theJustice Ministry.

* Assess effects from adjustment oflegislation.

(ii) Increase transparency in public actions * improved implementation of the Freedom of Council of Europe/EUand access to legal norms. Ensure that effects Information Law and the Administrative Procedures DANIDAproduced by laws are related to objectives. Code. USAID: Amencan Bar

Association (ABA)-CEELI; East-WestManagement InstituteSoros Foundation

Country Partner Strategy Matrix (FY03-05) Annex B9Page 4 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS P Performance Indicators/Targets and Timing Donors

11. Reform the Judiciary (iii) Increase capacity of institutions and * Comprehensive training program completed for Legal and Judicial Reform Council of Europe/EUSystem (continued) professionals responsible for implementing existing judges and prosecutors. Project (ongoing) EU/CARDS

reforms to increase effectiveness ofjudicial * Permanent training program established for court DANIDAsystem and ensure adequate application of administrators. USAID: East-Westlegal procedures. * Bar association assumed role as self-regulating body Management Institute;

to ensure quality of the bar. ABA-CEELI• Increase qualification of judges and * Ministry of Justice capacity for coordinated policy Soros Foundation

prosecutors responsible for control over making and legal drafting improved.implementing legal normrs. * Percentage of judicial decisions in civil cases

. Complete training for chancellors and effectively enforced increased to over 60 percent.court administration. * Judicial Inspection function fully operational, bi-

* Implement training in community law. annual judicial performance assessments produced* Develop Judiciary Conference Status. and asses declaration system for judges and* xeh crn%_t A . ,, v fBa. paUbMuLUM CUiUiuonali..

Associations. * New and transparent court administration system* Implement reorganization of Ministry of implemented in courts of all levels and modem,

Justice according to new law. automated case management system in place* Strengthen High Council of Justice, * Increased efficiency of functioning and operation of

including judicial inspectorate function. the bailiff service, develop training program and* Develop new court mfanagement and draft a handbook for police officers, to be widely

administration System. disseminated among the judicial police.* Strengthen the operation of the Public a Operational ADR Center for Commercial Disputes

Prosecutor Offices. in place* Strengthen the operation of the judiciary

police.* Establish an independent Altemative

Dispute Resolution Center for commercialdisputes.

(iv) increase quality of legal education. * Comprehensive reform program fully implemented, Legal and Judicial Reformsupported by twinning arrangement between the Project (ongoing)

* Implement comprehensive reform program Faculty of Law and a similar foreign law institution.for Faculty of Law, including * Surveys indicate higher qualification of graduatesimprovements in faculty, curriculum, from Faculty of Law.organizational, and administrationalstructure.

(v) Develop knowledge about laws in EU CARDS and CouncilEuropean Community. of Europe

(vi) Ensure effective operation of legal, DANIDAjudicial, and human right protection COE ECinstitutions. OSCE* Promote human nghts and good

governance, by increase effectiveness andpublic awareness of the Ombudsman. andthe Govemment Agent's Office

Country Partner Strategy Matrix (FY03-05) Annex B9Page 5 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance IndicatorsiTargets and Timing Donors

11. Reform the Judiciary (vii) Increase effectiveness of combating ITALYSystem (continued) crime, including ant-trafficking measures, in OSCE

full compliance with implementation of USAIDhuman rights.

III. Strengthen Local (i) Enhance and consolidate local autonomy. * Basic laws and regulations on local government PRSCs (FY03, FY04) USAID: Urban Institute.Institutions administration and fiscal autonomy passed.

* Complete and implemnent the basic Fiscal Decentralizationlegislation on territorial administration. Study (FY03)

* Identify sources of revenues for localgovemrnments and identify lines ofresponsibility on common and sharedfunctions.

• Transfer state properties to localgovemments.

(ii) Improve governance at the local level.

* Application of a series of measures toimprove local government's govemancestandards and practices, institutionalrelations of structures and capacities.

(iii) Increase capacity, transparency,accountability, and participation ofcommunities in local government.* Identify capacity needs for implementation

of the decentralization strategy.* Apply a series of measures and activities

focused on increasing public interest inlocal government.

B. Promote Sustainable Growth

I. Maintain Macroeconomic (i) Maintain high growth rate. * GDP increased by 18-21% in real terms over CEM - Competitiveness IMF - PRGFStability three yearsm (GPRS final indicator) and Sources of Growth

* Deepen structural and institutional (FY04)reforms.

* Facilitate increased domestic and foreignprivate investments through: (i)facilitating increased credit; (ii) narrowingthe difference between interest rates ondeposits and loans; (iii) privatizingremaining strategic enterprises.

* Promote increase of public investments toimprove infrastructure and human capital.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 6 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

I. Maintain Macroeconomic (ii) Deepen macroeconomic stability. * Macroeconomic stability maintained, with IMF IMF: PRGFStability (continued) PRGF targets met (maintain inflation at 2-4%

* Adhere to quantitative objectives of the annually).Bank of Albania.

* Maintain currency exchange stability.* Keep budget deficit under control.* Improve market instruments in monetary

policy.(iii) Deepen fiscal consolidation. * Budget deficit reduced from 9.1 % of GDP in 2000 IMF: PRGF

to 6.5% of GDP in 2004 (GPRS target).* Improve fiscal admninistration and expand

tax base, thereby increasing revenuesfaster than expenditures.

(iv) Improve public expenditure * Improve accuracy of revenue projections: % Public Administration DFID: Support for publicmanagement. deviation of actual from projected revenues (2000 = Reform Project (ongoing) expenditure managemnent;

-2.4%; target: no more than ± 5 %) Support for tax* Consistently plan revenues and * Maintain modest policy volatility: Average % administration reforn

expenditures. change from previous year's budget across functions* Ensure effective use of expenditures. (broad policy areas) (2000 = 1.4%; target s2%)

* Functional expenditure predictability: Average %deviation (in absolute value terms) of actualfunctional expenditures from budgeted (Establishbaseline for 2000; maintain that deviation or less infuture years)

* Budget unit expenditure predictability: Average %deviation (in absolute value terms) of actual budgetunits' expenditures from budgeted (Establishbaseline for 2000; maintain that deviation or less infuture years)

* Financial accountability: Number of days delay intabling audit of public finances with Parliament(2000 = 272 days; reduce this delay each year)

(v) Increase openness and improve external * Current account deficit reduced from 7.2% of GDP IMF: PRGFposition of the economy. in 2000 to 6.2% of GDP in 2004, with a rise in the EU

intervening years (GPRS target).* improve trade balance by considering * Level of currency reserves increased to 4.7 months

appropriate policies and instrument for of imports in 2004 (GPRS target).substitution of a part of imports and bycreating conditions for export promotion.

