Document ofThe World Bank

Report No:

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING

OF

BUSINESS ENVIRONMENT REFORM AND INSTITUTIONAL STRENGTHENING PROJECT

IN THE AMOUNT OF EURO 4.4 MILLION UNDER IBRD 4841 ALB(US$5.6 MILLION ORIGINAL EQUIVALENT)

AND

IN THE AMOUNT OF SDR 2.5 MILLION UNDER IDA 4239 ALB(US$3.7 MILLION ORIGINAL EQUIVALENT)

(Board Approval Date October 26, 2006)

TO

ALBANIA

January 11, 2012

Private and Financial Sector Development UnitSouth East Europe Country Unit Europe and Central Asia

ABBREVIATIONS AND ACRONYMS

ARCS Administrative and Regulatory Cost SurveyCPUDA

Competition Policy UnitDirectorate for Accreditation

GDS General Directorate of Standardization EU European Union GDM General Directorate of Metrology METE Ministry of Economy, Trade and EnergyMSTQPAD

Metrology Standards Testing and QualityProject Appraisal Document

PDOs Project development objectivesRIA Regulatory Impact Assessment

Regional Vice President: Philippe H. Le HouerouCountry Director: Jane ArmitageSector Manager: Lalit Raina

Task Team Leader: Evis Sulko

ALBANIA BUSINESS ENVIRONMENT REFORM AND INSTITUTIONAL STRENGTHENING

P096643CONTENTS

Page

A. SUMMARY.......................................................................................................................... 4B. PROJECT STATUS AND REASONS FOR THE PROPOSED CHANGES...................4C. PROPOSED CHANGES................................................................................................... 11D. APPRAISAL SUMMARY................................................................................................ 13

Annex 1 : Result Framework (November 2011)...........................................................16Annex 2: Action Plan......................................................................................................17Annex 3: Revised Result Framework............................................................................18Annex 4: Revised Allocation of Loan and Credit Proceeds and Revised Project Costs...........................................................................................................................................20

ALBANIA - BUSINESS ENVIRONMENT REFORM AND INSTITUTIONAL STRENGTHENING PROJECT (THE PROJECT) (P096643)

RESTRUCTURING PAPER

A. SUMMARY

1. The purpose of the second level restructuring is to extend the implementation period due to delays with the key investments of the project (construction of the metrology building under Part B, Development and Strengthening of the Metrology Standards, Testing and Quality – MSTQ – system) and adopt the project to changed circumstances. The following changes are proposed: (i) extending the closing date from January 15, 2012 to June 30, 2012 (the borrower through the official letter requested an extension until 30 May 2012, while the team decided to ask for an extension until the end of the fiscal year 2012 in order to avoid any potential risk of asking for an additional month in case needed) to complete the remaining activities, major ones of which include the construction of the metrology laboratory and procurement of equipment for it, (ii) addition of a new activity under Activity 1 of Part A (Facilitation of Business Entry and Operations)1 in line with the project objectives to establish an institutional and legal framework for inspections reform and to advance the inspection reform launched under Part A.1; (ii) substituting the Administrative and Regulatory Cost Survey (ARCS) with small surveys to measure outcomes under Activity 1 of Part A and removing this as a dated covenant; (iii) dropping formally assistance to a Competition Policy Unit (CPU) under Activity 2 of Part A as it was de facto dropped during the negotiations; (iv) reallocating savings from Consultants Services and Goods Categories, as well as the Unallocated Amount to Works Category for the contract for construction of the metrology building, respectively, under Part B to finance unanticipated cost overruns and underestimated costs. The project costs, financing and disbursements estimates are revised accordingly. The existing PDO and the outcome targets do not need to be changed as a result of the above changes in the scope and design. No additional safeguards are triggered as a result of the restructuring.

B. PROJECT STATUS AND REASONS FOR THE PROPOSED CHANGES

2. Overall project outcomes. The project continues to be highly relevant for the Government’s efforts to advance EU accession, improve the investment climate in Albania and contribute to strengthening enterprises’ capability to increase exports2. The

1 In the Financing Agreement, Component 1 is called Part A (Facilitation of Business Entry) that consists of assistance to regulatory reform (Part A.1. or Component 1.A in the Project Appraisal Document, PAD) and Competition Policy Unit (Part A.2 or Component 1.B in PAD).2 MSTQ infrastructure is an important mechanism that can facilitate trade and develop competitiveness. International harmonization and recognition of the MSTQ system are of critical importance for export competitiveness, as well as to reduce technical barriers to imports. International recognition of the tests done in a country is based on many factors, including necessary testing facilities; calibration facilities to calibrate the testing equipment used; existence of national reference measurement standards, so that all the measurements done in that country use the same references; up-to-date and internationally compatible

