37277 Report No. 37277-AL ALBANIA URBAN SECTOR REVIEW January 19, 2007 Sustainable Development Department Europe and Central Asia Region World Bank Document of the World Bank ALBANIA ­ GOVERNMENT FISCAL YEAR January 1 to December 31 CURRENCY EQUIVALENTS (Exchange Rate as of December 7, 2006) Currency Unit = Albanian lek US$1.00 = 97.8 leks ABBREVIATION AND ACRONYMS BEEPS Business Environment and Performance Surveys CBO Community Based Organizations CEM Country Economic Memorandum CIT Corporate Income Tax EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia EIU Economist Intelligence Unit EU European Union FAR Floor Area Ratio FIAS Foreign Investment Advisory Service FYROM Former Yugoslavian Republic of Macedonia GDP Gross Domestic Product IMF International Monetary Fund INSTAT Institute of Statistics IPRO Immovable Property Registration Office LED Local Economic Development LSBT Local Small Business Tax LSMS Living Standards Measurement Survey MPWTT Ministry of Public Works, Transport and Telecommunications NGO Nongovernmental Organization OECD Organisation for Economic Co-operation and Development PHC Population and Housing Census PIT Personal Income Tax PRSP Poverty Reduction Strategy Paper SEE South-Eastern Europe SME Small and Medium-sized Enterprise SMEA Small and Medium Enterprise Agency SPT Simplified Profit Tax SWOT Strengths Weaknesses Opportunities Threats TACRA Territorial Adjustment Committee of the Republic of Albania UCLG Union of Cities and Local Governments ULMP Urban Land Management Project UN United Nations Albania Urban Sector Review Table of Contents Executive Summary.............................................................................................................. i Part I. The demographic and economic dynamics of recent urban development ........ 1 Chapter 1 Demographic developments and trends -- Albania continues on the move 2 The migration phenomenon............................................................................................... 2 Urbanization....................................................................................................................... 4 Conclusions regarding demographic perspectives............................................................. 9 Chapter 2 Underlying Economic Dynamics ­ the Emerging Geography of Opportunities...................................................................................................................... 14 Services, the construction sectors and agribusiness on the rise....................................... 14 Private and informal sectors taking the lead.................................................................... 15 Emerging spatial concentration of economic activities ................................................... 16 Urbanization showing potential for poverty reduction.................................................... 22 Chapter 3 Constraints to effective urban development-- the challenges facing local governments........................................................................................................................ 26 Poor urban governance constraining business development ........................................... 26 Urban infrastructure deficiencies..................................................................................... 28 The financing gap in urban infrastructure and service provision .................................... 31 Conclusion to Part One.................................................................................................... 39 Part II: Urban planning and land management ............................................................ 40 Chapter 4 The emerging real estate market: implications for efficiency and welfare .............................................................................................................................................. 41 The urbanization process in Albania: the phased transition from a command economy to markets ........................................................................................ 41 An assessment of the current state of development of Albanian cities............................ 43 The land development process in Albania in 2006: response from the informal and formal sector to current regulations................................................................................. 47 The constraints limiting the activities of the formal real estate sector in Albania........... 55 Market parameters: demand, supply, prices, and affordability........................................ 58 Chapter 5 Informal settlements in Albania-- origins, past approaches, and new directions............................................................................................................................. 66 Historical background and current situation.................................................................... 66 Typologies of Informal Settlements................................................................................. 71 Main issues ...................................................................................................................... 74 Government's attempts towards regularization and legalization..................................... 75 Recommendations for legalization and integration of informal settlements .................. 79 Chapter 6 Towards a redefined framework for urban planning and land management .............................................................................................................................................. 82 Preamble: issues and missing links in the legal framework for urban planning and land management ...................................................................................................... 82 Recommendations regarding urban strategy, urban planning and the regulation of land development.................................................................................. 88 Appendix............................................................................................................................. 97 References......................................................................................................................... 120 List of Figures Figure 1.1 Population growth reversed during the 1990s...................................................... 2 Figure 1.2 Tirana and the central-coastal area are the main destination of population movements. Absolute and relative amount of population change, 1989-2001... 3 Figure 1.3 Shifts in Urban and Rural Population Shares, 1945-2001.................................... 5 Figure 1.4 The Greater Tirana Area leads the urbanization trend. ........................................ 6 Figure 1.5 Most Albanian municipalities are very small....................................................... 7 Figure 1.6 Population distribution by municipality is similar in Albania and in FYROM ... 8 Figure 1.7 and 1.8 Albania's city size distribution is moving closer to the market economy norm ............................................................................... 9 Figure 1.9 Urban population may continue to grow significantly over next decade........... 11 Figure 2.1 Number and turnover of registered enterprises by sector, 2001-2004 ............... 16 Figure 2.2 Number of firms per 1000 inhabitants in Albania by prefectures, 2005............ 17 Figure 2.3 Enterprise dynamics ­ districts with strongest enterprise growth and loss........ 20 Figure 2.4a and 2.4b Mapping of net immigration and of poverty headcount in percent within Tirana...................................................................................................... 24 Figure 3.1 Tirana, Durres and Lezhe are the clear leaders in per capita local revenues...... 34 Figure 3.2 The increasing clout of local government finances - evolution of discretionary revenues vs. total revenues of local governments in Albania 1998-2004......... 35 Figure 3.3 Albanian local government revenues continue to depend on national government's discretion ................................................................................... 36 Figure 3.4 Local governments are falling short of channeling resources to essential capital investments.............................................................................. 37 Figure 4.1 Distribution of dwellings by size within each consumption quintile in urban Coastal region .................................................................................................... 45 Figure 4.2 Distribution of total dwelling floor area by size and consumption quintile in urban coastal areas............................................................................................. 46 Figure 4.3 Typical informal settlement in Berat.................................................................. 48 Figure 4.4 Fier- Areas occupied by informal settlements.................................................... 50 Figure 4.5 Schematic representation of the land recycling process..................................... 53 Figure 4.6 Affordability of various types of new housing in urban areas in the Coastal zone (Durres, Fier, Vlore)........................................................... 62 Figure 5.1 Informal settlement of Kineta (Durres).............................................................. 73 Figure 5.2 Informal settlement in Skodra ............................................................................ 74 List of Tables Matrix of Key Recommendations........................................................................................ xv Table 1.1 The center-coastal region is the main locus of attraction for migrants.................. 4 Table 1.2 Comparison of population estimates by district, before and after 2001 national census................................................................................... 10 Table 2.1 Summary of SWOT analysis from 7-city LED strategic plans ........................... 21 Table 2.2 Absolute poverty rates (headcount) by region in percent, 2002-2005................. 23 Table 2.3 The impact of foreign remittances on construction activities and improvement of dwellings................................................................................... 25 Table 3.1 The top problematic issues preventing effective business operation and growth.27 Table 3.2 Key objectives identified in LED strategies ........................................................ 30 Table 3.3 Functions and responsibilities of Albanian municipalities and communes......... 31 Table 3.4 The structure of Local Government Revenues before and after fiscal decentralization - local government revenue in million leks .............................. 33 Table 4.1 The average dwelling space per capita in m2 across quintiles and regions......... 44 Table 4.2 The land recycling process .................................................................................. 54 Table.4.3 Household's income benchmarks based on typical salaries................................. 60 Table 4.4 Affordability Table based on Price-to-Income Ratio .......................................... 61 Table 5.1 Estimated costs of informal settlement upgrading and infrastructure provision in Albania...................................................................... 78 List of Boxes Box 1.1 A Brief History of Urbanization in Albania............................................................. 5 Box 1.2 INSTAT projections of spatial spread of population to 2021................................ 12 Box 1.3 Why relatively large cities remain poles of economic and social attraction.......... 13 Box 2.1 The challenges and prospects of the Albanian agribusiness industry.................... 15 Box 2.2 The economic dynamics of the Tirana metropolitan area...................................... 18 Box 3.1 Local investment plans far exceed locally available resources - Case studies: Elbasan and Shkoder............................................................................................. 38 Appendix Table A 1.1 Migration from prefecture to prefecture. ......................................................... 97 Table A 2.1 Relative frequency and average amount of remittances across regions, ...... 101 Table A 2.2 Albania ­ Districts and major Regions based on LSMS 2002....................... 102 Table A 3.1 Base SWOT analysis for the cities' strategic investment plans..................... 103 Table A 3.2 Investment priorities identified in Local Economic Development Strategic Plans.............................................................................................................. 107 Table A 3.3 The structure of local government revenues across Albanian cities, 2004. Local government revenue in thousand leks................................................. 113 Table A 3.4 Elbasan - selected planned capital expenditures identified in LED plan....... 113 Table A 3.5 Shkoder - selected planned capital expenditures identified in LED plan...... 114 Figure A. 3.1 Local capital expenditures fluctuate annually in Shkoder and Elbasan ...... 111 Figure A. 3.2 LED Strategies with clear ambitions but uncertain funding ....................... 111 Figure A. 3.3 Local Revenues and Expenditures, municipality of Shkoder...................... 112 Figure A. 4.1 Distribution of Consumption per Household per year (Coastal urban areas: Durres, Fier, Vlore)....................................................................................... 116 Box A. 1. 1 Comparing the rank-size distribution of cities across "Western economies" and transition countries................................................................................... 98 Box A. 5. 1 Classification of Individual Illegal Buildings ................................................ 117 Box A. 6. 1 The Master Plan And Zoning Plan of Warsaw............................................... 118 ACKNOWLEDGEMENTS The present report was prepared as a background analysis to inform the ongoing dialogue and operational program of the World Bank with the Government of Albania on issues of policy and strategy concerning urban development and local government. The Ministry of Public Works, Transport and Telecommunications was the main counterpart agency to the work. The report draws on discussions with a wide range of agencies and visits to several municipalities (Berat, Fier, Shkodra, Tirana and Vlora) during a mission in March 2006, as well as the team leader's earlier visits to Durres and Lezhe municipalities. The study was led by Christine Kessides (Task Leader). Part One was written by Yan Zhang and Stefan Rattensperger. Part Two was written by Alain Bertaud (consultant, real estate market, urban planning and regulation) and Toru Konishi (informal settlements), with inputs from Edesio Fernandes (consultant, legal framework issues). Artan Guxho and Gjergji Thomai (MPWTT) participated in and advised the mission. Sanjay Sinha prepared maps and assisted with data collection. Taras Pushak and Talip Kilic contributed analysis of household survey data with guidance of Andrew Dabalen, and Nand Shani helped with access to enterprise data. Rozena Serrano and Poonam Rohatgi assisted with the document production. Albania Urban Sector Review Executive Summary Until 15 years ago Albania was known to the world mainly as a tightly closed society where the state held a degree of ownership and control matched by few other socialist countries. Since then Albania has experienced extraordinary changes, again almost without peer among the transition economies. It has become distinguished within the ECA region in recent years for sustaining a strong pace of economic growth, for success in reducing poverty, for the extent of population movement--both through internal and external migration, and for the entrepreneurial energy of its people--demonstrated in both formal and especially, informal transactions. The effects of such transformation, good and bad, have become very visible--in physical or spatial terms, and in the daily lives of people--in urban areas, especially those that have expanded rapidly. This report focuses on trends and issues that have come to the fore with rapid urbanization and with the recent decentralization of major responsibilities to local governments. Continuing the achievements and addressing the problems will require actions by local governments and, just as importantly, by the central government, which sets the legal and regulatory conditions for local governance and the tone of political leadership. The major challenges facing both levels of government include: · restoring a better balance between public goods and private goods, and between public interests and private interests, as demonstrated in urban management and land use; · devising and implementing a form of urban planning and regulation that serves the urban economy and the demands for commercial and household real estate, and can be enforced; · making local governments more effective managers of cities, with sustainable financing. This implies that the private sector is enabled and not hampered by avoidable problems with local infrastructure services, or by unnecessary regulations or fiscal impositions; and · helping the citizens who remain relatively disadvantaged to continue improving their welfare, including their housing assets, in the urban location. The demographic and economic dynamics of recent urban development Albania continues on the move. Albania's population declined by 3.6 percent in the first ten years of the transition, as the population took advantage of newfound freedom to travel abroad and escape domestic economic and political crises. The period between the censuses (1989-01) witnessed an equally dramatic reallocation of population internally, with migration from the northern interior and mountain regions to the center and coast, especially the capital. The greater Tirana area and the Tirana-Durres corridor have become the heartland for new industrial, commercial and service activities, and the periurban zones home to tens of thousands of migrants. i The most obvious indicator of the internal population realignment is urbanization, with the share of the urban population increasing from 35 to 42 percent in the inter-census period. Most municipalities are very small (less than 25,000 residents) and only two secondary cities approach 100,000 (Durres and Elbasan). The Tirana/Durres agglomeration dominates the urban population distribution. Although determined by many factors, the urban development and migration phenemona since the transition have been correcting a spatial structure that evolved under central planning, adjusting to the emerging marketplace. The swell of migration, seemingly