* Progress towards bilateral and multilateralfree trade agreements in the region andfurther afield.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 7 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

I. Improve Financial (i) Restructure and strengthen the financial * Sale of Savings Bank and INSIG concluded. Financial Institution IMF MAE (TA for bankIntermediation market. * Deposit Insurance Fund established and operating Building TA Project supervision, deposit

satisfactorily. (ongoing); Financial Sector insurance law,* Improve legislation on operation of a * Supervisory development plan satisfactorily Adjustment Credit (FY02) modernizing the payment

capital market. implemented by the Bank of Albania. system, anti-money* Privatize Savings Bank and state-owned * Satisfactory banking regulation adopted by Bank of iFC: SvB marketing and laundering law)

insurance company INSIG. Albania. potential equity investment;* Develop deposit guarantee scheme. potential pre-privatization US (TA for bank* Strengthen capacity to supervise the equity investnent in INSIG supervision, support to

financial system. MoF for anti-moneylaundering)

EBRD: potential equityinvestmet in SvB;potential pre-privatizatioynequity investment inINSIG

(ii) Support improved banking services. * Volume of credit increased on average by 30% Financial Institutionannually during the next three years. (GPRS Building TA Project US: American-Albanian

* Promote competition among banks. intermediate indicator) (ongoing); Financial Sector Bank* Prepare and imnplement real time gross Adjustment Credit (FY02)

settiement system (RTGS). * Interest rate spreads decreased.* Stimulate diversification of products and * Outsourcing of budgetary and fiscal functions

banking and financial services. tirough open auctions.* RTGS system initiated.

1mI. Facilitate Private Sector (i) Promote free enterprise. * Unemployment reducedfrom 14% in 2001 to 12% Private Sector Strategy GTZ (TA for insolvencyDevelopment in 2004. (GPRS intermediate indicator) Update (FY04); law)

* Facilitate procedures for business access. * Total investments increased from 1901/ of GDP in Financial Sector AdjustmentReform institution issuing licenses and 2000 to 21-22% of GDP in 2004; of which public Credit (FY02) USAIDpermits. Increase transparency of the tax investment increasedfrom 7% of GDP in 2000 toand customs administration authorities by 8% of GDP in 2004. (GPRS intermediate indicator) FIAS (Administrative Soros Foundationpublicizing orders and instructions; and Barriers Study) (cofinancinginstalling telephone lines for registering * Study undertaken on administrative barriers to Administrative Barrierscomplaints. investors' entry. Steps taken to streamline Study)

* Establish a public information office in administrative procedures to investors' entry (PRSCeach ministry. condition). IMF: conditionality related

* Improve conditions for credit. Establish a * Legal framework for resolution of debt and to administrative barriersCredit Information Bureau; improve commercial disputes completed (PRSC condition). studytransparency and market information by * Financial reporting improved (FSAC condition).improving legislation on accounting and * Satisfactory accounting law enacted andauditing and the control and auditing of amendments to relevant legislation (FSACinstitutions. Improve enforcement of condition).bankruptcy and collateral legislation. * Progress in implementation of institutionalLaw. development program for bankruptcy enforcement

and secured financing (FSAC condition).

Country Partner Strategy Matrix (FY03-05) Annex B9Page 8 of 27

Diagnosis and Development Government Strategy/Acdons Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

m. Facilitate Private Sector (ii) Strengthen the institutionalization and EUDevelopment (continued) formalization of the market.

* Improve the institutional and legalenvironment for free competition in themarket. Strengthen the CompetitionDepartmnent and Competition Commissionand adopt the necessary legal framework.Strengthen Regulatory Bodies.

* Improve relation of business with tax andcustoms administration. Improve taxreimbursement procedures. Computerizelocal tax offices. Train tax and customsadministration. Establish independentcommission for taxpayers' conplaints.

* Increase land security and access.Complete chartering of remainingcadastral zones.

(iii) Support the development of SMEs. * Regulations for Savings and Credit Associations Microcredit Project GTZfinalized and implemented. (ongoing)

* Improve the legal framework for a Regulations for Non-Bank Financial Institutions EBRD: Albaniandeveloping and strengthening the activity improved. Reconstruction Equityof microfinance schemes. Fund; SME Recovery

* Promote business incubators. Credit Une

EIm: indirect lending toSMEs through a GlobalLoan Facility

(iv) Promote foreign direct investment. * Investment Promotion Agency established. MIGA: TA for Investment IMF: conditionality relatedPromotion Agency to Investment Promotion

* Establish a Foreign Investment Promotion AgencyAgency as "one-stop service shop" for Private Industry Recoveryproviding services to foreign investors. Project (ongoing)

* Develop free zones and industrial parks.* Establish and operate a database to

facilitate decision making for foreigninvestors.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 9 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

III. Facilitate Private Sector (v) Export promotion. Private Industry RecoveryDevelopment (continued) Project (ongoing)

. Revise and improve legislation toencourage exports.

* Develop functions to guarantee exporttransactions though Albanian GuaranteeAgency.

* Promote the development of productquality control mechanisms.

IV. Improve Infrastructure Power * Load shedding reduced in accordance with the Power Transmission and Austria: Cofinancing Drin(i) Improve the management and updated Action Plan. Distribution Project River Cascadeperformance of the power sector. * Power losses reduced to 42% in 2002 and to the (ongoing) Rehabilitation Project.

levels in the updated Action Plan for 2003 and EBRD: Drin River* Amend the law on the regulation of the 2004. Power Sector Rehabilitation Cascade Rehabilitation;

electricity sector to eliminate the * Bill collection increased to 90% in 2002 to the and Restructuring Project Cofinancing PowerGovernment's role in setting prices. levels agreed in the updated Action Plan for 2003 (FY02) Transmission and

* Enhance the competencies and the and 2004. Distribution Project;financial resources of the Energy * The government import subsidy reduced in possible loan for thermalRegulatory Body. accordance with the agreed levels in the updated power plant in Vlore,

* Approve a new cost-based tariff electricity Action Plan for 2003 and 2004. subject to feasibility studystructure and mechanism for future * The first phase of the power sector reform program EIB: Transmission andchanges by the Energy Regulatory Entity. implemented. distribution system

• Adopt mechanisms for protecting * The number of consumers without meters reduced in strengthening in Vlore,consumers with low incomes against the accordance with the levels in the updated Action Elbasan and Shkoder;rise in electricity price. Plan for 2003 and 2004. Supply of meters

* Adopt and implement a policy document Germany (iW): Systemdescribing in detail the strategy to strning in stemrestructure and strengthen the legislative strengthening in southemand regulatory framework.