Project Development Objectives (PDOs) is rated as moderately unsatisfactory, but continue to be achievable and could be achieved to a moderately satisfactory level by June 30, 2012, the proposed extended closing date. However, this depends to a great extent on the completion of the key investment under the project – construction of the metrology laboratory (42% of the project costs) – under Part B (Development and Strengthening the MSTQ system). The new infrastructure is important in the assessment of the overall outcome because the metrology (measurement) system is the most costly component of the MSTQ system that the project has helped develop and because the existence of appropriate facilities is also essential for Albania to be able to benefit from aid from other donors in terms of the equipment and training needed to develop a quality infrastructure in line with international standards3. The GDM has been able to increase the number of calibration services provided to 600 (YTD) in November 2011 compared to the annual (current end-of-project) target of 650 as of end-2011 and compared to 460 in 2010 and to 350 in 20094. However, because of the delays with the new infrastructure, the GDM has not been able to increase the number of kind of measurements in which it provides calibration services to the targeted extent. Once the equipment has been installed into the new laboratory in May 2012 and staff trained under the existing long-term consultancy by the end of the proposed closing date, this target would be met. Most importantly, GDM would be able to benefit from the other donor assistance. With regards to the business regulatory reforms (the PDO related to Part A, Facilitating Business Entry and Operations), while the project expects to complete the survey to assess the PDO by May 2012, Other related reports like Doing Business, Global Competitiveness Index, and BEEPS might be used to assess country’s business environment. The completion of the legal framework for the inspection reform and furthermore the pending adoption of the Decree instituting the Regulatory Impact Assessment system (RIA) designed with project support under Part A will further strengthen the significance of the results achieved to-date. The results achieved up-to-date are shown in Annex 1 and summarized briefly below.

3. Implementation progress. Overall implementation progress has improved moderately satisfactory from May 2011 in terms of result data in Annex 1, procurement and disbursement and was recently upgraded to moderately satisfactory. The value of

technical regulations; up-to-date and internationally compatible standards which are necessary for tests and technical regulations; internationally compatible system for the certification of quality systems, such as ISO 9001; internationally compatible technical inspection and market surveillance system; internationally compatible accreditation system in order to accredit calibration and testing laboratories, certification, inspection and personnel training organizations.3 Implementation of the MSTQ strategy designed under the Project will have considerable impact on the development of Albania. Before the project, Albania lagged behind in the MSTQ area in the Balkans and in East Europe. The Government therefore planned large investments in the MSTQ infrastructure with donor assistance over the next 15 years in order to narrow this gap and thus improve trade and attract more foreign direct investment. While financing is received from other donors (e.g. EU and GTZ) none of these donors provide funding for construction works. At the same time, the purchase of equipment and training of GDMC staff is, for the most part, conditional on the existence of modern metrology laboratories. Because of these reasons, Albania has not been able to take full advantage of EU financing for metrology infrastructure in the past and this problem will continue in the future if new metrology laboratories are not built. This is why the BERIS project agreed to finance the construction of new metrology laboratories.4 This is the PDO indicator for the PDO related to Part B, increasing enterprise’s sector capability to export. The project has financed TA (including a public awareness campaign) and some equipment to existing facilities in addition to the EU assistance.

signed contracts increased by 10% from 71% in May 2011 to 82%5; the value of contracts under procurement is at 3%; and the remaining 15% is allocated to activities under Part A.1 and Part B that are advanced in procurement process and could be contracted in January 2012 after approval of the restructuring6. As of January 4, 2011, disbursements under the IBRD loan 48410 increased by 10% from 29% in May to 39% of the total loan7 and disbursements under the IDA Credit 42390 increased from 57% in May to 62% of the total credit. Due to some delays in procuring complex items and unanticipated delays in construction and overambitious construction schedule, disbursements are lagging behind the disbursement schedule revised in the 2010 restructuring (extension) and the FY12 disbursement ratio is slightly under ECA average at 10.5%. However, it should be noted that, since so many activities depend on the completion of the construction of the metrology laboratory or are being carried out in line with the construction (equipment, furniture, supervision of construction, TA to the GDM), a large amount of disbursements would be made only in spring 2012. The following provides more details on the progress and remaining work to be done.

4. Part A: Facilitation of Business Entry and Operations – Business Regulations: This component has made satisfactory progress, and apart from the surveys and proposed new small consultancies (see para 6), the project work has been completed. Results and outputs include so far8: (a) establishing a light regulatory impact assessment (RIA) and monitoring and evaluation system for regulatory reforms, training of government officials in the RIA techniques and promoting RIA among a considerable number of public and private stakeholders, piloting the use of RIA for two laws and assessment of options for inspections reform; (b) establishing the Electronic Registry of Business Legislation that became fully operational on February 19, 2011; and (c), based on the RIA on options for inspections reform, the review of the institutional framework for inspections and the design of a legal and institutional framework suitable for Albania. An Action Plan for inspections reform was approved by the Task force for Regulatory Reform in July 2010; the Inspections Law was adopted by the Council of Ministers in March 2011 and approved by the Parliament in July 20119.