chaotic and spontaneous, has reflected Albanians natural and practical responses to the new geography of opportunity. How much future urban growth can be expected in Albania, creating continued demand for public investment, housing and urban services, as well as labor supply and consumer impetus for the economy? A likely projection indicates that the urban population could rise to 1.7-2.0 million over the next two decades, assuming a steady rise in the urbanization rate to about 54 percent. On this trajectory Albania would reach the (current) average urbanization of the Europe and Central Asia Region in 30 years, with a 61 percent urbanization rate and 2.2 million urban population in 2030. While these figures represent reasonable (and probably conservative) estimates given the uncertainty of migration behavior, they imply that Albania's cities may need to accommodate 400,000-700,000 new residents over the next generation if it continues the kind of demographic pattern typical of the rest of Europe. Not all of the new urban residents will be moving from rural settlements, since urbanization also results from the administrative reclassification of areas to reflect their changed character and from higher natural growth rates of the existing urban population. Where in the city system will most of the new urban growth occur? This will largely depend on trends in economic activity, discussed below. But it remains highly likely that the Tirana-Durres metropolitan area will continue to dominate the economic and spatial system. INSTAT projections show increasing regional concentration, with the share of population in Tirana and Durres districts to increase from less than a quarter to almost a third of the national population, and the other major regions (especially North and South) declining. The continued preponderance of the Tirana-Durres agglomeration should not be decried, but rather recognized in urban policy. Global experience and economic geography research confirm that the relatively large cities of any country are generally the most productive, as they capture and generate agglomeration economies. Metropolitan areas tend to be the locus of the most diversified production, innovative and information-intensive firms, and of new entrepreneurship as they offer the deepest labor market and opportunities for exchange of knowledge and ideas. The common diseconomies in large urban concentrations, such as traffic congestion, high land prices, environmental pollution, crime, and loss of green space are not fully inevitable, as they often testify to neglect of appropriate policy and investment. A deliberate program to promote dispersal of the urban population in Albania away from Tirana-Durres would be difficult to implement effectively and costly if exercised through public fiscal transfers, as evidenced from the very mixed and often disappointing regional ii development efforts of many countries. As incomes grow and the private sector diversifies, some of the secondary cities are likely to become increasingly attractive to firms and workers and to gain relative economic importance. Decentralizing political authority and easing regulatory controls on the private sector, as already underway in Albania, will tend to promote this process naturally by reducing the incentive for firms to stay physically close to Tirana as the "power hub". Providing more and better infrastructure in and between secondary cities would, of course, facilitate this process. It is best for such investment to come in response to the signals emerging from the secondary cities themselves, as evidence of their effective economic demand and their initiative to translate this energy into local fiscal resources. The evolving geography of economic opportunities. Behind the epic urbanization process has been a profound structural transformation of the Albanian economy away from agriculture and traditional industry, and towards higher productivity sectors. Activities of trade and services, that in all countries emerge and thrive from urban agglomeration, have been the dominant contributor to GDP growth since the early 1990s. Tourism is a major component (about 30 percent) of the service sector, showing signs of growing potential for coastal, cultural and ecotourism, starting from a very low base. With the building boom especially in urban areas, construction has become one of the most dynamic sectors of the Albanian economy. The 2005 Living Standards Measurement Survey (LSMS) shows that no less than a quarter of Albania's housing stock has been built after 1990. Although accounting for only around 10 percent of GDP, the construction sector has been the main source of growth in industrial output since 1998. Agriculture has traditionally played an important role in the economy, accounting for 24 percent of GDP and 58 percent of employment in 2004. The challenges for this sector will be to develop higher-value products for which domestic demand will grow with incomes, continue to diversify into agro-processing, and raise the quality sufficiently to compete in European markets. The spatial concentration of economic activity mirrors and explains the demographic spread, as seen in three broad regions. The Central region, anchored by Tirana and Durres, features the highest concentration of registered firms (partly for administrative reasons). It is here that the modern service and manufacturing activities, most of the companies with foreign participation, the public sector and the construction boom all come together. The region is also the hub of exports and imports and dominates all the port, air freight and passenger traffic in the country. The Coastal zone (to the north and south of Durres) has untapped potential for tourism and agriculture/agribusiness, both of which will require some structured development support to meet the high standards and competition from the broader EU region. The local economies of this zone are influenced by Italian and (to a lesser extent) Greek investments, with the former focused in construction and consumer manufacturing and the latter in trade. The Coastal region's trade and traffic focuses heavily on the hub of Durres, with little movement through a north-south or east-west axis that would integrate the coast more strongly to the rest of the country. Prospects for a wider traffic flow may depend on the eventual strengthening of Albania's economic neighbors (FYROM, Montenegro, and Kosovo). The Inland zone is therefore not gaining new impetus to replace the decline in iii agriculture, and this zone continues to lag behind. The cities of Berat and Korce are a positive exception and retain some regional dynamic and enterprise growth. Urbanization has demonstrated its potential for poverty reduction. Geographical mobility of labor, including urban-bound population movement, is one of the most important adjustment mechanisms households can use to cope with income and asset poverty, and with structural unemployment. Between 2002 and 2005, the LSMS surveys have revealed a marked decline in poverty, by all measures, in the four major regions of the country. Urban poverty has declined faster than rural poverty, with the urban poverty headcount falling from 19.5 to 11.2 percent (a 43 percent reduction), while the rural headcount fell from 29.6 to 24.2 percent (by 18 percent) over the period. There is also evidence of regional convergence in the distribution of poverty. The sharp decline in poverty in the Mountain region, the origin of many internal migrants, and in the numbers of unemployed poor indicate the benefit of remittances. The poverty analysis confirms that migration implies moving away from poverty--in particular, from the poorest and remotest areas of the country to the relatively richer districts of Tirana and the coast. There is also evidence of increased poverty within Tirana, in the zones with the highest incidence of new residents. Access to infrastructure and basic services is also weaker in these areas than for the city overall, as discussed below. Despite these pockets of poverty in the capital area, and the finding that unemployment is actually higher in Tirana than the national average, the city has achieved the highest decline in poverty headcount in 2002-2005 of any region (54.5 percent) and by far the lowest level of poverty (8 percent in 2005). The capital obviously suffers from failings in its investment climate (described next), yet provides the most vibrant market for self-employment and new enterprises, thus giving a foothold to low income migrant families. Income inequality is not much different in Tirana than in other regions of Albania and has remained relatively low, although it is not unusual for inequality to be higher in the large cities of many countries. In short, Tirana seems to deliver on the promise of improved welfare that continues to attract residents to the capital. Constraints and challenges facing local governments. Local governments are the first line forces responsible for managing cities. Yet much of what is required to ensure city performance for the benefit of firms and households depends on central government actions as well. The decentralization process has set a good course, but there remains a large disconnect between budget resources and requirements at the municipal level. Recent business surveys characterize the business environment across cities, including the public administration as well as other "soft" factors, as not conducive to exploiting Albania's comparative advantages. According to the 2005 BEEPS1 survey Albania ranks worse in most business environment indicators than its immediate Southeast European neighbors and the ECA region in general. Other city-level surveys confirm that problems range from anticompetitive practices to tax rates and deficiencies in electricity supply. Corruption appears to be a problem particularly in the larger cities, and especially for the construction sector. The time and cost required for business registration and business 1EBRD-World Bank Business Environment and Enterprise Performance Survey iv licensing, including bribes, is distinctly different across cities, with Tirana and Durres viewed particularly badly. Similarly, the transactions costs for acquiring land and the time necessary to complete the administrative procedures for construction activities are also problematic issues for entrepreneurs, with Tirana again receiving one of the worst evaluations. In most of the seven secondary cities that have produced local economic development strategies, infrastructure deficiencies come in for strong criticism--particularly roads, water supply and wastewater among the sectors provided at local level. Although the major responsibilities for managing and maintaining local physical infrastructure have been decentralized over 2000-2002, the cities lack the capacity and finances to fulfill their role in provision. With the major fiscal reforms approved in late 2002 locally generated revenues (mainly taxes and user charges) have jumped dramatically--from 4.2 percent of the total municipal budgets in 1998 to 19.6 percent in 2004. New taxes on small business and profits accounted for 38 percent of locally generated revenues in 2003-04, while property tax and infrastructure tax on new construction (levied at the time of permit approval) rose to 10 percent and 16 percent, respectively, of the locally raised receipts. The overwhelming majority of construction- and business-related taxes are raised in Tirana and the few next largest cities, although some other municipalities manage to generate more than their local population size and economic dynamics would suggest (e.g., Girokaster). Relative to the recent EU accession countries, Albania's share of discretionary local revenues in GDP remains tiny. Raising the performance of property taxation and actually allocating the new construction fees to required infrastructure investments will be essential to improve both tax efficiency and the urban economy. Local government expenditures have remained focused on operating and basic maintenance costs, despite the decentralization reforms giving municipalities greater responsibilities in local infrastructure. Capital spending has hovered around 17-20 percent of the local budgets since 1999, with the national government financing two-thirds of this investment in 2003-04. The local economic development strategies and investment plans give a more detailed picture of the imbalance between available resources and what local stakeholders consider as needed improvements in their city. In Elbasan and Shkoder, for example, the proposed projects serve better as a signaling of local concerns than as a guide to investment priorities, since the list in each city would imply a virtual doubling of the total revenue and expenditure they had realized annually in previous years. Decentralization, and the involvement of donors in local planning and reforms, have raised awareness and expectations of local constituencies. But much remains to be done to bring the local governments into a position to overcome past backlogs and meet effective demand for services in their area. Even if municipalities sustain the increases in local revenues from business and property taxes, these will not suffice to finance the pivotal investment projects on the cities' agendas for the medium term. Major infrastructure investments will therefore continue to be largely dependent on government transfers or external sources of funding. This means that the decision-making leverage for infrastructure investments remains effectively centered at the national government level, by means of conditional capital transfers. The local v governments could, however, sharpen their selectivity in investment planning, within the limits of their dependence on financing sources, and thereby exercise greater autonomy in local investment. Experiences and priorities in urban planning and land management Achievements and constraints in the emerging real estate market. Urbanization in Albania has gone through three distinct phases since the fall of communism. The first phase was dominated by the informal sector. The second phase saw the consolidation of the informal and the emergence of a formal sector. The third and current phase consists of further establishing the formal sector and regularizing the informal development. The main government objective during this third phase would be to formalize and integrate the real estate market. A key concern will be to ensure that low income households are not excluded from the formalization effort. The new constructions and urbanization of the first two phases were spontaneous and occurred with little government intervention. Indeed, the private adjustment during the first several decades of transition was remarkable, considering the starting point: an artificial spatial distribution of population (65 percent rural), State ownership of 70 percent of the housing stock, and severely suppressed housing demand (consumption of floor area was only five m2 per person in urban areas, compared to 16 m2 in Bulgaria at the time of transition). Given the economic and administrative weaknesses in the early 1990s, informal development was practically the only way that the population shift could have been accommodated. This first phase in the urbanization of Albania is therefore not to be deplored. It contributed to subdivide and distribute State land in small parcels expeditiously, and it created a large urban housing stock of sturdy houses that could be subsequently traded. Despite fifteen years of social and economic shocks, the outcome of an apparently chaotic process of urban development is rather positive for cities, in terms of the amount of new floor space and number of new units built--benefits shared not only by the emerging middle class but also by lower income groups.2 The ability of the lower income groups to have access to relatively large, well-built dwellings (even if in unserviced areas on the outskirts of town) is a significant achievement. In many countries with average household income similar to that of Albania, especially those experiencing rapid migration to cities, the majority of households in the lowest quintile can usually only afford dwellings below 40 m2 in unserviced areas, and the gap between the dwellings of rich and poor in urban areas is much wider. Equitable access to infrastructure and social services remains a significant issue for Albania, however. 