* Improve collection of electricity bills from Japan: Cofinancing Powerall consumers, especially households, and Transmission andbudgetary and non-budgetary institutions. Distribution Project and

* Reduce technical and non-technical losses Drin River Cascadein the electricity transmission and Rehabilitation Projectdistribution systems. Norway: Substations and

* Implement measures to reduce demand for materials; Supply ofelectricity by promoting conservation and metersthe use of altemative energy sources for Switzerland: Cofinancingspace heating and cooking. Power Transmission and

Distribution Project andDrin River CascadeRehabilitation ProjectUS: TA for power sectorreform and investmentevaluation

Country Partner Strategy Matrix (FY03-05) Annex B9Page 10 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

IV. Improve Infrastructure (ii) Expand capacity to import and generate Themial Power Project Sec above.(continued) electricity, and imnprve integration of the (FY03)

systern with the Balkan and Europeannetworks.

Prepare and irmplement least-costsinvestment program for rehabilitation ofexisting electricity generation facilities,the construction of new facilities, and thestrengthening of the electricitytransmission and distribution systems.Strengthen the electricity transmissionnetwork with the regional countries andthe European network.

Transort ;- i u r ur .npri and Ei-=r*gC%cy Road Project EU(i) Rehabilitate existing transpoit communication increasedfrom 244% of GDP in (ongoing); Trade andinfrastructure network. 2001 to 3.1% in 2004. (GPRS intermediate Transport Facilitation in EBRD: Road

indicator) Southeast Eumpe Project Rehabilitation Project; air* Complete the first stage of the * Increased community participation in the (ongoing); Road traffic control at Tirana

rehabilitation and construction of road maintenance of communal road network. Maintenance Project Airporttransport corridors. * National Road Administration (General Roads (FY02); Transport Project

* Increase financing for maintenance and Directorate) restructured. (FY04); Dutes Port Project EIB: Road Rehabilitation;the reorganization of maintenance services * Pavement managenment system operational. (ongoing). Air traffic control at Tiranaby contracting out routine mnaintenance. Airport; feny terminal at

* Undertake detailed studies and projects for Durres Port.construcbon of economically-feasibleroads, including Durres-Kukes-Morine Italyand Tirana-Klos-Peshkopi-Billate roads.

* Modemize mnanagemnnt and complete Kuwait Fundwork in the ports of Durres and Vlore andin the secondary ports of Shenguin and Italy (Secondary ports)Sarande.

* Realize the concessionary contract for theconstruction of a new passenger terminalin Rinas airport and the building of a newlocation site for the airplanes.

Country Partner Strategy Matrix (FY03-05) Annex B9Page II of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance IndicatorsTargets and Timing Donors

IV. Improve Infrastructure (ii) Comnmercialize transport services and Durres Port Project(continued) privatize state services. (ongoing)

* Imnprove the regulatory and institutionalframework.

* Establish the Albanian Naval Authority forthe management of port infrastructure.

* Improve the information and managementsystems.

* Update the inventory of the passengercarriages.Irmplemnent the master plan on air trafficcontrol system.

* Undertake a feasibility study and preparethe Master Plan to develop air transport.

V. Facilitate Rural Improve Rural Infrastructure * Incomes in rural areas increased. National Water Strategy ECHO (what project?);Development (i) Improve access to and quality of potable * Strategy for potable water supply and sewerage in (FY03); OPEC (what project?);

water and sewage systems. rural areas approved. Rural Development/Water Islamic Development Bank. Sanitary and Potable Water Agency in rural areas Project (FY05) (what project?)

* Approve the strategy for potable water established.supply and sewerages in rural areas.

* Establish the Sanitary and Potable WaterAgency in rural areas.

* Construct water supply lines andsewerages in the most critical rural areas.

* Encourage community participation inwater supply and sewerage projects.

(ii) Rehabilitate and improve main road axes, * Rehabilitate 1.800 /om of rural roads. (GPRS Community Works Projectelectricity supply systems, and intermediate indicator) (ongoing);telecommunication. Road Maintenance (FY02);

Community Works 11* Rehabilitate main roads linking (FY04)

municipalities and villages.* Reorganize and improve maintenance of

secondary and tertiary road network.* Imnprove electricity supply for rural

population, mainly by improving thegeneral condition of the supply network.

* Increase penetration of telephone serviceby introducing private operators.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 12 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS l Performance Indicators/Targets and Timing Donors

V. Facilitate Rural Facilitate Agricultural Growth * Agricultural growth rate of 5% maintained. Agricultural Services USAID: ImmovableDevelopment (continued) (i) Create functioning and secure land * Immovable property registration offices fully Project (ongoing); PRSC 11, Property Registration

markets and conditions for consolidation of functional in all disticts. HI (FY03, FY04) Projectproperty. * First registration of land completed. (PRSC Ill

condition). Improve functioning of immovable * Business plan for immovable property registration

property registration offices in all districts. system and for title security finalized and* Complete first registration of land, forests, implementation started.

and pastures. . Law on private property passed.. Prepare law on private property and review X Land consolidation activites are piloted in four

and improve legislaton on agricultural districts.land. * Fees for land registration reduced by 50%.

* Settle problem of ownership and * Time to register land transactions decreased by 50%cvZlXMs- .... sa-.fOlasuD. - to one day.

* Develop a system of decentralized(community-based) leasing of publicforest and pasture land.

(ii) Rehabilitate and restructure irnigation * Agricultural land with functioning irrigation and Second Irrigation and IFAD: Small-Scaleand drainage. drainage systems increased to 50% and 70% Drainage Rehabilitation Irrigation Rehabilitation

respectively of land requiring rehabilitation. (GPRS Project (ongoing); Project* Expend rehabilitation activities in lowland intermediate indicator) AgriculturelhTrigation Ill

and mountainous areas. * Irrigation facilities covering 60,000 hectares (FY05)* Restructure water enterprises and convert rehabilitated and upgraded.

into irrigation and drainage boards. * Drainage and flood protection facilities covering* Support establishment of Water User 50,000 hectares rehabilitated.