5. Reasons for Changes under Part A: These results could be further strengthened and better sustained during the extended project implementation period by building on the work financed by the project so far through the following activities:

6. The inspection system reform is one of the priorities of the Government of Albania under the Regulatory Reform agenda that the Project supports. There is a significant amount of work to be done to advance the inspections reform. According to

5 This included the largest equipment package (Euro 0,7 million) for GDM and one small consultant contract.6 This includes furniture package (Euro 355K) expected to be contracted in February 2012; 3 equipment packages of Euro 240K in total expected to be contracted in January 2012; some small consultant contracts and an IT contract, including the four new assignments of Euro 200K to support inspections reform.7 This includes withdrawal applications in the amount of $0.3 mn that is under the Bank approval.8 There was an intention to support the Government in putting in place institutions and procedures for licensing and inspections that facilitate business operations. At the request of METE, the project did not support work on licensing.9 The institutionalization of RIA is pending approval of the Council of Ministers of the Decision 584 on Amendments to Regulatory Impact Assessment. It is expected that it will be adopted by April 2012.

the model for inspection outlined in the Inspections Law, the new inspection organization will include a small new central structure (General Inspectorate) that will oversee inspectorates in line ministries, coordinate works of various inspectorates, and oversee the entire inspection reform. The General Inspectorate and Inspectorates within the line ministries need training in applying the new principles, procedures and ethics; inspectorates in line ministries need to be restructured and merged from 33 to less than 20, and over 50 sectoral technical regulations need to be amended to reflect the new organizational structure and the Inspection Law. To build on the Project work, there is also a need to further strengthen METE’s capacity for providing RIA training and to strengthen monitoring of regulatory reform processes by monitoring establishment and issuance of licenses at national level and introducing regulatory impact analysis in the legislative practices in Albania.

7. In this regard, the Bank team agreed with METE the inclusion of four new consultant services assignments under Part A.1 to advance the inspections reform: (a) a legal advisor for drafting rules of organization, functioning and the detailed functions of the Central Inspectorate of Albania; (b) a legal advisor for drafting amendments to laws and regulations enabling uninterrupted functioning of merged inspectorates and Central Inspectorate; (c) an advisor for drafting regulations enabling merging of inspectorates and their internal regulations; and (d) a senior international advisor for inspection and regulatory reform in Albania10. These consultancies would help build capacities and support building regulatory capacities and developing a regulatory management system for inspections. Some of the proposed activities were launched under the large consultancy completed under Part A.1, but a lot of work remains and some can be completed before the proposed new closing date.

8. In addition to additional work to advance inspections reform, the extension of the closing date would help strengthen project outcomes in training of government officials in the RIA techniques (see the result framework in Annex 1). Namely, METE is planning to organize systematic training of Government officials in RIA techniques by trained METE staff and drafted a training plan in June 2011 (this activity will be funded by METE). These activities would contribute to meeting the training targets for Part A.1. The training could be carried out once the Decree institutionalizing RIA has been adopted (now expected by April 2012).

9. Administrative and Regulatory Cost Survey (ARCS). During May 2011 mission, the Bank team and METE agreed not to carry out the ARCS, as planned in the PAD and as revised in the amendments of the legal agreements, but a small business survey measuring the key outcome indicators and PDOs and a public administration survey to monitor and evaluate reform progress within the public administration. The new business survey will include key questions from the ARCS related to project activities. The reason for this change is that, as the implementation of Part A.1 was mostly completed in the end of 2010, the adoption of the Decree instituting the RIA

10 This activity includes guidance on the implementation of the reform, training, preparation of a training material on RIA for civil servants as a structured course to be delivered by METE staff that has been already trained in RIA, drafting guidelines/paper for basic methodology and instructions to instill monitoring and evaluation system in legislative system in Albania to control for the flow of new business regulations or formalities.

system was delayed and it was anticipated that it might be even more delayed (adoption is now expected by April 2012). It became clear in May 2011 that, in order for the survey to assess the ultimate project results, including the impact of the delayed adoption of the Decree, there might be no time to carry out a full ARCS.

10. It should be noted that the launch of the ARCS through hiring a survey company is a dated covenant due December 10, 2011, as revised. The covenant is overdue because the company has been selected but the contract is not signed (pending the extension of the project).

11. Originally, the project had intended to carry out two ARCSs – the first at mid-term and the second at the end of the project - and small business surveys to assess project outcomes under Part A.1. Based on the amendment of the legal agreements dated January 30, 2008, the deadlines for the two ARCS that were dated covenants were postponed by nine months11 because it was too early to conduct the planned assessment of the impact of the regulatory reform for two reasons: (a) an investment climate survey that overlapped with ARCS in several areas was ongoing and it was thus more appropriate to conduct the ARCS later on; and (b) implementation of Part A.1 had experienced some delays (the terms of reference for selection of the consultant for implementing Part A.1 had only been cleared by the Bank in July 2007). Further, through an amendment of the legal agreements dated January 28, 2010, the Bank and the Borrower formalized the agreement made during the March/April 2009 mission to carry out only one ARCS at the end of the project and drop small business surveys for a number of reasons: (a) due to a number of World Bank and other surveys ongoing in Albania12, carrying out an ARCS at mid-term might have an adverse effect in terms of response rates and quality of the data collected; (b) other surveys that overlapped to a large extent with ARCS had provided sufficient data for monitoring business regulatory reforms; and with regards to the small surveys, (c) the one ARCS at project-end would be sufficient to measure the progress towards the PDO; and (d) there was available additional information based on the M&E work carried out for the project by METE with an M&E consultant hired under the project. At that time, the launch of the ARCS had thus been overdue (it was due on 12/30/2008), as noted in the ISR of February 2009, and METE was expected to submit a request for its extension in accordance with the revised implementation timetable for the component agreed during the October 2008 mission13. The request from the Government was not received but, as said above, during the March/April 2009 mission it was agreed to launch only the second ARCS by December 10, 2010, before the project closure, and to drop small surveys. Finally, based on the amendment of the legal agreements dated August 31, 2010, the deadline for launching the ARCS was postponed by one year to December 10, 2011 to assess the outcomes of Part A.1 at the end of the new closing date approved at that time.