2 For instance, the average floor space consumption per person has risen from the extreme low at the time of transition to about 20 m2 in cities of the Coastal zone, like Durres, Fier and Vlore. Currently three-quarters of household in the first consumption quintile have dwellings between 40 and 100 m2, and only 18 percent of households in this group have dwellings below 40 m2. The coastal zone is cited here because it is the region (along with Tirana) experiencing the most rapid urban growth. vi The spatial structure of Albanian cities resulting from this largely unplanned growth is relatively efficient, as seen by the average built-up densities between 80 to 200 persons/ha.3 The typical structure is quite compact, predominantly monocentric, and displaying a clear pattern of high density in the center and progressive lowering of densities in the suburbs. This decreasing gradient of densities is usually associated with the demand-driven development of cities having a much longer tradition of market economies. While in the periurban areas the densities are fairly efficient (saving on the land requirement), a key problem is that the network of circulation areas allows for pedestrian traffic but is not adequate for regular car and bus access, and spaces are not reserved for community facilities or parks. While households and developers have played a major role in building entire new neighborhoods within cities' cores and at their periphery, the public sector has lagged behind in developing infrastructure and in creating a clear legal framework for the real estate industry. In addition, municipalities have not been able to create a flow of municipal revenue that would allow a proper maintenance of the infrastructure already created. The lack of protection of the urban and natural environment, in particular in the costal areas, has been one of the major regulatory failures. In a few cases, notably in Tirana, the municipalities have managed to recover some of the public space lost to illegal development in parks and river banks in the 1990s. A more proactive approach to guiding land development through appropriate planning and regulation is needed for the future. Since its inception in the mid-1990s the formal real estate industry has, in many cases, been literally building on the base created by the informal developments. In this approach of "land recycling", a formal contractor negotiates with a group of households occupying a given site to obtain the land for a multistory structure, of which a certain number of units will be given back to the households. Their share of the development, corresponding to about 35 percent of the final floor space, is roughly equivalent to what builders pay for land in an efficient market. This arrangement has a number of pluses: it permits a mutually advantageous transfer in a context where information on market value is extremely poor; it leads to higher density use of plots where there is clear market demand; and it provides infrastructure connection and regularized status to the original occupants. The originality of the process in Albania is that it happens through negotiations between the informal owners and the formal developer without government involvement and without using eminent domain. Devised as an opportunistic response to housing demand in a legal and regulatory void, the practice also entails potentially serious contractual risks for the parties involved--therefore it is clearly a second best solution as compared to more formal land transactions. While at present the formal real estate sector seems to be expanding its activities faster than the informal sector, its progress is severely limited by three factors: · The absence of a recent "regulatory plan" (land use plan) and approved local regulations for most cities. When plans exist, they concern only a few blocks in the city center and focus mostly on urban design rather than clear land use guidelines and 3Based on observations in Vlora in the southern coastal zone and Shkoder in the north. These are rather high densities for cities of about 100,000 residents; in other parts of Europe, the density of cities of this size range is usually between 40- 60 p/ha. vii street alignments. Many specifications like setbacks, width of major roads, floor area ratio, and maximum heights have to be negotiated project by project. This practice increases the cost of construction by causing lengthy delays and creates the impression of arbitrariness and opportunities for corruption. According to developers, the entire administrative process (not including design and construction) for developing one block of flats may take up to 2 years prior to the design stage. At present, there do not seem to be any regulations for land subdivision.4 The current decree 722 (1998) on urban regulation takes an excessively normative approach and does not allow variations in land use regulations depending on cities and location. · The lack of funded municipal programs to build primary infrastructure. Without the benefit of current infrastructure network plans, developers are obliged to build and finance their own off-site links between their units and the existing network, or extensions of the network. This leads to fragmentation of the system, making it uneconomic and expensive to maintain. Developers pay an impact fee to municipalities (2-5 percent of construction costs), which is pooled with general revenues of the municipality rather than targeted for infrastructure investment. · The difficulty of acquiring undeveloped land, officially and legally, for construction. Most vacant land around cities is either encumbered by disputes over title or claims for restitution, or belongs to the government and is therefore not on the market. Vacant plots even within the official urban boundary (the "yellow line") requires a permission from the Ministry of Agriculture to be developed and the procedure is lengthy and uncertain. During the current phase of urbanization the municipalities, with support and guidance of the central government, will have to take a major role in designing appropriate regulations, enforcing them, monitoring urbanization and market prices, mobilizing a local revenue base to finance the operation and maintenance of urban infrastructure and services, and finding a mechanism for financing investment in primary infrastructure. One of the main challenges in formalizing the real estate sector is to provide fiscal resources to municipalities while implementing a simple set of regulations that does not paralyze the nascent market. To achieve that balance, municipalities will need a better understanding of how real estate prices are generated and how markets function, in particular in providing shelter to low income households. A further goal for the current phase will be to ensure that the new laws and regulations permit all real estate--whether existing stock or new construction--to become legal and formal, and served with infrastructure. It is important to note that the transition from informal to formal needs to be mostly voluntary--that is, on terms that households and firms can afford. Affordability is becoming a key issue. Despite the resourceful responses of the informal and formal sectors, real estate markets remain pressured. In addition to the force of continued growth in urban population and incomes, and the added fuel of remittances, Albania faces a persistent demand for urban land and construction propelled by the historic backlog of poor quality housing, the needs for new office and commercial premises in the center of cities, and the decrease in household size. The building industry appears to be 4Land subdivision regulations concern provisions of public space like streets, open space and community facilities, and infrastructure; they describe the standards to be used for various public facilities and the manner by which these will eventually be transferred to the local authority or the utility company. viii reasonably productive and competitive, so supply side inefficiencies would be mainly due to the policy environment in which it operates. Assessing the affordability of housing is difficult because of very incomplete data on incomes, so it is necessary to make approximate estimates with reference to notional wage and salary benchmarks, as well as to overall consumption estimates from the household surveys. Using housing cost data from cities in the Coastal region and a threshold of affordability determined by a price-to-income ratio below 4 (a performance level observed in efficient housing markets), it appears that a minimum size apartment of 45 m2 in the formal sector would be affordable only to a household at or above the 4th consumption quintile (80th percentile), i.e., the richest 20 percent. Given lower costs in the informal sector, however, a house of this size would be in reach of households at about the 2nd consumption quintile (the poorest 40 percent). Many of the poor urban households are occupying units they could not afford if they had to acquire them today. With less land available for informal development the supply of houses within reach of the poor (below about the 30 percentile) may be decreasing. The challenge facing the government is to allow formally the development of settlements which mimic in many aspects the informal settlements of the past, by providing for flexible and reasonable standards. A new law on "social programs for housing" passed in 2004 allows for a wide menu of instruments aiming to promote affordable housing. Some of these policies are ill-advised (i.e., interest subsidies). Others are quite sound in principle (e.g., rental vouchers), but their administrative and fiscal implications can be considerable. Encouraging a private rental market is an essential prerequisite. Care will be needed to ensure that implementing certain provisions of the law, such as publicly financed "social units" for certain types of households, does not become a fiscal drain or a source of distortion and negative incentives to a responsive housing market and a well-targeted social policy. To reach households in lower income groups, the most cost effective action of government would be to allow the development of formal private subdivision which approximates legally the current informal settlements. The challenge of regularizing and integrating the informal settlements. 5 Bringing these settlements into legal status and linking them to the urban networks remains one of the key challenges for Albania if it is to modernize and integrate its urban economies. There are several reasons for more urgent action: (i) the informal settlements are significant in size, containing up to one-quarter of the population and 40 percent of the built-up area of major cities in which they are located; (ii) they present significant hardship for many of the residents, particularly due to the lack of adequate social and infrastructure services, (iii) they perpetuate a spatial form of social exclusion that is damaging to society and to the younger generation especially; and (iv) the absence of adequate sanitation and drainage risks weakening the environmental sustainability of the urban areas. Although the pace of their expansion has apparently slowed, it is in the informal settlements where spatial and 5Informal settlements should be differentiated from individual illegal buildings, such as restaurants in protected zones and buildings not conforming to permits. ix demographic growth is happening and where the policy and legal conflicts all came together. There is a complex legal legacy affecting all aspects of the informal settlements in Albania. Various legislation passed in the 1990s stipulated that undeveloped urban land could be subject to restitution to the original owners, while claimants to agricultural land could receive cash compensation or comparable land but not their original plots. Aside from the complexities of establishing original owners and determining appropriate compensation, these legal distinctions have suppressed progress in resolving the informal settlements. Those households situated on land within the urban "yellow line" have generally not been able to obtain clear title due to overhanging claims for restitution, while those located in the periurban fringe cannot obtain infrastructure and services as long as the area is still designated as agricultural and nonurban. As government has not been able to resolve all the restitution or compensation claims, nor update the urban plans needed to recognize changes in land use, nor finance infrastructure investment in step with the growth in urban population, the informal settlements have become literally a "no-man's land" at the frontier of the urban management challenge in Albania. The issues, and therefore the solutions, for informal settlements vary in nature and extent depending on the type of settlement. In the periurban areas the main concern among residents is the lack of formal access to water and sanitation, electricity, or public transport, and the absence of or distance from schools and health centers. Within the urban perimeter the residents have easier connections to networks (even if illegal), but the key issue is fiscal sustainability. The municipality does not have the resources for investment in the local public goods, and the utilities have low incentive to pursue formal connection and cost recovery because of their own weak governance. Past attempts of regularization, as in the Bathore area of Tirana supported by a World Bank project, have been small scale, partial, and dependent on special legal dispensation. In May 2006 new legislation was passed to facilitate the administration of payment for land title and to legalize buildings without proper permit (excepting structures in designated tourism zones). While the legislation is a key enabling framework for eventual legalization of informal settlements, it faces unresolved issues of implementation. First, there remain associated claims over ownership or compensation. Second, by prioritizing legalization the law leaves to a second stage the urbanization of informal settlements (e.g., establishing proper rights of way). This sequencing implies that municipalities will have to buy back land for public spaces in the neighborhood at higher prices than the residents will have paid to get the title. Third, the law does not address the large financial needs for infrastructure for the settlements. Based on the first upgrading experiences in Albania and with comparative reference to other countries, these costs would be reasonably estimated at about US$3000 per household, or higher depending on distance from networks. While the economic returns to upgrading are likely to be attractive, a scaled-up program will require commitment of contributions from multiple sources, including beneficiaries and both levels of government, over the medium term. The first step in defining a priority action program for integration should be to distinguish the needs of different types of informal settlements (notably, those within the urban perimeter having infrastructure connections versus those outside that do not). Second, practical procedures for upgrading x should be worked out through pilot programs in the different areas. Third, a time frame and feasible financing plan needs to be worked out, separating the needs for funds to compensate ex-owners from the investment requirements for upgrading. The central and local governments should include the informal residents fully in planning and financial provisioning for such improvements. Identifying priorities for investment in upgrading of informal settlements will also need to take account of needs for investments to expand or rehabilitate secondary and primary infrastructure networks for regular neighborhoods that have rapidly densified in the post-transition period and outgrown their existing facilities. Towards a redefined framework for urban planning and land management Despite the many legislative reforms, much of what is happening on the ground in urban areas, both formally and informally, retains an ad hoc character. There is still significant room for improvement in the management of urban development, in particular to find a more adequate accommodatioan of both public and private interests in the development of land and use of property. This new balance needs to be reflected in changes in the urban planning law (currently being rewritten) and in regulations governing the uses of land and real estate, and in a concerted effort to integrate the informal settlements. Issues and missing links in the urban legal framework. Most of the debate on Albanian urban law has focused on three key issues (restitution, registration and regularization), but the legal reform agenda is much broader. In brief, Albania needs to move from the current approach that has subordinated the public interest to private rights , reduced urban development to construction, and limited urban planning to physical design. The current pattern of urban development has resulted from a largely unqualified legal approach that makes private property rights paramount, thus restricting the scope for state intervention through urban planning and management. While in the first decade of transition Albania has managed surprisingly well to respond to the immediate economic and social demands facing cities through almost unqualified private efforts, the next decade calls for a somewhat different story. Ensuring the cities' future success--in livability and environmental sustainability, ease of movement, and social integration of the low income population--may be a greater challenge yet, as it will require striking a better balance between private and public initiatives in future urban development. In this context, the legal-urban order in Albania has still to evolve significantly beyond the scope of the 1998 Urban Planning Law and its amendments in order to address the current state of urban affairs in a rapidly changing society. Both the 1998 Constitution and the country's civil legislation express a conservative, classical legal approach to land and property rights, which is essentially conducive to a laissez faire attitude insofar as urban development is concerned. With the right to construct being widely perceived as a mere accessory of the property right, there is little scope for public intervention through regulatory planning. The radical measure of expropriation is the main legal alternative recognized as available to government. New legal instruments (widely available in many countries) should be created or redefined for intervention in the urban land and property markets, reflecting the notion of the social function of property. The urban legal order should also be updated to support condominium and rental practices. xi Urban management is also constrained by issues of intergovernmental relations. The Ministry of Public Works, Transport and Telecommunications has a coordination function through its department of urban planning, which is under-resourced even relative to the planning units of some municipalities. There is an apparent disconnect between the 1998 Urban Planning Law and the 2000 Decentralization Law, in that local governments do not have the means to carry out their new urban planning responsibilities, while the central government retains a large de jure role in approvals. It may be preferable to reduce this oversight function, where truly needed to protect national interests, to a rapid "no objection" type of review, thus minimizing delays and opportunities for political intervention in municipal planning. Coordination across horizontal boundaries should also be encouraged and facilitated--both among the municipalities of the Tirana metropolitan area, and through municipal associations that can share practices and further the interests and capacities of local governments. There is also a gap between the urban legal-regulatory order prevailing in Albania and that common in the EU with respect to a social agenda. While there is clear protection of individual rights there is much less recognition of collective rights, and therefore the scope for organized civil society is still limited. Public participation in the discussion and formulation of urban plans is not required but does happen increasingly, particularly in the context of recent strategic planning and budgeting initiatives. Such participation will need to become a key part of the solution for problems of urbanization and regularization of informal settlements, especially. A protective framework for consumers' rights will also be more important as property transactions intensify. Recommendations regarding urban planning and policy for urban development. The basic first step in reforming the guiding framework should be to articulate a vision and strategy aimed at a sustainable and inclusive character of urban development. It is suggested that in setting the broad directions for urban land use policy (and for the general regulatory framework) the government, both central and local, should articulate clear objectives such as the following6, which would be key to achieving an urban system which is efficient and equitable: · there should be a legal housing product affordable without subsidies to the vast majority of the urban population (70-80 percent are shares expected in most developed market economies); · infrastructure should be available to all residents, e.g. convenient access to water and sanitation, good roads, drainage, and social services such as schools; · every settlement and new development should be formal, i.e. the system should allow the land user to have a recognized land title and building permit; · cities should develop spatially in a compact manner, so as to allow a maximum use of public transport, for economic and environmental sustainability. The actual work of realizing these objectives would be carried out by the private sector, but based on a coherent framework of urban regulation, public investment and taxation that sets the right incentives and makes the desired outcomes affordable. 