Associations and Federations. * Management of rehabilitated irrigation facilities* Train managers of WUAs and Federations transferred to Water User Associations.

in management and organization. * Water enterprises for Kavaje and Lushnje* Transfer irrigation works to WUAs. restructured (intermediate target), additional ten

district water enterpnses restructured (final target).* 500 WUA representatives trained. I

Country Partner Strategy Matrix (FY03-05) Annex B9Page 13 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS ___ Performance Indicators/Targets and Timing Donors

V. Facilitate Rural (iii) Improve access to and quality of services * Competitive Grant Scheme implemented. Agriculturai Services Netherlands: AlbaniaDevelopment (continued) in agriculture and livestock production. * Agricultural research institutions restructured to Project (ongoing); PRSC II, National Extension Project

transfer applied technology to small holder famis. Ill (FY03, FY04)* Strengthen advisory services and extend to * Certification process for seeds established. [FAD Mountain Areas

all areas of the country. * Seed regulations adjusted to international standards. Development Project* Support the development of an effective * Production of breeder seeds and multiplication of

pnvate extension service in areas with the basic seeds by seed research stations increased by Italy: Integrated Livestockhighest production potential in the 10% to 44 tons per research station. Project; Production,country. * Seed multiplication and trade fully private sector Preservation and Use of

* Restructure research agncultural based. Certified Saplings ininstitutions. * Extension service demand driven and adapted to Albania

* Establish the National Center of small holder needs.Agricultural Researches and Agricultural USAID: Support of DairyExtension Services. and Livestock

* Develop cost-recovery practices in Associations (Landagricultural research sector. O'Lakes); Assistance to

* Restructure and strengthen institutions of Albanian Agriculturalcontrol and certificatiorn of seeds and Trade Associationssaplings.

* Continue expansion of projects to improveveterinary prophylaxis and animal health.

* Consolidate the phytosanitary and cropprotection services - Limit public sectorrole to quality control and safe use.

(iv) Facilitate access to financial services. * Access to credit improved through increased Microcredit Project Switzerland (Microcreditcoverage of SCAs and increased bank lending to (ongoing) Project cofinancing)

* Establish conditions for expanding savings rural areas.and credit associations, village credit [FAD Mountain Areasfunds, and other financial intermediaries Development Projectin rural areas.

Ireland

USAID: OpportunityIntemational; Introductionof Small Business Creditand Assistance Program.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 14 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

V. Facilitate Rural (v) Improve fishery resource management * 6 community-based Fishery Management Pilot Fishery DevelopmentDevelopment (continued) and increase aquaculture activities. Organizations (FMOs) established. Project (ongoing)

*Major fishing ports and landing sites rehabilitated* Prepare a new Fishery Law. * Freshwater aquaculture restarted in 50 irrigation* Formulate and implement specific policies reservoirs.

to support the fishery sector and improve * Hatchery for Lake Ohrid Trout rehabilitated and itsaccess to inputs. staff trained.

* Support the resumption of fish production * Pilot Facilities for high value marine speciesactivity in available reservoirs. developed and operational.

* Establish high-value pilot aquacultureschemes in fresh waters.

* Assess feasibility of high-valueaquaculture in seawaters.

- L.otauLIis. t.s'.ah..y *VIII5anaIer-Lr

Organization to co-manage fishing portsand fishing resources with thegovernment.

* Rehabilitate fishing ports to improvehygiene and standards for navigation andfishery.

(vi) Increase the level of processing of * Impediments for FDI reduced as measured by Agricultural Services EU CARDS; Japan KR2agricultural, livestock, and fishery products. number of certifications needed. (ongoing)

* FDI increased by 25%.* Support training in food safety and quality

control, including laboratory services tocertify quality and safety standards.

* Promote foreign direct investment in agro-processing industry.

Country Partner Strategy Matrix (FY03-05) Annex B9

Page 15 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance IndicatorslTargets and Timing Donors

V. Facilitate Rural (vii) Improve conditions for trading * Lushnje and Vlore markets fully functioning. Plans Agricultural Services GTZ: Advice toDevelopment (continued) agricultural products in domestic and foreign for second phase markets finalized. (ongoing) Agricultural Policies;

markets. * Municipal market revenues increased by 500/% to Promotion of Self-HelpUS$30,000 per market per year. Organizations in Private

* Establish wholesale markets in Lushnje * Markets used ad infornation points for traders and Agriculture; Feasibilityand Vlore (and possibly in a second phase farmers. Study for TiranaShkoder, Korce, and Tirana) * Farmers' revenue from sales through markets Wholesale Market.

* Improve the structures of information, increased.marketing, and export promotion. Swedish International

* Improve the organization of product Developmnent Agency:markets and the inclusion of the Rural Market Developmentbeneficiaries in their management. Project, Korea District.

* Establish structures for collecting anddisseminating information about markets USAID: Agribusiness andto fannmers. Trade Association

* Promote the creation and strengthening of Development; Introductionagricultural marketing agencies in nural of Small Business Creditareas. and Assistance Program;

* Carry out studies on the possibilities to Private FoTestryincrease competitiveness of domestic Development Projectproducts on domestic and foreign markets.

* Improve legislation and administrativeprocedures related to exports.

(ix) Improve standards and control of USAID: Private Forestryproduct quality. Project; Dairy and

Livestock Development* Harmonize the legislation on foodstuff (Land o'Lakes)

products with that of the EU.* Complete legislation on quality, expiration

dates, and conditions for trading products.* Strengthen the border veterinary control

points.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 16 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjeclives of the GPRS Performance Indicators/Targets and Timing Donors

V. Facilitate Rural Improve the Management of Natural * Illegal logging reduced. Forestry Project (ongoing); ItalyDevelopment (continued) Resources * GDFP revenue increased by 100/6. Pilot Fishery Development

(i) Support the transfer of ownership or user * Six Fisheries Management Organizations Project (ongoing);rights to local communities. established and their codes of conduct (statutes) Natural Resources Project

operational. (FY05)* Strengthen structures of environmental

management at a national and local level.* Comnplete legislation on long-term leasing

of natural resources, such as pastures.* Continue transfer of forest and pasture use

or ownership rights to municipalities andrural communities.