12. Part A.2: Facilitation of Business Entry and Operations - Competition Policy

11 To December 30, 2008 and December 31, 2010.12Only the World Bank surveys included ARCS 2005, 2007-2008 ICA survey, 2008 BEEPs survey, annual Doing Business survey.13 Activities under Part A.1 had progressed (the consultant contract was expected to be signed in the end of 2008 based on the October 2008 mission)

Unit. The initial project design included assistance to build the capacity of the CPU to assess the impact of regulations on market competition. The CPU was supposed to undertake such assessments both for existing and new regulatory measures. This activity was, however, dropped in negotiations, and the project never financed any direct assistance to the CPU because the CPU was, in practice, a small unit within the Department of Market Policies (DMP) (the original Project implementation unit) in METE that was soon merged with other functions in DMP. Currently METE does not foresee a need for specific capacity building under Project financing to assess impact of regulations on competition.

13. Part B: Development and Strengthening of the MSTQ System. Progress in Part B has been uneven with good results in preparation of a medium term strategy for quality infrastructure, capacity building in the beneficiary agencies in the areas of metrology, standardization and accreditation and activities for raising public awareness of MSTQ and increased use of calibration services provided by GDM (the largest project beneficiary). The key investment – construction of the metrology laboratory for the General Directorate of Metrology (GDM) – has been delayed since the project extension of August 2010 ) and is the reason for non-achievement of the target for number of kind of measurement services GDM is able to provide calibration services (see Annex 1 and para 2). At the same time, 80% of the civil works and 10% of technical and electrical works (that account for a major part of the contract) have been completed. Implementation of related activities has advanced since May 2011, although with some delay: the largest equipment package (ICB III) valued at Euro 0.6 was contracted in November 2011; and procurement of total four equipment and furniture packages estimated at about Euro 1 mn are expected to be contracted in January/February. Regarding the existing laboratories, two lots of equipment at Euro 150,000 have been delivered to the GDM. Thanks to these and EU investments in metrology equipment, GDM has increased provision of calibration services although not in line with targets due to the delays with the construction (see Annex 1). Due to the recent progress since May 2011, the component is rated moderately satisfactory. The GDM is expected to meet the targets for the number of kind of measurements in which it is able to provide calibration services upon completion of the lab.

14. Reasons for Changes. Unless more implementation time is granted, the project will not meet its development objectives with respect to the development of the MSTQ system. Completion of the metrology laboratory on a timely basis is critically important for Albania to achieve the project objectives and utilize the EU funding to support development of the metrology system. Without World Bank financing, Albania is likely to lose the opportunity in the near term to have modern metrology facilities, which are a precondition for absorbing additional funds from other donors, notably the EU14.

14 The construction of new metrology laboratories is critical for Albania to upgrade its quality infrastructure to EU standards. While financing is received from other donors (e.g. EU and GTZ) none of these donors provide funding for construction works. At the same time, the purchase of equipment and training of GDMC staff is, for the most part, conditional on the existence of modern metrology laboratories. Because of these constraints, Albania has not been able to take full advantage of EU financing for metrology infrastructure in the past and this problem will continue in the future if new metrology laboratories are not built. This is why the BERIS project agreed to finance the construction of new metrology laboratories.

15. Since the first extension of the project closing date was approved in August 2010 and the construction of the metrology laboratory was launched in September 2010 (with a delay) with the completion date in September 2011, construction was delayed due to unanticipated work during the excavation period in Spring 2011 and interruption of work due to bad weather. There was also need to increase the contract value to finance unforeseen additional works during the construction. Subsequently, the completion date of works was extended from September 5, 2011 to October 28, 2011 and the contract value was increased from All 393,833,703 to All 445, 410,958. Thereafter, due to the delayed launch of the mechanical installation, delays in subsequent work and underestimated implementation period, METE, GDM and the construction firm have now agreed that a more realistic completion date of works would be April 30, 2012. The closing date of the project would thus need to be extended to allow completion of the laboratory and installation of the equipment and furniture.

16. Project Financial Management is currently rated as Moderately Satisfactory and the counterpart funding is rated Moderately Satisfactory reflecting the drawbacks of the mainstreaming of overall financial management arrangements for implementation through the Single Treasury System, such as delays in the processing of transactions. In addition, the project has experienced delays in receiving counterpart funds (1-2 months delay), as the budgetary thresholds set for 2011 have been lower than the project needs. Budgetary ceilings were imposed on foreign financing during the last two months of 2012, as discussed in the following paragraph. There are no outstanding audit reports for the Project and all audit reports were found satisfactory to the Bank. Quarterly IFRs have been submitted periodically with minor delays, in the format acceptable to the Bank.