6These points do not imply sequencing of priorities, i.e. it is not always necessary to provide title before infrastructure services. xii Second, consistent with these broad national objectives and with a local vision, every city needs to develop an up to date regulatory plan (land use plan), including a zoning plan. The key requirement is a simple document prepared through a public discussion and review, which can be widely available, understood and enforceable. The primary task is to delimit areas where development must be restricted or avoided for environmental or other public interest, and to provide clear but very basic land use criteria, including rights of way of primary roads, for the remainder. A good practice example is the zoning plan of Warsaw, Poland, which protects historical and environmentally sensitive areas and encourages market driven development and reuse of centrally located properties to meet demand, while keeping the city as compact as possible. The urban planning and regulatory practice in Albania should also be different from the past in several other important respects: (i) The local plans should include clear definition of subdivision regulations that promote affordable standards for legal land development. (ii) The past emphasis on the urban growth boundary (yellow line) should be relaxed, since this approach has been found in international experience to be often counterproductive--such boundaries do not reduce the demand pressures for urban expansion and can lead to higher costs of development. (iii) The municipal planning units should regularly monitor land and housing prices, as well as the supply and demand relative to different income groups. This function could be outsourced to the private sector. With better monitoring of the market values municipalities could also become more engaged in managing their own real estate assets (both buildings and land)--this would entail inventorying them, and assessing their potential value for use, rental, sale, leasing, and so on. (iv) More realistic and simpler regulatory plans would be easier to implement and enforce, reducing the government's emphasis on ex post demolition. Enforcement is better ensured upstream, through: (a) regulatory planning and zoning that serves the dynamic of the market rather than works against it; (b) public participation in formulation of the plans and regulations, and publicity for the finished products, to ensure general support and transparency; and (c) a more streamlined permitting process that reduces transactions costs of obtaining approvals and discourages corrupt behavior of officials. (v) There is need for significant reorientation in the attitudes and professional education of urban planners. Enabling this transformation, and meeting the demand for urban planning skills, will require changes in the formal training and licensing of planners, greater exposure to international good practices in simplified, market-oriented urban planning, as well as involvement of expertise from qualified NGOs and international firms, and support from donors. The third leg of the urban framework is the nonregulatory mechanisms: infrastructure investment and use of fiscal and financial instruments supporting urban development. Investments in infrastructure are indispensable to keep housing price affordable in the long run and to serve an efficient private economy. Although there is certainly scope to explore more public-private partnership in urban infrastructure provision especially for tariff-based services such as water supply, the resources to allow investments in local public goods xiii (roads, sanitation, drainage, and green spaces) with little or no revenue-earning potential will need to come largely from local taxes and impact fees. The available fiscal sources could be exploited more, for example by applying property tax on the basis of occupancy where ownership has not been clearly established, and by more consistent collections. Property taxation can also have nonfiscal benefits, by discouraging speculation and underutilization. As noted, the revenues from the construction impact fee could be better managed to direct the funding to infrastructure investment rather than to other expenditures. Over the medium term municipalities will also need to acquire the ability to finance such investment through borrowing. There are other opportunities for new forms of public-private partnership in financing that could be explored over the longer term in Albania, to share the value gained by land redevelopment. In conclusion... The dramatic transformations Albania has experienced since the transition have had very clear spatial dimensions. The increased concentrations of population settlement and of economic activity have brought about improvements in welfare for both the urban residents and for the communities sending migrants. The geographic pattern of Albania's economy is strong and apparently becoming more established, as the Tirana/Durres metropolitan region will likely remain the economic center of gravity. Urban growth will continue but at a measured pace, as Albania's urbanization rate approaches levels seen elsewhere in Europe. National development strategies and policies, including policies to strengthen and improve the investment climate experienced by firms in each city, should therefore acknowledge and work with these spatial realities. The spontaneous market response that emerged in the first decade of the transition managed to absorb a massive increase in demand for urban property and to improve the quality of housing quite dramatically. But the complementary public contribution of local public goods and services has not kept up with the private efforts. Urban management has been largely missing, in terms of a government role in providing both the needed infrastructure and a well-focused and light-handed regulatory guidance that also mimics the affordability and responsiveness of the informal market. The challenge for central and local governments will be to promote a more integrated urban economy that maintains the entrepreneurial agility demonstrated in the past, while ensuring that cities realize the citizens' desires for an inclusive and environmentally healthy society. xiv MATRIX OF KEY RECOMMENDATIONS What: Problems/issues Why: rationale for intervention How: interventions/actions needed Who (and at what level) When A. Refining the Legal Framework for Urban Planning and Land Management Disconnect between the 2000 De jure intervention in municipal Revise the Urban Planning Law to Central government (MPWTT), Short-term (12-18 Decentralization law and the 1998 Urban planning has caused unnecessary reconcile with the overall through parliamentary action to months) to mid- Planning law--urban planning is still delays and thus increased cost of decentralization process revise urban planning law and term (18 months to quite centralized living and doing business o Decentralize decision making enact national guidelines to be 3 years) power to minimize delays and expanded on, and adapted, by unnecessary intervention in local laws and regulations municipal planning level. E.g., "no objection" type of review at MPWTT Unbalanced notion of individual Current approach has restricted the Revise urban planning law and MPWTT and the Parliament Mid- to long-term property rights and individual and social scope for state intervention through related legislation to strike a better (beyond 3 years)-- obligations--dominant private law planning and management, leaving balance between private and public for full approach to unqualified property rights only the instrument of eminent interests (e.g. allowing options of implementation of domain surplus value capture, public-private such options partnership in land development, etc.) B. Formulating and Implementing Well-focused and "Market-Friendly" Urban Planning and Management Policy Need for vision and strategy aimed at a Provide guiding principles for Develop a national urban sector MPWTT leading Immediate to mid- achieving an efficient and equitable, urban regulatory plans and other strategy intergovernmental consultation term sustainable, and inclusive urban system urban legislation or regulations to and stakeholder participation follow (Local strategies Articulate visions and strategies for Municipal governments, through should be part of urban development in municipalities a local collaborative process process of developing regulatory plans) Absence of updated, applicable Reduce the huge transaction costs Formulate and implement Municipal planning , through a Short to mid- term regulatory plans, and lack of of urban development, facilitate o Regulatory and zoning plans local collaborative process and enforcement, contributing to: orderly and efficient urbanization, o Subdivision regulation under guidance of MPWTT o De facto impossibility of formally protect public interest, and limit Urban Planning Department developing vacant land, due to opportunities for rent-seeking and lack of regulatory plan and/or corruption lack of approval for rural land conversion to urban uses xv Absence of updated, applicable Reduce the huge transaction costs Formulate and implement Municipal planning , through a Short to mid- term regulatory plans, and lack of of urban development, facilitate o Regulatory and zoning plans local collaborative process and enforcement, contributing to: orderly and efficient urbanization, o Subdivision regulation under guidance of MPWTT o De facto impossibility of formally protect public interest, and limit Urban Planning Department developing vacant land, due to opportunities for rent-seeking and lack of regulatory plan and/or corruption lack of approval for rural land conversion to urban uses o Rigidity of "yellow lines"(urban Reduce market distortion and Relax urban growth boundary Subject to the revision of Urban Mid-term growth boundaries), producing foster orderly urbanization that Planning Law ; may also be unproductive outcomes--failing does not force illegal/informal done in an experiment basis at failing to reduce the demand development. the municipal level pressures for urban expansion and leading to higher costs of development Lack of widely-available basic Lay the foundation for a well Complete the urban land registration Immovable Property Short- to mid-term information on: functioning land and real property Registration Offices (IPROs) market Complete public land asset inventory o Land and property ownership (infrastructure, public land, MPWTT Short- to mid-term Reveal land value structure to environmentally sensitive areas and o housing and land prices inform market players (to lower cultural heritage sites, etc.) the risk threshold) and setting of Mid-to long-term o real estate transactions zoning parameters Monitor land and housing prices and Municipal planning offices and make information widely accessible MPWTT Little citizen participation in the Enhance transparency of the Hold early and broad stakeholder Municipal planning offices Short- to mid- term formulation of urban plans planning process so that the plans consultations on defining visions and are widely understood and strategies for regulatory plans. inclusive, and public authorities Conduct public hearings and make are held accountable for plans publicly available as they are enforcement produced Lack of public property asset Enable public sector to influence Improve public property asset Municipal planning offices, Long-term management urban development and leverage management, through options such as under national guidelines from private investment rental, sale, leasing, and other active MPWTT land transactions xvi C. Providing Infrastructure Investment and Incentives to Facilitate Private Sector-led Urban Development Informal settlements need to be Bring informal settlements into the Develop implementation regulations MPWTT and Ministry of Justice Short- to mid-term integrated into urban areas (with larger urban socioeconomic system for the new legislation (Law 9402); (IPRO) to provide guidelines regularization, urbanization and security and legal-institutional framework, prioritize actions by type of informal of tenure) with access to normal and/or illegal settlement infrastructure and social services Short- to long-term Launch pilot programs to develop MPWTT, in collaboration with (for full practical procedures for full selected municipalities implementation) integration Lack of primary and secondary Remove a substantial barrier to Investing in municipal infrastructure Ministry of Finance, to review Short- to mid-term infrastructure to make urban investment private sector-led local economic (water, sanitation, drainage, parks) and make intergovernmental climate attractive and to integrate development and to integration of and social services, through capital transfers more informal settlements informal settlement municipal budgets (including transparent and rule-based infrastructure impact fee earmarked for this purpose) and capital transfers from central government Short- to mid-term Municipalities, under national Municipalities to assess and prioritize guidelines infrastructure investment needs, including network system plans Limited fiscal and other means of Remove a substantial barrier to Improve current property valuation Municipalities with guidance of Short- to mid-term financing urban development private sector led local economic and property taxation function MPWTT and Ministry of development Finance Ensure allocation of construction Short-term Mobilize more resources and impact fees to essential increase efficiency infrastructure investment Municipalities Enable policy decisions to be made Explore public-private partnerships Mid-term as close as possible to the in the provision of infrastructure and Central government to develop a beneficiaries / service users services, especially tariff-based legal framework for PPPs Provide options for long-term Central government to develop Mid- to long-term financing through municipal an appropriate legal framework borrowing for municipal credit, and sound fiduciary requirements for municipalities to qualify xvii D. Building Human and Institutional Capacity in Urban Planning and Land Management Approach to planning as physical design, Instill a paradigm shift in the planning Revise planning education; MPWTT, universities, research Mid- to long-term with little regard for or understanding of mentality of policy makers, planning Provide professional training; institutes, and professional market forces among policy makers and officials and professional urban Establish licensing system of urban associations planning profession planners. planners. MPWTT's urban planning department has Central guidance in urban planning Recruit adequate staffing MPWTT Short-to mid-term weak capacity and management needed at the central Provide targeted training and technical level, consistent with decentralization assistance as appropriate of main functions to municipalities Short- to mid-term Re-orient national building inspectorate MPWTT (construction police) and strengthen inspection capability in municipalities Lack of skills in planning and development Improve human capital in urban Provide targeted training and simplified MPWTT, universities, research Short- to long-term control in municipalities planning and management at the local guidelines and tools to assist preparation institutes, and NGOs, in level of regulatory plans collaboration with the World Bank and other donors xviii Albania Urban Sector Policy Analysis Part I. The demographic and economic dynamics of recent urban development Over the past 15 years Albania has made significant progress in its transition from rigid central-planning to a market-based economy. The country has undertaken far-reaching structural reforms and earned distinction as one of the fastest growing of the transition economies, with an average annual real GDP growth of 7.5 percent in the period of 1998- 2004 (IMF, 2006). This impressive growth has also been fueled by remittances from external migration, which the Bank of Albania estimated in 2004 at US$ 1 billion, or 13.5 percent of GDP (Hernandez-Coss et al, 2006). The strong economic performance coupled with remittances, together with relatively low income inequality, have contributed to reducing the poverty rate more dramatically than in any other country of the Western Balkans in the past several years.7 Accompanying the economic and social transition has been the increase in urbanization from 36 percent of the population in 1990 to 44 percent in 2003. Albania remains one of the poorest countries in Eastern Europe,8 and it still has a long way to go in replacing the economic structure of socialism with a formal productive system based on high value and processed agriculture, light manufacturing and services. The expansion of urban populations and urban economies has been a key element in the recent transformations, feeding the increase of internal transfers, capital stock, housing the construction industry, and the reallocation of the labor force to higher productivity activities. These trends have permitted the dramatic improvements in welfare and created a vibrant marketplace for pent-up entrepreneurialism. Part One of this report describes some of these developments characterizing the new urbanized context of the Albanian economy. The analysis also underscores the urgent need for modernized governance, especially at the local level, to ensure that cities can function efficiently and equitably. The fiscal and political decentralization begun in 2000 sets the framework for local governance, although important dimensions of municipal financing capacity are still being worked out. Specific policy attention also needs to be devoted to the particular challenges facing cities in the areas of urban planning and land management. Problems in these areas affect the mix of public and private goods, or of private and public interests, in the local environment that determines the quality of everyday life. These issues are the focus of Part Two of the report. 