* Introduce practices of joint management ofsea resources by rural communities thoughFribhry Management Organizations.

(ii) Improve capacity to manage natural Forestry Project (ongoing); Italy (cofinancing Forestryresources. Fishery Development Project).

Project (ongoing)* Improve management structures and USAID

control of forests and pasturesexploitation.

* Restructure forestry services to facilitatethe sustainable use of forests and pastures.

* Create legal and institutional frameworkfor managenent and use of fishing waterresources.

* Protect land from erosion thoughforestation and construction ofmountainous dams.

* Rehabilitate drainage to eliminate floodsin the country's northwestem areas.

Facilitate Non-Farm Development * Increase of nonfarm activities in rural areas, Microcredit Project IFAD Mountain AreasPromote non-farm activities in rural areas to measured by increased share in total income. (ongoing); Commnunity Development Projectincrease employment and incomes. * Framework developed for protection of natural Works Project (ongoing);

resources and cultivation of medicinal herbs. Community Works 11 DFID: Cofinancing for* Support the extension of microfinance (FY04) Mountain Areas

schemes-including SCAs-and advisory Development Projectservices.

* Carry out community works programs. ireiand* Broaden advisory services to non-farn

development. USAID: Opportunity* Development of niche markets, such as International.; Pnvate

agricultural tourism, environmentally Forestry Projectsustainable collection and processing ofmedicinal herbs, handicrafts, etc.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 17 of27

Diagnosis and Development Government Strategy/Acdons Selected Bank and Government Bank Group Instruments Actvites of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

V. Facilitate Rural Promote Rural Human Development * Incentives established for teachers and doctors to TA: Early Child UNICEF (Early ChildDevelopmnent (continued) (i) Increase access to and improve quality of work in rural areas. Development and Social Development and Social

services of education, health, and social * Decrease in tumover of teachers and doctors in rural Cohesion Post-Conflict Cohesion Post-Conflictprotection in rural areas. areas. Grant Grant)

* Rehabilitate school buildings and Rural Human Developmentequipment. Study (FY04)

* Continue implementation of programs forteacher training and retraining in ruralareas, mainly for teachers who do notteach in their subjects.

* Establish training and vocational trainingschools for qualification and restraining offree workforce.

* Establish new health centers andambulance clinics in rural areas.

• Improve access to emergency service anddental and pharmaceutical service in ruralareas.

* Improve mother and child care in ruralareas.

* Improve targeting of social support andeconomic assistance systems.

* Extend social and health insuranecschemes to all rural areas.

* Inplement the project for use of schoolbuses to transport pupils to school.

(ii) Strengthen scif-govemance. Fiscal Decentralization USAIDStudy (FY03)

* Implement decentralization plan asscheduled.

* Strengthen local government capacitiesthough training in preparation of regionaldevelopment policies and in delivery ofpublic services.

* Encourage community participation inI self-govemance. I

v I, s aIu.IsI .Juav., naLIAVA n 1V-V.q fIICA. DY

Page 18 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS | Performance Indlcators/Targets and Timing Donors

VI. Promote Sustainable (i) Strengthen environmental institutions and * Enforcement of environmental regulations Environment Project (FY03) DFID (increasing capacityEnvironmental legal framework. improved. of inspectorate andDevelopment * Concrete decentralization of environmental services improving monitoring)

* Restructure MoE, strengthen branches and to local govemment - quantified.inspectorate. * Integration of environmental considerations in EU: Regional Strategy for

* Define authority and responsibilities of sectoral policies - number of environmental units Treating Dangerous Wastelocal govemment units in the field of established.environment Norway: Impiementing the

* Define the role of line ministries, regional Re-constructioninstitutions for implementing policies, and Program on Environmentthe legal framework for environmentalprotection and monitoring of indicators. CIDA: policy advisor toEstablish environmental structure in the Ministry ofcentral institutions. Environment

* Increase nublic aware nes* onf ,ndparticipation in environmental protection.

(ii) Prepare and adopt long-term policy * Long-term policy documents prepared.documents, strategic environmentalassessments, and environmental policyinstruments.

* Prepare 2001 National Action Plan forEnvironment

* Prepare, approve, and implement law onCarbon Tax and Packaging Tax.

* Prepare norms on environmentaldischarges from stationary and mobilesources; norns on environmental quality(air, water, land).

Country Partner Strategy Matrix (FY03-05) Annex B9Page 19 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS _ Performance Indicators/Targets and Timing Donors

VI. Promote Sustainable (iii) Reduce pollution from existing * Two "hotspot" sites meet prescribed standards. Environnant Project (FY03) UNEP: Feasibility studiesEnvironmental Development resources. * "Hotspot" feasibility studies completed and for Hot Spots(continued) accepted by Govemment.

* Rehabilitate two of the five "hotspots." * Construction of sewerage facilities completed. SIDA: Sharra Waste Dump* Undertake a feasibility study for three * Enterprises selected and audits completed resulting Feasibility Study

"hot spots." in integrated permits issued.* Finalize the construction of two sewerage * Plans for regulation of construction and road EU: Regional Strategy for

treatment facilities. maintenance prepared and approved by Treating Dangerous Waste* Improve the environmental management Govemment.

of urban waste and establish two sanitary * Amount of arsenic eliminated at Fier Nitrogen Plant. DFID: Support to Ministrylandfills. of Environment to

* Implement five pilot projects for reducing strengthen capacity toindustrial discharges. implement and enforce

* Regulate the activities of the construction environrnental legislationsector and road maintenance in four citieswith high levels of dust in the air.

* Eiminate i,800 tons of arsenic solution inFier Nitrogen Plant.

(iv) Undertake measures to improve * Improved surface area. Butrint Park Management - IFADsustainable use of resources. * Increase protected areas surface in 3 years, from 6% IDF (ongoing); Natural

to 15%. Resources Project (FY05)* Implement three pilot projects applying * Forest areas rehabilitated, amount of fines collected,

combined measure against soil erosion. number of fires.* Increase protected areas * Number of visitors to Dajti National Park increased.* Designate Shkoder Lake ecosystem and * Amount of forest transferred to communities,

VIore Bay as Protected Areas. number of communes involved, population* Rehabilitate forests damaged by fires or impacted.

economic activity (in coastal areas, Kune- * Pilot community projects for sustainable localVaini lagoon system, Lura) natural resources implemented.