17. Most recently, delays in disbursements due to implementation issues (mainly the construction of the metrology lab, 42% of project costs, and related equipment of over Euro 1 mn) have been exacerbated by foreign financing ceilings imposed by the Ministry of Finance during the last two months of 2011 due to the adverse impact of the eurozone crisis on economic growth, budget revenues and public debt level. This is a countrywide issue, which has affected almost all the Bank projects in implementation in Albania. The national budget for 2012 will continue to be very constrained, in order to keep public debt, the highest in South-Eastern Europe, below the 60% threshold. As such, the Bank team remains concerned about the impact of budget ceilings on project implementation. The METE and the MoF have assured the Bank team that the budgetary threshold imposed on domestic and foreign investments will not negatively affect Government contribution and IDA and IBRD planned disbursements to financing the project expenditures in 2012. In this regard, it was agreed during the November mission and subsequent meetings with the MoF and METE that sufficient funds for government contribution (including forex losses) and foreign financing will be made available by March 2012 to cover project costs and successfully close the project (see Annex 2).

18. The government contribution consists in 5% of project costs exclusive of taxes (local cost) and 20% of VAT, if applicable. Foreign exchange losses incurred during implementation of the project amount to EUR 26.8 thousand and EUR 44.2 thousand, respectively for IBRD loan and IDA credit, as of November 2011. As the Borrower bears all foreign exchange risks, the losses incurred require addressing by the METE/ MoF as the project approaches completion to avoid short-fall in financing signed

contracts, and financing of overall project expenditures. During 2011, a partial refund amounting USD 19.6 thousand has been made in IBRD loan account. METE has assured that funds will be made available in the 2012 budget under the local cost caption in order to cover for the above mentioned foreign exchange losses as well as 5% local cost and VAT on project expenditures within March 2012. (See Annex 2)

19. The Borrower performance. The Borrower’s and the implementation agencies’ performance is moderately satisfactory with moderate shortcomings that are being addressed based on the actions agreed during the November 2011 supervision mission15. With the efforts taken to address the shortcomings and commitment of the Borrower, the implementation progress picked up between May 2011 and year-end and justified the upgrade of the project management and implementation progress to moderately satisfactory (see para 3).

20. More specifically, with regards to the implementation agencies, the shortcomings that affected implementation during the project life and more recently between end-2010 and Fall 2011 have been and are being addressed, as follows: (i) the procurement consultant will continue to assist METE staff until the closing date to strengthen the quality of the procurement work; (ii) METE appointed a new project manager in June 2011, and (iii) in order to improve the efficiency of coordination within METE and between METE, GDM and supervision of construction, the Bank team leader based in the Country Office will meet weekly with METE/GDM to review procurement and implementation progress and a civil engineer hired by the Bank will continue to carry out bi-monthly on-site visits with the supervision firm and construction site to help identify early signals of concern. With regards to financial management and provision of counterpart funding, the Borrower (MoF) performance is rated moderately satisfactory (see para 15-17).

21. Going forward, since practically all key procurement – civil works and large equipment packages – have been completed, there is less concern that the weak procurement capacity will jeopardize the project results. At this point, the key weakness with the Borrower performance is related to coordination and supervision of civil works that the Bank team is monitoring very closely now. The foreign financing threshold will become an increasing concerning issue for all projects in 2012 that will require closer cooperation between Bank and Government in all the projects.

C. PROPOSED CHANGES

Closing date

22. The Project Closing Date would be extended until June 30, 2012. This would be the second extension of the Project resulting in a total extension of 17.5 months. The Project meets the criteria for extensions outlined in OP 13.30, as explained in Section B

15 It is very important to note that the overall delays in project implementation and low level of disbursements have been caused by other factors to a great extent, as explained in the restructuring paper from August 2010 and in this paper. These factors included the project design factors (i.e., time required to prepare MSTQ strategies and develop TORs before activities were launched), change of the site for the new metrology lab, procurement complaints, lengthy ICB procedures, external factors (poor weather and unanticipated work during the construction).

related to achievability of the PDOs and satisfactory Borrower performance, as well as to existence of an implementation action plan (para 29).

Parts of the Project/Components

23. Part A.1.16 of the Project will be:

(a) expanded including a new activity “establishing an institutional and legal framework for inspections reform” to advance the inspections reform that was designed and launched under the project and to strengthen the project impact. The proposed activities include consultant services at the estimated cost of Euro 200,000.

(b) modified due to delays by removing reference to “undertaking an ARCS (Administrative and Regulatory Cost Survey) to assess outcomes of Part A of the project” in current activity (e), as amended (throughout the legal agreements). The project will undertake small business surveys to measure these project outcomes. The legal covenant related to launching the ARCS by December 10, 2011, as revised, will dropped.

24. Part A.2. in the Financing Agreement will be cancelled because the project did not finance any assistance to CPU and is not anticipated to finance any.

Institutional Arrangements

25. Subsequently, the “Competition Policy Unit” will be removed from the project as the project beneficiary / agency responsible for implementation of Part A.2.

Results Framework

26. The result framework is revised by (i) removing reference to the intermediate result related to the CPU since the assistance to the CPU is cancelled (there were no separate component indicators related to the CPU); (ii) adding a new PDO level indicator “number of inspection agencies” with a baseline of 33 and target of <20 (30%) to measure the additional project activities supporting inspections reform and institutional strengthening; (iii) removing reference to ARCS under the following PDO indicators: business satisfaction with quality of regulation and % of senior manager time dealing with state administration; and (iv) revising the PDO #3 based on expected improved performance (as of mid-year) and correcting the erroneous target for Intermediate Indicator #1 under Part B (based on equipment procured) (see Annex 3).