7World Bank, Western Balkans Programmatic Poverty Assessment Progress Review (2001-2005), June 2006. 8GDP per capita is still only 6.5 percent of EU-15 average (EIU country profile 2006). 1 Chapter 1 Demographic developments and trends -- Albania continues on the move The migration phenomenon Albania is unique in its demographic situation, in that it is the only country in Europe that enjoyed a natural growth rate above 1 percent throughout the 1990s (King and Vullnetari, 2003; INSTAT, 2002). However, between the 1989 and 2001 Censuses, Albania experienced population decline by 3.6 percent. The underlying driving force has been the large-scale international emigration since the end of the self-isolation. In 2001, about 600,000 to 700,000 or one fifth of the resident population of Albanians, were estimated to be living abroad, mainly in Greece and Italy (Carletto et al, 2004). The post-communist exodus unfolded in a series of stages linked to critical moments of economic hardships and political instability. Stampini et al (2005) identified four key phases in this evolution. Following the 1990 fall of the communist regime (under which emigration had been officially prohibited), the initial political turmoil, social unrest and economic downturn from 1990 to 1992 triggered a surge of international migration. The period of 1993-1996 saw the return of political stability, economic growth, and falling unemployment. Nevertheless, international migration continued to grow, largely due to sizable wage and wealth differentials between Albania and its neighboring countries, public sector downsizing, and inadequate infrastructure and services provision. In l997, the collapse of a series of pyramid schemes led to the peak of temporary and permanent migration. Since 1999 the economy has steadily recovered. The regained political stability and revived economic growth have helped rein in the migratory outflow, though still at high levels. Figure 1.1 Population growth reversed during the 1990s Total Population in Albania (1945-2001) 3,500 3,182 3,069 3,000 2,591 2,500 000)'( 2,068 2,000 oni 1,626 at 1,500 1,392 Total Population 1,122 1,219 opulP ('000) 1,000 500 0 1945 1950 1955 1960 1969 1979 1989 2001 Census Year 2 Figure 1.2 Tirana and the central-coastal area are the main destination of population movements. Absolute city populations and % population increase by district, 1989-2001 3 In parallel with international migration, post-communist Albania has witnessed an equally significant internal movement of the population. The internal spatial reallocation of the population has been mainly from the interior and mountain regions to the central and coastal regions, from highland to lowland, and from rural to urban areas. As demonstrated in Figure 1.2 and Table 1-1, between the two Population and Housing Censuses (PHC) in 1989 and 2001, the central and coastal regions became the most sought after destination of internal migration. Between 1989 and 2001, Tirana and Durres top the list of most popular prefectures/regions receiving migrants, absorbing close to three quarters of total internal migration flows. Fier and Vlore in the southwest costal zone, followed by Lezhe to the northwest coast and Elbasan in the center, also received immigrants but much lower shares. The outflow from the economically backward North Eastern region (prefectures of Diber and Kukes) greatly dominates that from the South-East (prefectures Berat, Gjirokaster, Korce). There are also significant short-distance flows (predominantly rural-urban flows) within Central Albania and within the North East Mountains. Table 1-1 The center-coastal region is the main focus of attraction for migrants9 Inter-regional migration flows (1989-2001), number of persons and distribution in percent Region of Region of arrival departure North-East Centre-Coast South-East Total North-East 107,433 1,465 108,898 In % 98.7 1.3 100 Centre/Coast 2,491 11,721 14,212 In % 17.5 82.5 100.00 South-East 1,273 58,256 59,529 In % 2.1 97.9 100 Total 3,764 165,689 13,186 182,639 Source: INSTAT Census 2001. Urbanization Much expected but unprepared for, urbanization has become a visible and inevitable trend since 1990, when restriction to free movement was lifted. Between 1989 and 2001, the share of urban population increased from 35 to 42 percent. Because the total population was declining throughout the decade due to net emigration, the increase in numbers of urban residents (about 1 percent per year) was not nearly as large as would be expected by the increase in urbanization rate. Albania remains one of the least urbanized countries in the ECA region, where on average 63 percent of the population is urban. 9While the total number of Albanians moving across the three major regions was 182,639 according to Table 1.1, the number of migrants across the 12 prefectures in the same period was 252,735 (see table A.1.1 in Appendix). The more detailed the administrative division, the higher is the number of internal migration flows recorded. 4 Box 1.1 A Brief History of Urbanization in Albania From 1945 to 1990, urbanization in Albania was under rigorous state control. In order to build a modern, industrialized socialist society, up to 1960, the Party leader encouraged the development of industry and construction sectors. This policy led to a rapid increase in the urban population. Between 1950 and 1955, the country registered an astonishing 7 percent annual growth in urban population. However, from 1961 to 1990 government shifted gear and started forcibly limiting urbanization. The development of small towns became a priority and big cities were forced to settle behind "yellow lines" ­ the city boundaries established by master plans. This restriction on urbanization was partly because urban residents enjoyed much better welfare provision (housing and health services, for instance) than their rural counterparts. In fact, the government issued domestic passport or identity cards and enforced employment restriction at enterprises to keep people in the country side. This policy resembled similar approaches in other countries in the previous Soviet Bloc. Source: various sources including UN (2002) State of the Housing Sector. Figure 1.3 Shifts in Urban and Rural Population Shares, 1945-2001 90 80 78.7 79.5 onital 70 72.5 69.1 67.7 66.5 64.5 60 opuP 57.9 50 al % Urban otTfo 40 42.1 30.9 32.3 33.5 35.5 er 30 27.5 % Rural haS 20 21.3 20.5 10 0 1945 1950 1955 1960 1969 1979 1989 2001 Census Year The urban growth was highly concentrated, however. At the center of the urbanization phenomena is the explosive population growth and urban expansion of the Greater Tirana area. According to the 2001 census, the municipality of Tirana witnessed a dramatic population increase of 43.4 percent, from 238,057 residents in 1989 to 343,078 in 2001. However, approximately 850,000 inhabitants reside in the four districts forming the Tirana/Durres Metropolitan Area10, although estimates vary. A 2004 EU study11 states that the population in this Tirana/Durres agglomeration is estimated to exceed one million, or approximately 75 percent of the country's total urban population. This growing urban region can be further distinguished by two major sub-areas: (i) the Tirana-Durres axis, in which most industrial and commercial activities are centered; and (ii) the peri-urban areas where tens of thousands of migrants have settled in. 10The four districts are Tirana, Durres, Kavaje, and Kruje. 11European Commission PHARE Programme (2005), Albania--National Transport Plan: Phase 2 Study Phase (ANTP), Final Report, Louis Berger S.A., Paris and Albania 5 Figure 1.4 The Greater Tirana Area leads the urbanization trend Population densities and main urban centers across districts, 2001. Source: INSTAT. 6 Administratively, there are 65 municipalities and 309 communes in Albania.12 Most of the municipalities are very small, with one third (23) having population size in the range of 5,000 to 9,999 (an average of 7,184 residents), while one third (22) are in the range of 10,000 to 24,999 (an average of 15,627 residents). In 2001, Tirana was the only city with population more than 100,000, although Durres is estimated to have joined this league and Elbasan is on its way to reaching the 100,000 threshold.13 Figure 1.5 below shows the distribution of municipalities across different ranges of population size. Figure 1.5 Most Albanian municipalities are very small 400000 25 23 350000 22 20 300000 seitil noitalup 250000 15 200000 paicniu mfo Po150000 10 10 erb 100000 5 muN 50000 4 3 2 1 0 0 0 <1,0001,000-4,999 5,000-9,999 9 9 10,000-24,9925,000-49,9950 ,999 0-74 Population ,00 75,000-99,999>100,000 Number of Range of Population Size Municipalities Source: 2001 Census According to the 2001 Census, close to half of the Albanian urban population (47 percent) is concentrated in five biggest municipalities (with more than 75,000 people) with 23 percent of the urban population residing in Tirana. Smaller cities with 25,000 to 50,000 residents were home to 17 percent of the urban inhabitants. 12"Municipality" is understood as the local administrative unit governing a city or town, which is larger than a village and usually comprises more than 4,000 people and hosts industry. During the communist era, in order to make the country more industrialized, some settlements gained municipality status even though the share of non-farming jobs was small. Commune is understood as a local administrative unit in rural areas, comprising several villages, which is governed by a chief who is elected for three-year terms by commune residents. 13Note that districts, prefectures, municipalities and cities often share the same name, e.g. the city of Elbasan is run by the Municipality of Elbasan and is located in the district and prefecture also called Elbasan. A "city" is not an official administrative classification, whereas the other units are. In this report "city" and "municipality" are used interchangeably. In the case of Tirana, the city proper has one main municipality (and 10 "mini-municipalities"), while "Greater Tirana Area", which is an unofficial designation, would comprise up to 7 neighboring municipalities. 7 Figure 1.6 Population distribution by municipality is similar in Albania and in FYROM 35% 30% 30% noital 25% puoP 23% 24% 23% ytialpcniu 20% 20% 15% 17% M 13% of 11% er 10% 11% haS 9% 5% 8% 6% 2% 3% 0% 1,000-4,999 5,000-9,999 10,000-24,999 25,000<49,999 50,000-74,999 75,000-99,999 > 100,000 Range of Population Size Municipality Albania Municipality FYROM Source: 2001 Census, INSTAT for Albania and 2002 Census for FYROM. One of the questions of interest for this study is whether the urban system in Albania is anomalous, relative to what would be considered a "normal" pattern of market economies. An approach to this question is to examine the city size distribution in Albania against the so- called "rank-size rule" ("Zipf's law") of city sizes. As described in the Appendix (Box A.1.1), the usual regularity in the size distribution of cities in market economies is not found in former socialist economies which experienced a strong and enduring influence of central planning. The Russian Federation is a classic example where the largest cities tend to be smaller than predicted by the city-size ranking. It might be expected that the Albanian city system would also show distortion due to the extreme controls exercised during much of the socialist period. Using the rank-size distribution technique, we plot two graphs of Albanian city size distribution in 1989 and 2001, in order to shed light on the changing dynamics of urban system in this country of transition. In 1989, the graph exhibits that the capital city, Tirana, and the second and third largest cities, Durres and Elbasan, respectively, are "too small" in the sense that Zipf's law would predict larger population figures. In 2001, after a decade of internal migration and structural reforms, the city-rank distribution appears to be aligning with the market-based rank-size rule. In particular, Tirana has grown closer to the benchmark of Zipf's law, but has not risen above the line.14 So at least by this standard, Tirana is not "too large". And compared to three cohort countries (FYROM, Croatia and Moldova), Albania appears to have evolved closer to the line (see both Figure 1.7 and 1.8 below, and Box A.1.1 in the Appendix). 14This analysis refers to the city not the greater metropolitan area population. 8 Figure 1.7 and 1.8 Albania's city size distribution is moving closer to the market economy norm Size Distribution of Albanian cities (1990) Size Distribution of Albanian cities (2001) 13 13 cities > 5,000 cities > 5,000 12 slope = -1.0823 12 slope = -1.0807 on)it 11 laupoP on)ita 11 ul 10 opP( 10 Ln( Ln 9 9 8 8 0 0.5 1 1.5 2 2.5 3 3.5 4 0 1 2 3 4 5 Ln(Rank) Ln(Rank) Source: INSTAT, 1990 and 2001. This exercise reveals a powerful trend that the urban development and migration movement have been correcting a structure that evolved under central planning, reflecting adjustments to the emerging marketplace. 15 The aforementioned movement and relocation, albeit seemingly chaotic and spontaneous, in fact has reflected Albanian individuals' and families' natural and practical responses to the emerging geography of opportunity as the epic socioeconomic transition unfolds. Conclusions regarding demographic perspectives One of the major constraints in analyzing the demographic trends beyond the 1990s is that estimates of changes in population by district, prefecture or municipality since the 2001 Census are not available with any reliability. Although such estimates are provided by the municipalities to INSTAT, closer examination of these data reveals major anomalies. For example, 2005 population data shared with the Bank mission show most of the districts reporting that their population re-approximates the levels that had been estimated in 2000, before the last census. The 2000 total population had been estimated at 3.961 million, whereas the census introduced a major correction to 3.069 by accounting for the extent of emigration. The 2005 estimates currently reported by the municipalities suggest a total population of 3.820 million, which would imply a 24 percent increase since the census four years earlier - which is manifestly impossible, unless there had been a massive return of emigrants. The reasons for the overestimates are not clear, although it is possible they reflect efforts by the local governments to assert a larger size in order to claim more fiscal transfers. Although accurately determining inter-censal population figures is clearly very difficult in the case of major internal and external migration, it would be important for INSTAT to try to produce reasonably reliable subnational population figures for purposes of planning public funding and service delivery fairly. 15Caution need to be taken while using this technique to predict the economic and demographic future of individual cities. City development is unlikely to be dictated solely by the correction of past distortions. 9 Table 1-2 Comparison of population estimates by district, before and after 2001 national census District Estimate Census Estimate Estimate Change 01.01.2000 2001 01.01.2002 01.06.2005 2005/2001 Berat 161,772 127,837 128,410 157,938 24% Bulqize 57,409 42,968 42,985 48,453 13% Delvine 28,063 10,765 10,859 29,660 176% Devoll 42,143 34,641 34,744 43,080 24% Diber 104,790 85,699 86,144 88,687 3% Durres 222,768 181,662 182,988 270,524 49% Elbasan 265,192 221,635 224,974 246,816 11% Fier 254,137 199,082 200,154 264,319 33% Gjirokaster 72,806 35,750 55,991 76,992 115% Gramsh 50,250 54,647 35,723 35,897 -34% Has 22,788 19,660 19,842 19,174 -2% Kavaje 105,346 78,179 78,415 110,531 41% Kolonje 29,484 17,161 17,179 27,617 61% Korce 196,969 142,909 143,499 180,673 26% Kruje 71,010 63,517 64,357 67,077 6% Kucove 45,985 35,338 35,571 42,997 22% Kukes 81,377 63,786 64,054 62,637 -2% Kurbin 70,078 54,392 54,519 70,393 29% Lezhe 81,149 67,734 68,218 92,785 37% Librazhd 82,517 72,387 72,520 72,782 1% Lushnje 171,844 143,933 144,351 181,219 26% Malesi e Madhe 53,213 36,692 36,770 53,492 46% Mallakaster 50,596 39,529 39,881 44,367 12% Mat 76,373 61,187 61,906 66,756 9% Mirdite 50,113 37,056 37,055 41,252 11% Peqin 37,378 32,964 32,920 34,600 5% Permet 41,388 25,780 25,837 37,473 45% Pogradec 86,727 70,471 70,900 89,538 27% Puke 46,203 34,386 34,454 39,016 13% Sarande 79,947 35,089 35,235 82,864 136% Shkoder 233,127 185,395 185,794 222,191 20% Skrapar 53,797 29,845 29,874 39,342 32% Tepelene 50,808 32,404 32,465 40,817 26% Tirane 626,821 519,720 523,150 630,668 21% Tropoje 42,317 27,947 28,154 28,117 1% Vlore 214,715 147,128 147,267 178,823 22% Total 3,961,400 3,069,275 3,087,159 3,819,567 24% Source: Census column from official PHC (2001). Later estimates as reported unofficially by municipalities to INSTAT and collected for the Bank missions in 2006 (obtained from Jolanda Trebicka, WB consultant). Even if there were a safe approximation of mid-decade population, it would be difficult to make any strong suppositions about the future trends in overall population movements, or especially in their spatial dimensions. For the essential purposes of planning urban development policy and local government responses, it is necessary to postulate some general notions of the magnitude of future urban growth, and its location in rough outlines. 