* Implement management plan for DajtiNational Park.

* Implement measures for transfer of nghtsof ownership or use of natural resources tomunicipalities/local communities.

* Implement six pilot community projectsfor sustainable use of local natural

I resources.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 20 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

VIl. Promote Urban (i) Improve access to urban infrastructure. * Public expenditures for public works (water, Municipal Water and KfWDevelopment sewerage) increased from 1.2% of GDP in 2000 to Wastewater Project (FY03); EU

* Increase access to infrastructure and basic 2% of GDP in 2004. (GPRS intermediate indicator) Urban Land Management Italyservices (e.g., potable water and sewerage) * Share of urban and suburban population with Project (ongoing);in areas with shortages and neglected access to potable water supply, sewage system, and National Water Strategyconmnunities. electric power increased. (GPRS intermediate (FY03);

* Adopt appropriate/affordable standards for indicator) Durres Port Projectthe poor in relation to access in (ongoing);infrastructure. * Access to essential urban infrastructure provided in Conununity Works Project

* Increase the use of conmmunity-based 20 neglected and/or under-serviced urban areas (ongoing);approaches. (subprojects), affecting approximately 20,000 Community Works II

* Increase the effectiveness of investment to families. (FY04)build infrastructure in areas with new * Develop an Infrastructure Management Plan forconstruction. Greater Tirana.

e Fo.,.u!satc stteg.c devek,pjinmi pians to . Prepare a national Urban Development Strategy.establish more direct links betweentrends/land development models,economic activities, especially in areaswith rapid growth, such as Tirana-Durrescorridor and the areas of Kanzemunicipality.

* Commercialize the water/sewageenterprises to improve operation andmaintenance and cost recovery.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 21 of 27

Diagnosis and Development, Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS . Performance Indlcators/Targe*s and Timing Donors

VIL. Promote Urban (ii) Guarantee land ownership rights. * Preliminary registration carried out for about 1 ,000 Urban Land Management USAIDDevelopment (continued) families in informal settlements in Bathore and (ongoing)

* Complete land property restitution and Lapraka on a pilot basisadopt compensation measures. * Urban development strategy completed setting out

. Amend law on property restitution to actions to regularizelegal informal settlements andfulfill government's legal obligations to further improve supporting legal frameworkproperty restitution claims and adoptapplicable measure for compensation ofproperty restitution.

* Complete registration of innmovableproperties.

* Legalize areas with infornal construction.* Explore practical models for regulation of

informnal settlements.* Collect accurate information on land

property status.* Fulfill legal requirenents to formalize

informal settlements.* Local application of paynent for

development of land for infrastructure ininformal settlements, based on the UrbanLand Managemnent Project.

* Adopt a new policy on public property.* Identify measure to give municipalities

legal ownership rights over public landand other municipal assets.

* Identify measures allowing municipalmanagement and use of lands and otherassets.

(iii) Develop the housing market and * Number of homeless reduced. (GPRS intennediate Urban Land Managenentincrease the access of the poor to housing. indicator) (ongoing)

* Undertake extended surveys on urban * Urban development strategy completed.poverty and development of data andinformation systems to assess future needsfor investments and policies.

* Mobilize resources for adoption ofindicators for urban development andpoverty reduction at the municipal level.

Countiry Partner Strategy Matrix (FY03-05) Annex B9Page 22 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS | Performance Indicators/Targets and Timing Donors

ViII. Improve (i) Continue liberalization of the * Liberalize the fixed telephone services. Privatization TA (FY03, Italy trust fund forTelecommunications telecommunications sector. * Improve the structure of service tariffs. FY04) privatization advisors

* Privatize Albtelekom telephone service company.* Increase the level of telephone penetration to urban

and rural areas.* Improve quality of service.* Consolidate the Teleconmmunications Regulatory

Body.* Extend intemnet service to educational and training

institutions to help businesses.

_______________________________ C. Promote Humian Developnment -

!. 9 su *..an ^ 7 uuuic Assistance Share of population In poverty according to the Social Services Delivery DFID: Support for LivingsSafety Net (i) Increase coverage of the poor. absolute poverty line (under S2 per capita per Project (ongoing); Standards Measurement

day) reduced from 46.6% in 1998 to 38% in 2004 Social Safety Net Review SurveyMDG Goal 1: Eradicate * Identify economic and social indicators (GPRS final Indicator). (FY03);Extreme Poverty and Hunger that can be used to assess the economic PRSC (FY02, FY03, FY04);(Target: Halve, between 1990 and social situation of the country's * Share of population in extreme poverty (under Poverty Assessment (FY03)and 2015, the proportion of regions. SI per capita per day) reduced from 17.4% Inpeople whose income is less * Allocate block grants from the central 1998 to 14% In 2004 (GPRS flnal Indicator).than one dollar a day) budget on the basis of the economic and

social indicators. * % of ndihme ekonomike beneficiaries who were* Determine how to monitor and meet poor and % of poor (including children) receiving

national objectives for poverty reduction social assistance.while framing and implementing effective * Proportion of ndhime ekonomike funds allocated topolicies for the decentralization of the families meeting national criteria for eligibility.social safety net scheme. * Recomn endations implemented on the design and

* Review the policy and legal framework for operation of social assistance programs resultingeffective safety nets. from the social safety net study.

* Carry out training of employees.* Establish a database on the economic and

social situation of social groups.* Harmonize economic assistance with other

forms of social protection.* Gradually target the system at a minimum

living standard.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 23 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

1. Strengthen the Social Safety Social Care * Satisfactory policy implemented to make the Social Services Delivery DFID: Social policyNet. (continued) (i) Extend social services coverage to the financing of conmunity-based services sustainable Project (ongoing); PRSC adviser to the Ministry of

whole county in accordance with the (PRSC II) (FY02, FY03, FY04) Labor and Social Affairsquantitative and qualitative needs of * Satisfactory Govemrnment strategy adopted for for establishing standardsvulnerable social categories or social reducing and ameliorating poverty that specifies for social care services andcategories at risk. Inmprove the delivery and how the roles for conumunity-based social services, monitoringquality of social services. pension programs, and cash economic assistance

policies will be coordinated within an environment* Prepare social service strategy. of increasing decentralization. (PRSC III). Improve legislation for full

decentralization of services.* Training service-providing staff and

administrators.* Cooperate with NGOs.* Harmonize with economic assistance

scheme.* Establish daily local centers to care for

categories with specific needs.