Financing

27. Reallocations: As shown in Annex 4, Credit and Loan funds will be reallocated from Consultants, Goods Categories and Unallocated Categories to Works Category for financing the increased (unforeseen) costs of construction of the metrology laboratory 16 In the Financing Agreement, Component 1 is called Part A (Facilitation of Business Entry) that consists of assistance to regulatory reform (Part A.1. or Component 1.A in the Project Appraisal Document, PAD) and Competition Policy Unit (Part A.2 or Component 1.B in PAD).

(see para 13). The reallocation is made possible by savings gained from consolidating activities under one large contract under Part A.1., reducing the scope of M&E activities under this contract during implementation, cancellation of the CPU under Part A.2. and availability of some unallocated funds under Part A and C (Project Coordination). Some savings were also gained after updating the project costs based on actual contract values.

28. Project costs and Financing plan. Project costs and Financing Plan, as presented in the PAD, will be revised to reflect all the proposed changes, as shown in Annex 4.

29. Implementation plan. METE has prepared an action plan acceptable to the Bank team to complete the remaining activities under the project. This includes: (a) a revised timetable to complete the works by April 30, 2012 with the Defect & Liability Period ending on May 30, 2012 and an action plan for other key actions affecting implementation and project results (Annex 2); and (b) an updated procurement plan to reflect the proposed additional activities to advance the inspections reform, as well as revised costs and estimated timetable for procuring the equipment and furniture for the metrology laboratory and other remaining activities.

D. APPRAISAL SUMMARY

30. Technical. It should be noted that Part A.1. was designed to implement business regulatory reforms in a systematic manner and on a sustainable basis in key areas affecting businesses entry and operations. It should be further noted that, after project launch, certain reform activities related to building regulatory capacities and a regulatory management system were further defined and specified to country circumstances to support the PDOs and Part A outcomes.

31. Originally, the project included institutionalization of a regulatory impact assessment and improvement of access to business regulations (which was done, see Section B). In addition, the PAD identified two areas of business operations that were particularly problematic and costly in Albania - inspections and licensing – and where the Government was committed to reforms17. In this regard, when the project activities were being defined in the early years of implementation to support Part A outcomes, the World Bank encouraged the Government to consider a strategic approach to reforming inspections and licensing systems (instead of a fragmented, isolated changes).

32. In the area of licensing, METE did not fully share the Bank’s suggested approach of prior assessment of reform options by international experts. Rather, it chose to obtain assistance from other donors to fund the licensing component in line with more short-term objectives. As agreed between the Government and the Bank, the role of the regulatory reform consultant under the project was confined to monitoring developments in the area of licensing. To date, the newly established National Licensing Center has competence over a narrow subset of business licenses. Despite anecdotal evidence indicating an improved perception of licensing by business, a full-fledged assessment of the reform would require additional data and analysis, beyond the current scope and resources of the project.

17 Inspections and licensing were not mentioned separately in the Financing Agreement.

33. In the area of inspections, the project financed a comprehensive institutional reform based on a strategic approach and consideration of different options. Specifically, as described in Section B, the project financed (i) an impact assessment of the reform options for inspections, based on the RIA capabilities being acquired, in parallel, by METE; and (ii) design of a new legal and institutional framework in accordance with existing capacities in Albania, as well as legal and organizational set-up of the Country. The framework is in line with EU requirements for various sectors of interest, as well as with the “best practices” globally. This reform was well-thought and broadly consulted before decision was made to proceed.

34. Regarding the project outcomes, it is expected that the fundamental reform of the inspections system will significantly strengthen Part A’s contribution to expected outcomes measured in terms of improved business satisfaction with quality of regulation and less time spent with state administration.

35. There are no changes to economic and financial, social or environmental analysis. There are no exceptions to Bank Policy.

36. Risks. There is a risk with regards to Part B – not mentioned at appraisal - that timely completion of the construction of the metrology laboratory will be affected by external factors, such as weather condition. This risk has been now counted into the proposed new closing date. With regards to Part A outcomes, the key risk is related to the delayed adoption of the Decree instituting the Regulatory Impact Assessment system designed with project support. Failure to swiftly adopt this crucial piece of legislation would compromise the realization of project outcomes under Part A, while also undermining the significance of the results achieved to-date. There is also a risk with the impact of budget ceilings on project implementation (para 16-17).

37. Mitigation measures. The risks, as identified at appraisal, are mitigated by the actions agreed during November 2011 mission: (a) the Bank team, METE and GDM will meet weekly to monitor progress against the construction timetable and procurement plan; (b) METE and GDM will ensure adherence of the main contractor to the need to increase manpower and working time to complete the construction on time; (c) the Bank will carry out bi-monthly on-site supervision of the construction; (d) the contract of the local procurement will be extended until the proposed new closing date; (e) both the Prime Ministry and METE have strong ownership of the inspections reform and their leadership will ensure commitment and support from relevant ministries; (f) the risk that there might be an opposition from line ministries and inspections to merger and more transparent work will be mitigated by publicizing broadly principles and goals of inspection reform; getting businesses associations to voice their support to the reform and to criticize any opposition to the reform, and to closely monitor progress of the reform by Albania Country Office and to engage the highest levels of the Government of Albania if opposition is detected; and (f) the METE and the MoF have assured the Bank team that the budgetary threshold imposed on domestic and foreign investments will not negatively affect Government contribution and IDA and IBRD planned disbursements to financing the project expenditures in 2012.