10 A first question of importance to future policy, therefore, is how much future urban growth can be expected, creating continued pressure on public investment, housing and urban services. An indication can be obtained from alternative population projections made by INSTAT, and by the United Nations (Figure 1.9). Given the wide range posited by INSTAT and the middle estimate of the UN through 2020/21, it appears that the urban population could rise to 1.7-2.0 million over the two-decade horizon--assuming that the UN's urbanization estimate of 54 percent is a valid parameter. On this trajectory Albania might reach the ECA average urbanization in 30 years, with a 61 percent urbanization rate and 2.2 million urban population in 2030. While these figures only represent an order of reasonable guesses, given the major uncertainty of migration behavior, they imply that Albanian cities may need to accommodate 400-700,000 new residents over the next generation if it continues the kind of demographic pattern typical of the rest of Europe. Figure 1.9 Urban population may continue to grow significantly over next decade Total population Urban population Urbanization rate 4000 70% 3680 3548 3500 3,727- 3220 3335 3440 60% 3113 3,216 3063 61% 3000 54% 54% 50% 51% 2500 48% 45% 42% 42% 40% 2000 2233 2,013- 1929 30% 1500 1,737 1762 1448 1603 20% 1000 1306 1290 500 10% 0 0% 2000 2001 2005 2010 2015 2021 2020 2030 UN/DESA (Census base UN/DESA UN/DESA UN/DESA INSTAT UN/DESA UN/DESA year) Ave annual -0.46 0.00 0.68 0.70 0.62 - 0.62 0.28 total growth Ave annual 1.01 1.27 2.07 2.03 1.89 - 1.81 1.34 urban growth Notes: Growth rates refer to previous five year average. INSTAT estimates for 2021 based on range of assumptions regarding migration, fertility and mortality. INSTAT figures refer to January 1 and UN figures to mid-year, so comparisons cannot be taken as exact. Sources: INSTAT (2004), UN (2004). Not all of these residents will actually be moving from rural areas. Besides migration, the rising urbanization rate also reflects the inevitable administrative reassignment of rural to urban categories (e.g., from commune to municipality status) to reflect increases in built-up density of formerly rural areas--especially those on the periphery of cities--and changes in their economic structure to a more urban character. And the natural growth of the urban population will increasingly dominate the demographics, as cities host more young residents of reproductive age. 11 Nevertheless, the issue arises as to where in the urban system most of the new city growth will occur. The next section reviews the trends in economic activity, which are the closest determinants of where firms and workers choose to locate. While the future economic structure cannot be known with any certainty, it remains highly likely that the Tirana-Durres metropolitan area will continue to dominate the economic and spatial system, as recognized in projections by INSTAT (Box 1.2). Box 1.2 INSTAT projections of spatial spread of population to 2021 According to INSTAT (2004), population in Tirana and Durrës districts would grow from 700,000 to 1,200,000 in the next twenty years. This 70 percent increase is attributed to the continued settlement of immigrants originated from the rest of the country, combined with natural increase of the existing population in the region. Populations in the South and in the Center (Tirana and Durres excluded) added to around 1 million in 2001. In the absence of internal migration, both would grow to 1.2 million--slightly less in the South and slightly more in the Centre, due to a somewhat lower fertility in the former region. The North, a region with the most sizeable emigration, will see its population decline to 340,000 in 2021, if emigration continues at its most recent level. The share of population in Tirana and Durrës districts would notably increase from less than a quarter to almost a third of the population of the whole country. The relative importance of each of the other three regions would decline: little in the Centre, but substantially in the South and even more so in the North. More than ever, the Albanian population would be concentrated in the central part of the country. Even apart from Albania's particular features of internal migration, the continued preponderance of the Tirana-Durres metro area in the city system is to be expected, and for good reasons (see Box 1.3 below).16 This advantage should not be decried, but rather recognized and addressed in the urban policy and investment. The fact that in many transition and developing countries the largest cities, such as Tirana, suffer major diseconomies even before all the potential gains of size have been realized is often a testament to the neglect of urban policy. For example, weakness in public transport services and lack of traffic management should be blamed first for serious congestion, not the size of the city itself. Similarly, neglect of solid waste management and of public green spaces leads to premature and unavoidable loss of environmental amenities. Excessive land prices become inevitable when the land supply is heavily regulated and urban planning is ineffective. 16It is telling, for example, that Albanian migrants to Greece sampled in the 2005 LSMS report that they invest their remittances mainly in Tirana even when they did not originate from the Tirana area; and while 13 percent of the sample lived in Korce (the eastern interior of the country) before migrating, less than half of them invest remittances in the same district (Kotzamanis 2006). 12 Box 1.3 Why relatively large cities remain poles of economic and social attraction The relatively large cities of any country are generally the most productive for all the reasons of agglomeration economies. Multi-centric, metropolitan areas tend to be the locus of the most diversified production, of innovative and information-intensive industries and services, and of entrepreneurship because they offer the deepest labor market and most opportunities for exchange of ideas (Henderson, Shalizi and Venables, 2001). Recent research has suggested that despite the decline in transport costs in recent decades, physical proximity has become no less important to firms' productivity. In fact, the growing role of information technologies and of knowledge-intensive production across many sectors seems to be favoring greater concentration of workers and activities using such skills, as opposed to diminishing the value of face-to-face interactions that cities offer (Gasper and Glaeser 1998, Glaeser 1998). Evidence from both theory (including the New Economic Geography) and research is highly robust in revealing that agglomeration is an increasingly potent phenomenon of "self-reinforcing development" that encourages firms to co-locate in close proximity in cities. Firms often remain where they can have ready access to markets even in the face of diseconomies such as congestion and high land and labor prices (Venables 2005). Recent institutional research focusing on the importance of dense networks of personal exchange and relationships that foster innovation confirms the value for entrepreneurs and educated workers to remain spatially connected, and the continued attraction for them of large cities (Storper and Venables, 2004). While globalization has created opportunities for dispersing production across the supply chain to new locations, it has tended not to reduce the dominant role of the larger metropolitan areas of each country as focal points for inward investment, highest value activities and services, and magnets for the best educated workforce. A deliberate policy to promote deconcentration of urban population in Albania could be difficult to implement effectively and very costly if exercised through public fiscal transfers, as evidenced from disappointing regional development policies of many countries.17 As incomes grow and the private sector diversifies, some of the secondary cities are likely to become increasingly attractive to firms and workers, and to gain relative economic importance. Decentralizing political control and easing regulatory controls on the private sector, as already underway in Albania, will tend to promote this process naturally by reducing the incentive for firms to stay physically close to Tirana as the "power hub". Providing more and better infrastructure in and between secondary cities would, of course, facilitate this process. The next chapter describes how some of the secondary cities see their economic future. 17 The main finding of recent studies of regional development policies is that agglomeration economies and market access create strong increasing returns that tend to reinforce the spatial concentration of economic activity in the dominant cities and regions of countries. This pattern is very difficult to change by fiscal or financial policies. See literature review in Marianne Fay, editor, "Brazil Economic Development at State Level--(Some) Lessons from Experience", World Bank, Latin American and Caribbean Region, May 2005 draft. Evidence of a trade-off can be found between national growth and regional dispersion in EU's Cohesion Fund recipient countries. Ireland has (until recently) strategically focused its public investment (including EU regional aid) on its major agglomerations, contributing to its impressive national growth. In the case of Spain (and in Portugal), however, EU regional aid has been dispersed widely across regions, leading to a slower catching up towards the EU-15 average. (See Davies, Sara, Hallet, Martin, (2002). "Interactions between National and Regional Develoment.") In fact, EU-wide experience with regional policy demonstrates a similar pattern: during 1980-2000, GDP per-capita levels between Member States converged, while they appeared to diverge across administrative regions within each country, implying increasing inequalities. André Sapir, et al. (2003), "An Agenda for a Growing Europe: Making the EU Economic System Deliver." . 13 Chapter 2 Underlying Economic Dynamics ­ the Emerging Geography of Opportunities Services, the construction sectors and agribusiness on the rise Behind the epic urbanization process has been a profound structural transformation of the Albanian economy away from traditional agriculture and basic industry to higher productivity activities, including services and construction (WB CEM, IMF 2006). Activities of trade and services, the sector that in all countries emerges and thrives from urban agglomeration, has been the dominant contributor to GDP growth since the early 1990s. In terms of enterprise numbers, wholesale and retail trade accounted for more than half of all registered companies in Albania in 2004 (INSTAT). Tourism is another major part (about 30 percent) of the service sector, showing signs of growing potential.18 Albania has a significant potential to attract foreign tourists for coastal, cultural and ecotourism. According to official data, the number of tourists has continued to increase by 49 percent year on year in the first nine months of 2005 to reach 622,000 (EIU, 2006). While tourist numbers increased threefold since 2003 and investment is on the rise, the tourism industry is still tiny in proportion to other countries in the region. With building booms in major urban areas (primarily building flats and buildings for families), construction has become one of the most dynamic sectors of the Albanian economy, employing 17,000 workers (INSTAT).19 The 2005 Living Standards Measurement Survey (LSMS) shows that no less than a quarter of Albania's housing stock has been built after 1990. Although accounting for only around 10 percent of GDP, the construction sector has been the main source of growth in industrial output (and equal to or more important than agriculture) since 1998. According to the local business survey done in the course of local economic development (LED) strategic plans in several cities in the past couple of years (see further below), businesses consider the construction sector by far the fastest growing sector in each of the cities. In terms of where businesses would like to invest, the construction sector ranks first, too (DELTA, 2004). This spur in the construction industry might also be explained by the lack of secure alternative outlets for savings.20 Agriculture has traditionally played an important role in the economy, accounting for 24 percent of GDP and 58 percent of employment in 2004 (IMF PRSP Report 2005). Several of the urban LED strategies, e.g. in Berat, Lezhe and Korce, indicate that developing a stronger presence of agro-processing industries in the cities is anticipated to become a future driver of the local economy. The recent statistical data of enterprises confirms that agro-industry is doing well (estimated to have grown by 10 percent in 2005), although it remains focused on traditional low-value outputs (e.g., bakery and dairy products) (INSTAT, EIU 2006). The 18During 2004 it is estimated to have generated $673m in revenues, marked with increases in visitor numbers and expenditure per person. 19This figure is very likely to be underreported. 20The banking system has still to gain trust from the Albania citizens, as an aftermath of the notorious pyramid scheme of 1997. 14 challenge for this sector will be to raise the quality sufficiently to compete in European markets, and to break into product niches with higher income elasticity of demand. Box 2.1 The challenges and prospects of the Albanian agribusiness industry In many cities the agribusiness industry is a key driver of local economic development. For example, in Berat agribusiness is the most developed and yet still most promising sector for further economic development. About 42 percent of the local labor force is employed in the sector which constitutes 49 percent of the total number of businesses. The city of Berat is home to more than half of the region's agribusinesses and employs 59 percent of the sector's employees. Investments in this sector have during recent years brought higher productivity and increased incomes. Although product diversification is still limited, the two main products, olives and figs, are well-known in international markets and new production lines for beverages, conserved foods as well as a wine cantina have been established. Local companies have been awarded gold metals at international trade fairs. Despite these achievements, a number of difficulties remain to facilitate a rapid development of the sector. The LED strategy of Korce, a city with an equally important agribusiness industry, points out the prevalent challenges of agribusiness to become competitive and well- oriented in the national and international markets: (i) A modern agribusiness sector needs to be supported by a modern agriculture, a sector which still has a lot of room for improving productivity. (ii) A favorable agribusiness environment with adequate public infrastructure and services, as well as an agribusiness park, should be put in place. The urban plans should take these needs into account. (iii) In contrast to the agri-processing industry in Albania, foreign businesses have been exposed to competition for a longer amount of time and tend to have a competitive edge. Businesses need to be facilitated and encouraged to become more market-oriented. (iv) The marketing strategies of neighboring countries' producers are more sophisticated, e.g. for wine. More competitive sales and marketing strategies are necessary to strengthen the position of local agricultural products. (v) Further value has to be added with processing agricultural products. Apart from strengthening the operational efficiency there is potential for the introduction of new products, which would be readily appreciated by local customers. Source: LED Strategies of Berat and Korce, 2005. Private and informal sectors taking the lead The private sector has increasingly become the driving force of the economy, expanding remarkably from only 5 percent of GDP in 1990 to 75 percent in 2002. Companies with 10 or more employees continue to dominate the Albanian economy. While only representing 4.7 percent of the total registered enterprises, firms of this size class account for 58 percent of the formal employment and 64 percent of revenues (INSTAT, 2004). Directly or indirectly through state-owned enterprises, the government remains the single biggest employer.21 Services and construction are the two major private-sector employers. Microenterprises, with 1-4 people employed, represent 34.2 percent of total employment and amount to more than 90 percent of total active enterprises, largely operating in the service sector (INSTAT, 2004). 21This includes both government jobs and large state owned enterprises, which operate in non-tradable sector (such as telecommunication, insurance, oil and gas which is totally for domestic consumption, and some mining companies). 15 As in other transition countries a significant share of Albanian businesses operate in the informal sector, primarily engaging in the construction and services sectors in urban areas. Depending on the definitions used, informal economic activities are estimated to range between 30 and up to 60 percent of GDP (Muco et al, 2004).22 The small and medium-sized enterprises (SMEs) may be more constrained than larger firms by the still underdeveloped financial sector. According to the 2005 LSMS, family and friends have been the single most important source of funds (including remittances) for supporting SMEs operating in the formal and informal sectors. A study of Albanian migrants in Greece surveyed in the 2005 LSMS, who in total account for 60 percent of the remittances flows from abroad, reveals that few of the respondents reported trying to establish their own businesses in Albania. The major part of the flow is directed to house construction in Albania, as well as for family consumption (Kotzamanis 2006). Figure 2.1 Number and turnover of registered enterprises by sector, 2001-2004 45,000 s 600,000 40,000 ekl 26,164 Other Services sesi noilli 500,000 35,000 7,953 21,847 67,012 6,685 7,288 7,484 22,504 prre 30,000 m ni 400,000 71,851 4,313 Transport and 3,902 Communication 16,201 nte 25,000 5,567 5,190 58,399 244,039 35,160 ofr 20,000 Trade 204,305 151,999 174,668 be 15,000 veronrut 300,000 200,000 18,283 18,684 19,144 20,258 Construction 49,011 68,988 num 10,000 seirp 100,000 37,393 46,464 1,325 122,884 5,000 1,134 1,253 1,467 ert 81,870 86,200 109,737 Industry total 3,852 3,833 4,008 4,818 en 0 0 2001 2002 2003 2004 2001 2002 2003 2004 Source: INSTAT. Emerging spatial concentration of economic activities Generally speaking, the dynamic economic activities are manifested spatially in three broad regions, in terms of their overall development trends and prospects. The Central region, anchored by the capital city Tirana and Durres, the major port of Albania, sets the pulse of economic activity. Figure 2.2 shows the differences in the regional concentration of enterprises across Albania. The strongest business activity is to be found within the Tirana-Durres-Fier corridor, where close to 60 percent of enterprises are registered, with Tirana alone accounting for 39 percent of total registered enterprises of the country. Other regions of strong enterprise presence are Korce, Vlore and Elbasan. In the north and the south of the country business activities are particularly weak (INSTAT, SMEA 2005).23 22This high level of the shadow economy is fueled in large part by an unsatisfactory business and investment climate. UNDP is funding a new study of the informal economy in 2006-07. 