Sodal Insurance * Contributor-benefsciary ratio in social insurance PRSC 1, 11, Ill (FY02, FY03,system increased. (GPRS intermediary indicator) FY04)

(i) Increase the number of contributors and * Initial package of recommendations implementedreduce the budget subsidy. from the social safety net study. (PRSC 111)

. Pension policy package submitted to Parlianent to* Include the rural population in social address overall, longer-term projected problems of

insurance contribution, coverage, affordability, equity, and adequacy in the* Review structure of pension differences. pension system, including a schedule of specific* Improve legislation. changes in such parmeters as indexation,. Explore scope for merging urban and rural contribution rates, and contribution ceilings. (PRSC

schemes. 11)* Improve control and monitoring. * Satisfactory implementation of agreed scheduled* Introduce social security number. parametric changes in the pension system, including* Review current work processes and at a minimum a phased increase in retirement age

computerize required information system. and appropriate indexation arrangements. (PRSCiI

* 3-year work and investment program prepared forimproving the ongoing perfomiance andadministrative efficiency of the Social InsuranceInstitute. (PRSC 111)

Country Partner Strategy Matrix (FY03-05) Annex B9Page 24 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS | Performance Indicators/Targets and Timing Donors

11. Improve the Quality of (i) Increase the effectiveness and financial * Education expenditures as a % of GDP increased Education Refonn Project University of Boccone,Education efficiency of public education. from 3.4% in 2001 to 3.7% in 2004 (movement (ongoing); Education Italy

toward OECD average of 5.5%). (GPRS Reform Project 11 (FY04);MDG Goal 2: Achieve * Prepare an administrative and financial intermediate indicator) PRSC 1, 11, III (FY02, 03,universal primary educaton reform strategy: streamline the function of * Number of pupils per teaching personnel declines. 04)(Target: Ensure tli, by the sector at the central, local, and school (GPRS intermediate indicator)2015, children everywhere, level; establish or consolidate new . Full staffing and budget consistent with approvedboys and girls alike, wIll be stnuctures in MoES engaged in planning, organizational functions of: (i) policy analysis,able to compkte afuil policy analysis, human resource, and planning, and monitoring; (ii) financialcourse ofprimary financial managemnent; establish a GPRS management; (iii) humnan resources management.schoolIng). monitoring unit; gradually imnplement (PRSC condition)

administrative and financial reform * First Annual Education Perfonnance ReportMDG Goal 3: Promote starting with pilot projects. published by Policy analysis unit. (PRSC condition)geder equalty d * Prepare and implement a training procramcp.,,..cr ,vamcn (Target: for managing staff at central, local, andEUminate gender dispary i school levels with the aim of increasingprimary and secondary the ability of the employees to carry outeducadion by 2005 and to aU their new functional responsibilities.lewes of educaion no laterthn 2015).

(ii) Increase attendance of basic education. * Enrollment In 8 year education Increased from Education Reform Project90% In 2000 to 94% In 2004. (GPRS flnal (ongoing); Education

* Analyze factors affecting demand for basic Indicator) Reform Project 11 (FY04);education by sub-groups of families * Secondary education increased from 40% in PRSC 1, 11, In (FY02, 03,inclined to abandon school. 2000 to 50% In 2004. (GPRS flnal Indicator) 04)

* Pilot programs aimned to increase school * Average schooling period Increased from 9.5attendance by these sub-groups. years in 1 99 to 10 years In 2004. (GPRS final

* Implement pilot program on the use of Indicator)school buses in 5 areas accessible for thisservice. * MOES publishes data showing progress in meeting

* Prepare and implement legal package for targets for gross enrollment rates (PRSC condition)financial support to children of poor * Free textbooks to low income households providedfamilies. under accepted subsidy scheme. (PRSC condition)

* Continue rehabilitation of schools in urban * Information on schools rehabilitated in the perviousareas and establishment of new schools in year published in Albanian newspapers. (PRSCsuburban areas. condition)

Country Partner Strategy Matrix (FY03-05) Annex B9Page 25 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

(iii) Increase quality of teaching personnel. * Share of teachers in K-8 and secondary schools Education Reform Project Italian Cooperationwithout adequate education declines. (GPRS (ongoing); Education Program and OPEC Fund

* Increase and restructure wages of teaching internediate indicator) Reform Project 11 (FY04) for Intemationalpersonnel by 12% a year. * 2003 salary increase based on a human resources Development

* Increase of financial compensation for management plan. (PRSC condition)teachers working in disadvantageous * Strategy and implementation plan to attract and OSI AEDPareas. Preliminary analysis of factors to retain qualified teachers prepared by Humanattract good teachers to rural areas or Resources Management Unit. (PRSC condition)difficult suburban areas.

* Prepare and test training program forteachers without adequate education.

* Identify teachers to be trained, trainingplanning, and implementation.

11. Improve the Quality of (iv) Increase enrollment at secondary * Secondary vocational education and training (VET) PRSC (FY02, 03, 04) GTZF.ducation (continued) vocational schools and improve their market created or restructured in selected pilot sites, based Swiss Agency for

orienration. on a strateg and implementation plan to pilot Development andmodem VET programs that reflect regional labor Cooperation

* Decentralize vocational education market needs. (PRSC condition) AEDPcumcula.

* Prepare legislative framework forestablishment of vocational schools onbasis of regional planning of labor marketdemand.

* Publish teaching and leaming matenalsupporting new curricula.

* Restructure or establish 5 vocationaleducational and training boarding schoolsfor the benefit of the rural and suburbanareas.

* Prepare, pilot, and implement retrainingfor vocational school teachers.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 26 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Tining Donors

Ill. Develop an Effective (i) Improve the effectiveness and efficiency - Health expenditures as % of GDP increasedfrom Health System Recovery DFID: Technical Supportand Sustainable Health of use of resources. 3% in 2001 to 3.2% in 2004. (GPRS intermediate and Development Project to Policy and PlanningSystem indicator) (ongoing); Unit, Assistance to Health

* Train personnel to be engaged in the * Corruption reduced. (GPRS) Health 111 (FY05) Insurance Institute.planning process. * Process of planning, resource distribution, and PRSC (FY02, FY03, FY04)

* Undertake studies to more accurately monitoring improved at central and local levels. WHO: Support to theassess the needs in the most important (GPRS) Health Care Reform

MDG Goal 4: Reduce child areas of the system. * Health budget targeted towards priority needs within Process andmOrtaly(warget: Reduce by * Prepare two regional master plans. Government's health strategy. Reorganization of MOH.213, between 1990 and 2015, * Inmprove the methodology for funding the * Government decree issued to institutionalize thethe under-five mortality system, primarily focusing on upgraded budget tracking and reporting system, CIDA: Advisor to Healthrate). strenghening the HIS. including the System of Health Accounts. Policy and Planning Unit.