Annex 1 : Result Framework (November 2011)

Outcome Indicators BaselineTarget Values

2006 2007 2008 2009 2010 5/2011 6/2011 11/2011 12/2011

Business satisfaction with quality of regulation (source: ARCS) (1) 3.3 (2005)

NA NA NA NA NA   NA NA 2.5 Actual                  % of Senior manager time dealing with state administration (ARCS) 16.1

(2005)NA NA NA NA NA   NA NA 13

Actual                  Use of MSTQ services, measured as number of calibration services provided by GDM (YTD) 26

(2006)30 190 250 350 450   300 650 650

Actual (latest actual: 30/11/2011) 26 200 280 350 460 180 295 600  Results Indicators for Each Component                    Business Entry and Operations Component:                    Number of Government officials trained in RIA and other regulatory review techniques by the project (cumulative) 0

(2006)NA NA 3 40 40   50 90 90

Actual (latest actual: 30/11/2011)     3 0 42 42 42 42  Number of RIA pilots carried out (cumulative) 0

(2006)NA NA NA 1 3   3 3 3

Actual (latest actual: 30/11/2011)       1 3 3 3 3  Export Capability Component:                    Number of kind of measurements (2) in which GDMC is able to provide calibration services (cumulative) 4 (2006)

5 6 13 20 25   30 50 50

Actual (latest actual: 30/11/2011) 4 5 13 20 20 20 20 25  Number of accreditations granted in accordance with the EA standards (cum.)

3 (2006)3 6 9 13 20   22 24 24

Actual (latest actual: 30/11/2011) 3 7 13 16 17 14 14 16  Number of accreditation assessors trained (by the project) (cumulative) 0

(2006) NA 5 10 15 20   40 50 50

Actual (latest actual: 30/11/2011)   5 14 14 50 69 69 79  % of adopted standards made available electronically (cumulative) 77.4

(2006)77.4 81.5 84 90 100   100 100 100

Actual (latest actual: 30/11/2011) 77.4 81.5 84 90 97.5 100 100 100  Project Coordination Support Component:                    

Number of workshops organized by METE to discuss Government’s progress in business environment reforms with relevant stakeholders, including progress made in BERIS-supported reforms (cumulatve) 5 (2006)

5 8 10 13 15   16 17 17

Actual (latest actual: 30/11/2011) 5 8 10 13 16 16 16 16  [1] 1 very satisfied; 6 Very dissatisfied; (2) Dimensional, Mass, Force, Electricity, Flow, Pressure, Temperature, Volume, Acceleration, Time and frequency, Humidity, Roughness, Hardness, Magnetism, Viscosity, Acoustics, Optics, Vibrations, Ionizing Radiation, Chemistry.  

Annex 2: Action Plan

Who Action By whenMoF Provide funds (Euro 290,000) for making

unpaid amounts to ensure meeting of project objectives

15 December

MoF/METE Provide sufficient funds for local cost (including forex losses) and foreign financing to successfully close the project

March 2012

Bank Supervision mission and ICR launch February 2012Council of Ministers

Adopt the Decree instituting the Regulatory Impact Assessment system

April 2012

METE/GDM/main contractor

Complete works for the construction of the metrology lab

by April 30, 2012 (pending extension)

METE/GDM Complete procurement and installation of equipment for the metrology lab

According to the proposed procurement plan (pending extension)

METE Send the final update of the procurement plan to the Bank

December 5, 2011

METE Send the Bank an updated procurement plan By end of the first week of each month

Bank/METE/GDM Meet to review progress against the updated procurement plan (subject to extension)

Weekly

METE Extend the contract of the local procurement and financial consultant until the proposed new closing date18

Upon proposed extension of the closing date

18 The contracts of the financial management expert and M&E consultant will likewise be extended until the proposed new closing date.

Annex 3: Revised Result Framework

Project Development Objective (PDO): The objectives of the Project are: (a) to facilitate business entry and operation; and (b) to strengthen the capacity of the Recipient’s business sector to increase exports towards regional and European Union (EU) markets.Revised Project Development Objective: Not applicable

PDO Level Results Indicators* C

ore

D=DroppedC=ContinueN= New

R=Revised (revision in italics)

Unit of Measure Baseline

Cumulative Target Values

Frequency Data Source/Methodology

Responsibility for Data CollectionYR1

(2006)YR2

(2007)YR3

(2008)YR

(2009)YR5

(2010)

YR6(June 2012)

Indicator One: Business satisfaction with quality of regulation

C Number 3.3(2005)

NA NA NA NA NA 2.5 At the end of the project

Reports prepared by the MSES

METE

Indicator Two: % of Senior manager time dealing with state administration

C % 16.1(2005)

NA NA NA NA NA 13 At the end of the project

Reports prepared by the MSES

METE

Indicator Three: Use of MSTQ services, measured as number of calibration services provided (year-to-date)

C Number 26(2006)

30 190 250 350 450 400 (800 at the end of 2012)

Semi-annual Reports prepared by the GDMC

GDMC to METE

Indicator Four: Number of inspection agencies

N Number 33 (2011)