23The weakness of the enterprise sector in the north has various origins. Enterprise activity declined strongest during the period of 1997 to 1999, when cross-border economic exchange fell significantly after the closure of the border with Montenegro. The collapse of the pyramid scheme in 1997 further damaged business activity, as did the Kosovo crisis. The particularly dilapidated infrastructure in the area adds further to the problem. Shkodra is a notable example of a regional 16 Figure 2.2 Number of firms per 1000 inhabitants in Albania by district, 2005 Source: INSTAT enterprise and population data, 2005. The modern service and manufacturing sectors are taking ground in the Tirana/Durres area. This metropolitan region alone has attracted about 67 percent of the companies with foreign participation. As people spontaneously leave their impoverished villages to seek jobs, better education and social services, and as returning migrants from abroad seek to set up business in their home country, the construction boom that has swept through the central and coastal areas has been particularly strong in south of Durres and in turn fueled urban and regional economies. Here, the public sector and construction industry offer the best and most buoyant employment opportunities in Albania. capital that experienced a strong economic decline in the 1990s. The number of registered businesses fell sharply from 2,594 in 1995 to 944 in 1999 and has only recovered to 1,633 by 2004 (Shkodra LED Strategy). 17 The Tirana-Durres region is also the main trading hub of the country, featuring the country's only international airport. Over three-quarters of the total volume of imports and exports processed in Albania's ports in 2004 pass through Durres (EIU, 2006). As 95% of the country's exports go to European Union countries, with Italy being the main trading partner with regard to exports (81 percent), and EU countries also providing two-thirds of imports, Durres' gateway position is quite secure (Bank of Albania, 2006). This economic undercurrent of the Tirana-Durres metro area is also reflected in the high flow of passenger trips. In 2004 the region recorded 63,700 passenger trips a day, or 62 percent of the daily domestic passenger trips surveyed. The growth rate of the annual car fleet in the period of 2003-2013 is estimated to be 11.2 percent, compared to 9.6 percent in the Coastal region and 6.4 percent inland (ANTP, 2005). This economic momentum is also shown in Figure 2.2, where the Tirana-Durres region undisputedly leads in terms of enterprise density in Albania. Overall, it is highly likely that the Tirana-Durres metropolitan region will retain the highest growth dynamics in the country. Box 2.2 The economic dynamics of the Tirana metropolitan area The greater Tirana area is estimated to account for about half of the country's total economy, and to offer per capita income at least 50 percent higher than the country average (ANTP 2005). The capital's construction sector is booming and is estimated to account for as much as 25 percent of metropolitan employment. The industry is dominated by large, formal-sector firms building mid-rise high cost apartment blocks in the central city, and small informal builders assisting in incremental detached housing development at the urban periphery. The trade sector has been growing steadily, most importantly the retail sector. Taking into account the limited choices for employment and the relatively low start-up costs, it is estimated that commerce constitutes for more than half of all businesses in Greater Tirana and one third of employment. Almost 60 percent of new firms since 1990 are to be found in the trade sector. Growth in the industrial sector has been slow compared to retail and construction sector, although the capital region has enjoyed the lion's share of both domestic and foreign investment in industry (King and Vollnetari 2003). State-owned manufacturing enterprises were broken up, some turned into successful smaller companies, while others were closed down and many of these remain unused properties within the city. Assembly activities in clothing and footwear industries could potentially be extended to other product types. Unemployment based on official figures is estimated to be 19 percent of the workforce in Tirana, which is significantly higher than the national average (13 percent). (World Bank 2005) The urban labor force reports lower participation rates than the rural agricultural labor force which is still occupied mainly with low productivity subsistence farming. Whether the formal enterprise economy of Tirana and other cities is incapable of absorbing the available labor force, or many entrepreneurs rather prefer to operate in the informal sector, is not entirely clear. The Bank's Labor Market Assessment deems the problem with urban unemployment to be one of inadequate demand, reflecting the weak investment climate. There is no doubt the informal sector (and self-employment) are the main entry points into the urban economy for low-income migrant families in Tirana. Des pite the shortcomings in the investment climate it is evident that the Tirana labor market 18 provides sufficient opportunity to sustain the lowest poverty rates, by any measure, among all urban areas of the country according to the LSMSs, and that the capital has also managed to reduce these poverty rates further between 2002-2005 (see Table 2-2). Inequality, by various indicators, is not much different in Tirana than in other regions of Albania and has remained relatively low, although it is more common for inequality to be much higher in the large cities than in other urban or rural areas of many countries. In short, Tirana seems to deliver on the promise of improved welfare that continues to attract residents to the capital. Sources: PADCO, 2001; ANTP, 2005; World Bank (2005) The Coastal Zone24 shows potential in tourism and agriculture. The coastal zone includes Shkoder, Malesi e Madhe, Lezhe and Kurbin in the north as well as the prefectures of Fier (3 districts) and Vlore (3 districts) in the south and the Elbasan prefecture (3 districts) bordering Tirana. With a strong agricultural base, most cities in this broadly defined region have agribusiness as an established pillar of the local economy, with untapped potential to supply the domestic and international market. The region also has a strong potential for tourism development, with a combination of naturally beautiful shorelines in the south as well as the cultural and archaeological heritage from Greek and Roman times. Northern coastal areas also have resources for the development of a vibrant tourism industry once an appropriate infrastructure is provided and a structured tourism promotion is put in place. The regional economies in the coastal zone have partly been driven by Foreign Direct Investment. Italian investments, primarily in the form of small and medium-size enterprises, are concentrated in the west of the country, close to the Adriatic Sea.25 Greek investments dominate in the south and southeast of the country, close to the border. Greek investors are predominately active in trade (98 percent), with the rest in other industries such as textiles, garments, leather products, and tobacco.26 Although there are other ports in the southern coastal zone, traded goods of the region run almost entirely through the port of Durres, as noted above. Internal and external trade creates little traffic on the north-south axes beyond the central region, and the trade volumes between Albania and it Balkan neighbors are low--representing only 2 percent of total trade in 2000, increasing to a modest 4 percent by January 2006 (Bank of Albania, 2006). This means that the potential economic effects of north-south and east-west transit traffic on the extremes of the country are insignificant to date (ANTP, 2005). Shkodra's LED strategy identifies a vision for the region as a gateway to Montenegro, a role that may possibly become more important with its new national independence. The solid economic dynamic in the central region and parts of the coastal area becomes particularly apparent by looking at the enterprise dynamics over the last years. Figure 2.3 24Using the classification in European Commission PHARE Programme (2005), Albania--National Transport Plan: Phase 2 Study Phase (ANTP), Final Report, Louis Berger S.A., Paris and Albania 25They are primarily involved in construction (35 percent), textile and footwear manufacturing (21 percent), trade and services (16 percent), and the agro-food industry (8 percent). 26 World Bank (2004), "Albania: Sustaining Growth Beyond the Transition." A World Bank Country Economic Memorandum. Poverty Reduction and Economic Management Unit, ECA. 19 below shows the evolution of enterprise growth in relative and absolute terms, for the economically most buoyant and the declining districts. Figure 2.3 Enterprise dynamics ­ districts with strongest enterprise growth and loss Change in absolute and relative amount of enterprises by district, 1998-2004. Tirane +35% Vlore +110% Durres +49% Korce +114% Lushnje +349% Puke -62% Mat -50% Skrapar -61% Kukes -84% Diber -72% -2000 -1000 0 1000 2000 3000 4000 5000 6000 7000 Change in absolute number of enterprises Source: INSTAT, the quoted enterprise figures include sole traders. The economic dynamics of the Inland Zone27 continue to lag behind. The mountainous inland in the north and south-east can be characterized by poorer agricultural fertility than the coastal areas. Many locals have moved to the central region or abroad over the last decade, as described in Chapter One. With depleting rural population and less desirable natural environment and resources, unless deliberate action is taken the inland zone will remain underdeveloped and lagging behind. The cities of Berat and Korce are a positive exception and still retain some regional dynamic and enterprise growth. Overall, the region's economic importance has continued to decline and does not play a significant role as an interregional transit route, since trade with Kosovo and Macedonia is very limited. This pattern may be attributable in part to the poor level of transport connections, but the weak effective demand in the area also implies low returns to major new transport investment (ANTP, 2005). 27Using the classification in European Commission PHARE Programme (2005), Albania--National Transport Plan: Phase 2 Study Phase (ANTP), Final Report, Louis Berger S.A., Paris and Albania: Kukes (3 districts) and Diber (3 districts) prefectures in the north-east, together with Puke district from Shkoder and Mirdite district from Lezhe; Berat (3 districts), Korce (4 districts) and Gjirokaster (3 districts) prefectures in the south-east. 20 What LED strategies reveal about regional urban economics The findings in this section reflect the ideas, objectives, and strategic actions outlined in Local Economic Development28 (LED) strategies for seven cities and an Urban Study for the capital Tirana (PADCO, 2001). In collaboration with the main stakeholders a structured planning process was undertaken by the seven cities in 2004-05. The aim was to assess the socio-economic situation of each of the local economies, leading to identification of a vision and goals for the cities as well as the proposal of common solutions for the problems faced by the community. The strategic plans derive from the perceived strengths and future opportunities of the cities, while the weaknesses and threats identified need to be managed and alleviated. A number of common observations across the Albanian cities that participated in this "SWOT analysis" for the LED process are summarized in the following table. Table 2-1 Summary of SWOT analysis from 7-city LED strategic plans Strengths/Opportunities Weaknesses/Threats 1. The cities' strengths and opportunities largely 1. The poor physical infrastructure is a major emanate from their natural and historical concern for all city stakeholders, most notably for endowments, geographical setting and a relatively the local businesses. Unreliable power supply was well qualified work force. the primary concern, but inadequate sewage systems and inadequate water supply are very widespread, too. The urban road infrastructure needs urgent rehabilitation and the public transport system in larger cities is lacking. The cities of Lezhe and Korce delivered a distinctly better assessment of the local infrastructure than did the others. 2. In most cities agribusiness is an established pillar 2. Informal business competition represents a major of the local economy and the cities' strategies saw impediment for the business community. The an optimal potential in expanding the volume and private sector development is further hampered by marketing of the agribusiness sector to supply the high levels of corruption and a burdensome domestic and international market. bureaucracy of local public institutions. The communication and collaboration between the local government and businesses is lacking, which is why the municipalities are often seen more as an obstacle than a promoter of business. 3. A further distinct strength was identified in the 3. The shortcoming in urban planning law and naturally beautiful environment of the country as national spatial plan was a common point of well as the rich cultural and archaeological heritage criticism, the capacity of municipal institutions was which are great resources for the development of a commonly found to be insufficient, urban regulatory vibrant tourism industry once an appropriate plans were absent and the registration of private and infrastructure is provided and a structured tourism public properties was insufficient. Larger cities like promotion is put in place. Tirana, Durres and Elbasan report having significant informal settlements, which are not integrated into the city. 28For the cities of Durres (Center/Coastal Zone), Lezhe, and Shkodra (Coastal Zone), and Berat and Korce (Inland Zone), these strategies were developed within the framework of the DELTA programme with the support of the World Bank, the Soros Foundation and FLAG. LED strategies were undertaken by the municipalities of Elbasan (Center/Coastal Zone) and Fier (Coastal Zone) with the support of CO-Plan consulting and funded by the Dutch Government. (The Bank did not obtain a copy of the full LED strategy documentation for Fier.) 21 4. It was commonly found that specific business 4. A common threat for local human capital is the enabling progresses, like a closer cooperation with brain drain of professionals who are leaving the and better support from the municipality, would not cities either for Tirana or abroad. involve large costs to be put into practice. 5. In terms of the human capital, the Albanian cities generally believe that they have a well qualified existing labor force. The young population does generally have a good level of education and the major cities see a potential to strengthen their university level education. The overall picture of optimism appeared to be strongest in Lezhe, Korce and Berat--even though the latter two experienced net emigration over the 1989-2001 period Chapter Three discusses further some of the conclusions these cities draw from this strategic assessment regarding priorities for institutional reform and investments needed to energize their local economies. Urbanization showing potential for poverty reduction Migration and urbanization are undoubtedly the social phenomena with the most far reaching implications for the life of Albanians in the post-communist period. Geographical mobility of labor, including urban-bound population movement, is one of the important adjustment mechanisms households can use to help cope with poverty and structural unemployment. This is particularly crucial as poverty ­ both monetary poverty and inadequate access to basic services such as water, health care, and education ­ remains pervasive in many parts of Albania. Between 2002 and 2005, the LSMS surveys have revealed a marked decline in poverty, by all measures, in the four major regions of the country (Table 2.2). Urban poverty has declined faster than rural poverty, with the urban poverty headcount falling from 19.5 to 11.2 percent (a 43 percent reduction), while the rural headcount fell from 29.6 to 24.2 percent (by 18 percent) over the period. There is also evidence of regional convergence in the distribution of poverty, with disparities in poverty rates shrinking both across rural areas and across urban areas. A particularly dramatic improvement is seen in the Mountain region29, which had by far the highest poverty rates in the country in 2002 but by 2005 has come close to the national rural average. To illustrate, while in 2002 the Mountain Rural headcount of absolute poverty was 50 percent as compared to 30 percent for All Rural and 25 percent for National, by 2005 the Mountain Rural rate was reduced to 28 percent--more closely approaching the All Rural and National rates of 24 and 19 percent, respectively. 29 The following regional classification is based on LSMS (2002) geographical distribution and differs from the classification used to classify regional economic dynamics. For the specific LSMS (2002) classification see Appendix to Chapter Two, Table A2.2. 