* Continue decentralizing authority. * Medium-term strategy issued that identifies priorityMDG Goal 5: Improve E :is,a - nwisv i in the iMinistry policy retorns and programs to improve thematernal health (Target: of Health. institutional capacity of the health insurance system.Reduce by 3/4, between 1990 * Prepare and implement a conruption * Government budget allocation for child vaccinationand 2015, the maternal reduction plan. and female IT and Rubella coverage increased tomortality ratio), compensate for reduction in donor contributions.

(PRSC 11)

MDG Goal 6: Combat (ii) Improve access to and quality of health * Number of doctor, nurses, pharrnacists, and Health System Recovery French Cooperation:HIV/AIDS, malaria and services. hospital beds per 1,000 inhabitants increased, and Development Project Masterplan of 10 Regionalother diseases (Target: Have (GPRS intermediate indicator) (ongoing); Hospitals in Albaniahalved, by 2015, and begun * Construct and rehabilitate about 80 health * Achieve coverage of 100% of territory with health Health III (FY05) SIDA: Strengtheningto reverse the spread of centers and about 400 outpatient clinics, centers and 50% of the territory with outpatient PRSC (FY02, FY03, FY04) Management andHIVIAIDS, and the supply them with necessary equipment, clinics. (GPRS) Maintenance System forincidence of other major and train their personnel. * National Standards and Guidelines on health the Albanian Healthdiseases). * Transform 5 major hospitals into regional services prepared as the basis for health planning Services.

hospitals. and rationalization strategy. USAID: Strengthening* Motivate personnel employed in rural and * Health service rationalization plan developed for Primary Care Services at

remote areas to slow their transfer to large one region to improve quality of and access to District Level, Nursingcities. health services, and local capacity developed to Initiative.

replicate planning to other regions. SADC. Training of* Revised contract approved between the Health Albania nurses, midwives;

Insurance Institute and the Tirana Regional Health Medical Equipment inAuthority that introduces elements of performance- Shkodra.based remuneration system. (PRSC 111) ECHO: Vanous health

service rehabilitationprograms.DFID: Support to theAlbanian Order ofPhysicians.

Country Partner Strategy Matrix (FY03-05) Annex B9Page 27 of 27

Diagnosis and Development Government Strategy/Actions Selected Bank and Government Bank Group Instruments Activities of OtherObjectives of the GPRS Performance Indicators/Targets and Timing Donors

(iii) Improve health indicators though * Infant mortality reduced by 15% from 21 per Health System Recovery USAID: Nationalspecific interventions. 1000 live births in 2000 to 17 in 2004. (GPRS and Development Project Reproductive Health

flnal indicator) (ongoing); Survey, MCH Technical* Aim for 1000/o vaccination coverage of * Maternal mortality reduced by 25% from 20 per Health IIl (FY05) Assistance.

children under 2. Extension to other age 100,000 live births In 2000 to 15 in 2004. (GPRS PRSC (FY02, FY03, FY04) UNICEF: MCH, Matemalgroups and gradual inclusion of new EIP final indicator) and Child Nutntion,vaccines. Gradual involvement of MoH in * Incidence of dlarrheal cases reduced by 50% Immunization.program funding. from 1200 per 100,000 inhabitants In 2000 to 600 UNFPA: STDs/HIV/AIDS

* Implement programs to reduce/prevent per 100,000 Inhabitants in 2004. (GPRS flnal Prevention Program,TBC, HIV-AIDS, STD, etc. indicator) Reproductive Health

* Implement programs to reduce demand for Programs and Surveydrugs, alcohol, and tobacco. * Child immunization rate above 90%; female TT WHO: TB DOTS Program,

* Reduce diarrheal cases and epidemics by coverage rate over 90%, and Rubella coverage rate Disease Surveillanceimproving a regional surveillance system for women 15-35 years over 60%. System, Communityto control quality of potable water and * Tracking of HTV/AIDS and TB cases reported Mental Health Systemfoodstuffs. through expanded surveillance system among high- UNDP: HIV/AIDS

. Prepare strategy on mental health. Extend risk population. Prevention.SHO project to four additional districts. * Priority health promotion programs identified in the CIDA: HIV/AIDS

c Implement information system for public National Action Plan implemented. (PRSC III) prevention, Reproductivehealth programs and indicators. Health, Elderly Health

Care.

Annex BIOPage 1 of 1

AlbaniaSummary of Development Priorities

Country Major issue ° Country Bank Reconciliation

Network area performance' priorityc priority' of country andBank priorities d

Poverty Reduction & EconomicManagement

Poverty reduction Fair Rural poverty High HighEconomic policy Good High Moderate IMF has leading role.Public sector Fair High Moderate EU has large role.Gender Fair Trafficking Moderate Moderate

Human Development DepartmentEducation Fair Enrollment High HighHealth, nutrition & population Fair High HighSocial protection Fair Targeting Moderate Moderate

Environmentally & SociallySustainable Dovelopment

Rural development Fair Land market Moderate ModerateEnvironment Fair Moderate ModerateSocial development Fair Moderate Moderate

Finance, Private Sector & InfrastructureFinancial sector Good High HighPrivate sector Fair Environment Moderate ModerateEnergy & mining Poor Power outages High Highinfrastructure Fair Sustainability Hign Moderate Other donors active in some sectors.

a. Use 'excellent," 'good," 'fair," or'poor."b. Indicate principal country-specific problems (e.g., for poverty reduction, 'rural poverty;" for education, 'female secondary completion;" for environment, 'urban air pollution').c. To indicate pnority, use 'low," 'moderate,' or'high."d Give explanation, if pnorities do not agree; for example, another MDB may have the lead on the issue, or there may be ongoing dialogue.

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Report No. 24189 ALBType: CAS