NA NA NA NA NA <20

INTERMEDIATE RESULTS

Intermediate Result (Component One): Business Entry and Operations Component: Government has well-functioning mechanisms and policies in place for systematically assessing and improving the business environment, including for applying the RIA and other complementary mechanisms to business sector regulations. The CPU has strengthened its capacity to assess impact of regulatory measures on competition.The CPU has strengthened its capacity to assess impact of regulatory measures on competition.Revised Intermediate Result (Component One): Government has well-functioning mechanisms and policies in place for systematically assessing and improving the business environment, including for applying the RIA and other complementary mechanisms to business sector regulations. Intermediate Result indicator One: Number of Government officials trained in RIA and other regulatory review techniques (cumulative)

C Number 0(2006)

NA NA 3 40 40 90 Semi-annual * Monitoring report TFU

Intermediate Result indicator Two: Number of RIA pilots carried out (cumulative)

C Number 0(2006)

NA NA NA 1 3 3 Semi-annual * Monitoring report TFU

Intermediate Result (Component Two): Export Capability Component: The General Directorate for Metrology (GDMC), General Directorate of Standardization (DPS), and Directorate for Accreditation (DA) have acquired the ability to deliver MSTQ services to meet business sector needs.

Revised Intermediate Result (Component Two): Not applicable

Intermediate Result indicator One: Number of kind of measurements19 in which GDMC is able to provide calibration services (cumulative)

C Number 4(2006)

5 6 13 20 25 30 Semi-annual * Statistics GDMC to METE

Intermediate Result indicator Two: Number of accreditations granted in accordance with the EA standards (cumulative)

C Number 3(2006)

3 6 9 13 20 24 Semi-annual * Statistics DA to METE

Intermediate Result indicator Three:: Number of accreditation assessors trained (cumulative)

C Number 0(2006)

NA 5 10 15 20 50 Semi-annual * Statistics DA to METE

Intermediate Result indicator Four: % of adopted standards made available electronically (cumulative)

C % 77.4(2006)

77.4 81.5 84 90 94 100 Semi-annual * Statistics DPS to METE

Intermediate Result (Component Three): Project Coordination Support Component: The METE has acquired the capacity to monitor and evaluate progress in improving the business environment and implement effective consultation with business sector

Revised Intermediate Result (Component Two): Not applicable

Intermediate Result indicator One: Number of workshops organized by the METE to discuss Government’s progress in business environment reforms with relevant stakeholders, including progress made in BERIS-supported reforms (cumulative)

C Number 5(2006)

5 8 10 13 15 17 Annual * Semiannual and annual reports, workshop documentation and list of participants

METE to policy makers, business association, general public

19 Dimensional, Mass, Force, Electricity, Flow, Pressure, Temperature, Volume, Acceleration, Time and frequency, Humidity, Roughness, Hardness, Magnetism, Viscosity, Acoustics, Optics, Vibrations, Ionizing Radiation, Chemistry.

Annex 4: Revised Allocation of Loan and Credit Proceeds and Revised Project Costs

(a) Reallocation of Proceeds under Loan: IBRD 48410 ALB(SCHEDULE 1, Withdrawal of the Proceeds of the Credit)

Category

Allocation % of FinancingCurrent (in Euro) Revised (in Euro) Current Revised

(1) Goods 1,650,000 1,622,000 95% 95%(2)Works 2,690,000 2,778,000 95% 95%(3) Consultant Services

10,000 0 95% 95%

(4)Unallocated) 50,000 0 95% 95%(5)Front-end Fee 0 0 Amount payable

pursuant to Section 2.04 of this Agreement in accordance with Section 2.07(b) of the General Conditions

Amount payable pursuant to Section 2.04 of this Agreement in accordance with Section 2.07(b) of the General Conditions

TOTAL AMOUNT 4,400,000 4,400,000

(b) Reallocation of Proceeds under Credit: IDA 42390 ALB(SCHEDULE 1, Withdrawal of the Proceeds of the Credit)

Category

Allocation % of FinancingCurrent (in SDR) Revised (in SDR) Current Revised

(1) Consultant Services

2,143,000 1,942,000 95% 95%

(2)Training 310,000 310,000 95% 95%(3) Goods and Works 10,000 211,000 95% 95%(4.)Incremental Operating Costs

37,000 37,000 95% 95%

TOTAL AMOUNT 2,500,000 2,500,000

(c ) Project costs

Project costs, as presented in the PAD, will be revised to reflect all the proposed changes, as shown in below table: Components Original

(Euro 1000)% of Total

Revised (Euro 1000)

% of Total

Part A: Facilitating Business Entry and Operations

1,711 22 1,405 18.3

1.1. Business Regulation 1,426 19 1,405 18.31.2. Competition Policy 285 4 0 0Part B. Development and Srengthening of the MSTQ System

5,665 74 6,086 79.3

2.1. Metrology 5,060 66 5,455 71.12.2. Standardization 150 2 199 2.62.3. Accreditation 200 3 252 3.32.4. Inter-institutional Activities 255 3 180 2.3Part C. Project Coordination 235 3 181 2.4Unallocated 50 1 0 0Front-end Fee 10.9 0 0 0TOTAL 7,672 100 7,672 100