22 Table 2-2 Absolute poverty rates (headcount) by region in percent, 2002-2005 Region 2002 2005 % change Inequality* COAST Urban 20.2 11.6 -42.6 0.293 Rural 20.9 19.7 -5.7 CENTER Urban 19.3 12.5 -35.2 0.278 Rural 28.5 25.9 -9.1 MOUNTAIN Urban 24.7 17.1 -30.8 0.254 Rural 49.5 27.7 -44.0 TIRANA 17.8 8.1 -54.5 0.286 All Urban 19.5 11.2 -42.6 All Rural 29.6 24.2 -18.2 National 25.4 18.5 -27.2 *Gini coefficient, 2005 Notes: Other standard poverty measures, such as the poverty gap and severity of poverty, confirm the geographic ranking obtained using the headcount. Other inequality measures such as the Theil also confirm a geographic ranking similar to the Gini coefficient. Source: LSMSs (Western Balkans Poverty Assessment Progress Report, June 1, 2006) The sharp decline in poverty in the Mountain region can be taken as a strong indicator of the benefit of remittances since, as seen in Chapter One, this region has been a major sender of migrants internally. The LSMS data (see Table A.2.1 in the Appendix) indicate that the average amount of gifts/remittances sent from households in urban areas is almost twice as high as in non-urban areas, and Tirana ranks by far the highest in the average amount of remittances made. About a third of Albanian households report that they are recipients of remittances from abroad. The relative frequency is significantly lower in the Mountain region, where only 22 percent of households report claim to receive international remittances. However, among the households receiving remittances, those of the Mountain region lead in the average annual amount of international remittances (217,000 leks compared to a national average of 160,000 leks).30 A further indication of the importance of remittances in staving off poverty is that the numbers of unemployed in poverty fell by 51 percent between 2002-05, almost twice the decline of 28 percent among the employed poor.31 This disproportionate improvement in the lot of the unemployed poor is likely to be attributable to their access to remittances, since official transfers are not a very significant source of income according to the LSMS. What emerges from various analyses is that there is a clear direction of migration ­ moving away from poverty ­ in particular, from the poorest and remotest areas of the country to the relatively richer districts of Tirana and the coast. Carletto (2004) posits that internal migration is largely driven by poverty, in sharp contrast with international migration, which frequently involves more educated and skilled people (the "brain drain"). The 2001 Census shows that much of the international migration from Albania flows from the center/coastal region and from the southern border area, neither of which is particularly poor. However, 30The direction of international and national remittance payments might give further evidence to the assumption that initial interregional migratory movement was from rural to urban areas, while cities like Tirana, Durres and Vlore served as the stepping stone for international migration. 31"Western Balkans Programmatic Poverty Assessment Progress Review", Powerpoint presentation, June 1, 2006 23 even international remittances have had a strong impact on poverty. 32 A spatially disaggregated analysis (poverty mapping) reveals that pockets of high poverty are dispersed across the country. This is true even in districts that are, on average, among the least poor. The areas where poverty incidence is greatest within Tirana are highly correlated with those with the highest incidence of new residents. (Figures 2.4a and b) (Zezza et al, 2005). These are also the areas on the city outskirts, where urban infrastructure and basic services are relatively weak. 33 The incidence of poverty among new urban residents is considerably higher than among longer term residents. Figure 2.4a and 2.4b Mapping of net immigration and of poverty headcount in percent within Tirana Source: Zezza et al. (2005). The observed patterns of poverty do not suggest that rural migration to urban areas has simply led to the relocation of poverty to the urban areas. In fact, well managed urbanization can become an effective way of alleviating poverty. While the urban migrants may be among the poor of the cities, they benefit from the urban opportunities that have kept the poverty rates there low and declining, and even held inequality rates low in the cities. And, it is the remittances from employment (both formal and informal) in cities that help the poor individuals and families in the sending areas to cope with poverty. Evidence from the LSMS confirms that remittances are to a high degree used to pay for basic necessities and durable goods, particularly in rural areas. In addition, Table 2-3 below shows the considerable impact 32The 2005 Labor Market study reports from the LSMS findings that more than 60 percent of individuals who received remittances from abroad would have been poor in the absence of these and other transfers, and more than 40 percent would have been extremely poor. Eighty percent of remittances from abroad went to households who would have been poor without transfers, and two-thirds of such transfers went to households who would have been extremely poor. Non-poor households received only 20 percent of the external remittances (World Bank 2005, p. 48). 33Poverty mapping uses a combination and extrapolation of survey data and census data to estimate poverty of specific subgroups or small area populations. Disaggregated household-level data are currently not available on the mushrooming informal settlements around Tirana, although the area was oversampled in the 2005 LSMS. In addition, the LSMS data do not allow for the spatial disaggregation of poverty estimates beyond the macro-region level (Central, Coastal, Mountain, and Tirana). In particular, poverty estimates are not available for any specific urban areas other than Tirana. 24 that foreign remittances have been having on the construction activities of private dwellings. 37 percent of all household who (1) either purchased or constructed a dwelling or (2) made improvements or renovations to their dwelling unit reported that their construction activities were financed to a high degree by remittances. The figures also show that remittances from abroad have particularly fed housing construction in urban regions. Table 2-3 The impact of foreign remittances on construction activities and improvement of dwellings Coastal Central Mountain Tirana Total Total Region Region Region Urban Rural % of HHs, having undertaking construction/improvements*, who financed part of it via 44.45 37.41 44.40 18.27 47.18 27.15 36.83 remittances % of construction cost/ improvements financed by 85% 86% 79% 64% 79% 86% - remittances Notes: *The term `Construction/Improvements' includes all responding household purchasing or constructing a dwelling as well as those making improvements/renovations to their private dwellings. The aforementioned population movements and underlying economic dynamics are a result of the opportunities cities provide for their citizens and business community. To facilitate these dynamics in private sector development and make cities more attractive places to live as well as the primary locus for economic activity, productivity and employment opportunities, it is essential to ensure high quality urban governance, effective public service provision and a favorable investment climate. The next chapter describes these challenges facing newly decentralized local governments. 25 Chapter 3 Constraints to effective urban development-- the challenges facing local governments While the Albanian economy has achieved much success in the past decade in terms of growth, private sector development and poverty reduction, numerous imbalances and weaknesses remain. This chapter begins by looks at some of the "soft" and "hard" factors constraining the growth of private sector businesses and the reduction of informal sector activity. Several recent studies evaluating the Albanian business and investment climate confirm the identified weaknesses and threats identified in the local economic development strategies for cities as outlined in the previous chapter (Table 2-1).34 The following analysis describes the major obstacles to business growth and distinguishes, where possible, between the capital and large cities. While the local governments are the first line forces responsible for managing cities, much of what is required to ensure city performance for the benefit of firms and households depends on central government actions as well. The fiscal and functional decentralization process in Albania became established in 2000 with the passage of new legislation On the Organization and Functioning of Local Governments. A significant part of governance responsibilities, including public service provision, were transferred to the local government level. However, the ongoing decentralization process entails a large number of difficulties including the mismatch between local responsibilities and budget means, discussed further below. Poor urban governance constraining business development The various business surveys reviewed here characterize the business enabling features as deriving from the natural endowment of the cities, ranging from their geographical location to tourist values or natural and agricultural resources. However, the public administration as well as other soft factors were not deemed conducive to exploiting such advantages. In general, according to the recent BEEPS survey Albania ranks worse in most business environment indicators than its immediate SEE neighbors and the ECA region in general (BEEPS, 2005). On a regional level, the overall business enabling environment was felt to be improving in Korce and Lezhe, while entrepreneurs in Shkoder and Berat found that it had changed for the worse over the last years (Delta, 2004). 34See for example BEEPs (2005): The EBRD-World Bank Business Environment and Enterprise Survey (BEEPS) is a joint initiative of both institutions. The BEEPS were carried out most recently in 2005 and cover virtually all of the countries of Central and Eastern Europe and the former Soviet Union, as well as Turkey. The study covers a broad range of issues about business environment and exhibits simple indicators for all key areas. The main BEEP's sample was drawn from the universe of firms in a broad range of economic activities across regions. ARCS (2004): The Administrative and Regulatory Cost Survey, prepared under the assistance of the Foreign Investment Advisory Service (FIAS) of the World Bank examines the administrative barriers to private sector investment in Albania. The survey sample comprised 500 businesses located throughout Albania, which were grouped in three categories of location: Tirana, 6 largest secondary cities and the rest. The 6 largest cities include Durres, Elbasan, Fier, Korce, Shkoder, Vlore. 82% of businesses are located in Tirana and the 6 largeest cities. DELTA Albania (2004): The Local Business Enabling Enbironment Survey was initiated by the World Bank and carried out by the Foundation for Local Autonomy and Governance (FLAG). The survey was conducted in five cities ­ Korce, Berat, Lezhe, Shkoder and Durres, with the aim to obtain information on the perception of the urban businesses regarding local conditions and regulations that affect them. Five percent of the registered business in the municipalities, a total of 353 businesses, were interviewed. 26 Table 3-1 The top problematic issues preventing effective business operation and growth. Percentage of respondents rating specific issue as problematic Problematic issues Location Tirana Secondary Small cities Total cities Anti-competitive practices 79% 79% 77% 79% Tax rates 78% 74% 56% 72% Electricity 65% 81% 53% 70% Corruption 66% 75% 58% 69% Macroeconomic instability, frequent changes of laws 65% 76% 56% 68% Economic and Regulatory Policy Uncertainty 57% 66% 47% 59% Information in time on laws & regulations 47% 66% 34% 53% Crime, theft and disorder 30% 47% 27% 37% Source: ARCS, 2004. Notes: For each problematic issue the location with the highest incidence is marked in bold. The most frequently mentioned problems for business operation and growth are anti- competitive practices (informal sector competition), the tax rates, electricity supply as well as corruption (ARCS, 2004). The competition from businesses operating in the informal sector is the most worrisome factor responsible for an unfavorable business environment. It is a particular problem for small and medium-sized enterprises (82 percent), the commerce sector (87 percent) and domestically owned businesses (84 percent). In terms of location, no clear differences were observed. Corruption appears to be a more problematic issue for the businesses operating in the six biggest cities rather than for those operating in other locations like small cities. The extent to which businesses perceive corruption as a problem is highly dependent on the sector, with businesses operating in the construction sector finding it most problematic (78 percent). 35 The time and cost it takes to process and receive the registration necessary to operate a business is distinctly different across cities and industries. In 2004 the registration procedure in Tirana took on average 36.5 days, significantly longer than in the six big cities surveyed (22.2 days). However, the average total cost for registering a business in the capital is only half compared to the six largest cities (US$304 vs. US$598). In addition, Tirana has a much higher ratio of bribing involved in the registration process (31.8 percent) compared to the businesses surveyed in the six big cities (6.9 percent). This is also confirmed by the 2005 BEEP survey. In general the most expensive item of the registration is the cost for outside help. There are no distinct differences regarding the average time and cost for obtaining business licenses according to locations, but Tirana is again characterized by the highest rate of bribing (ARCS, 2004). One outlier is Durres, where the time to receive all required licenses and permits each year is on average twice as high as in the other large cities surveyed. The city also ranks highest in entrepreneurs judging the number of days spent with bureaucracy as "many" and therefore unacceptable (Delta, 2004). 35A recent public perception survey of corruption in Albania undertaken in 2004 and 2005 found that among public officials questioned, political influence in hiring and promotion of civil servants was believed to be less in the local administration than in either the education or health systems. Citizens surveyed reported that crime victimization had dropped by half in 10 cities in 2005 over 2004, and the city average rate was much lower than nationally (3.6 percent vs. 5.2 percent, respectively). Respondents' evaluation of municipal services improved slightly in 2005 over 2004. (USAID 2006) 27 The process and cost for acquiring land as well as the time necessary to complete the administrative procedures for construction activities is another problematic issue for entrepreneurs, with the severity of the problem having different magnitudes depending on the city size. The average time spent and cost paid by businesses to acquire land and premises in Tirana are much higher than elsewhere. The average amount of the official fees for Tirana district are 14 percent of total costs, while the most expensive cost items are outside help and bribing. It takes about one month at an average cost of US$142 to register the property title, while bribes used to make the registration are highly frequent (39 percent), at an average value of US$161. Bribes are significantly higher in Tirana than elsewhere. The total time to complete the administrative procedures for construction activities themselves is about 8 months on average, although the administrative procedure is much slower in Tirana (374.5 days compared to 203.4 days in the 6 biggest cities). Urban infrastructure deficiencies An improvement in infrastructure was commonly found to be a key factor where the business climate had improved across surveyed cities. By the same token, the pressing need for rehabilitation of the dilapidated local infrastructure was seen as a major concern by all stakeholders in the cities' LED strategies. The major responsibilities for managing and maintaining local physical infrastructure have been decentralized over the last years. As will be further explored in the assessment of the municipalities' financial capacity, cities are currently lacking the resources and finances to sufficiently fulfill their infrastructure and service provision role. The energy supply remains a major obstacle for private sector activity. Across all business climate surveys electricity supply is the major concern. It appears most problematic in large cities, where 81 percent of businesses consider it a major problem of business growth and effectiveness, compared to Tirana and smaller cities. Although the deficiencies in Albanian power supply have to be tackled as a national problem, part of the problem has to be dealt with on the regional and local level. Across most of the cities that participated in the LED strategies the lack of continuity in power supply was perceived to be a pivotal impediment for business prospects and citizens' needs alike. Major breakdowns remain to be common although some improvements have been made in recent years. On the municipal level it is a lack of rehabilitation and upgrading in electricity infrastructure (transmission and distribution) that severely reduces operating ability. In every city but Lezhe major rehabilitation activities for power supply are on the agenda for the coming years. The quality of infrastructure in the urban road and transport sector is also in urgent need of improvement. Road infrastructure is perceived to be another main problem for the growth and effectiveness of businesses. It is considered a big problem for 95 percent of businesses in Shkoder, 90 percent in Korce and 83 percent in Durres (Delta, 2004). The quality of roads, which is considerably worse in Albania than in other countries of the region36, is a major obstacle for local business development and competitiveness (tourism, trade and service provision). The local transport system is run down and needs urgent 36According to ANTP (2005), Albania's paved road network compares unfavorably in relation to its neighbors (12.4 percent of national roads paved vs. 63 percent in Serbia-Montenegro and in FYR Macedonia). The condition of roads leaves much to be desired: in 2000 only 32 percent of the national network was rated in fair to good condition, and 60 percent of the urban roads were rated in poor condition. 28 rehabilitation. In larger cities like Durres, Elbasan or Tirana the improvement of urban traffic management as well the putting in place of a good quality public transport system are also top priorities. Public transport licensing has been decentralized and has to be managed by the local governments. Finally, the rehabilitation of street lighting is broadly requested. Water supply and wastewater treatment are recognized as inadequate and represent an immediate need of infrastructure upgrading. The rehabilitation of obsolete water networks as well as the lack of wastewater treatment was identified as a major challenge in the LED strategies. Some recent increase in accessibility and a positive assessment of local conditions in cities like Korce and Lezhe notwithstanding, water and sanitation remain a top priority in infrastructure upgrading for most large Albanian cities. Water utilities were decentralized and service quality improved somewhat over the last years, but service quality falls short of the levels achieved in other ECA countries and lower middle income comparators. The water supply in almost all urban areas remains irregular, with Korce being the only city surveyed with a 24-hour access. Another common criticism made is the low efficiency of local utilities with a high level of non-revenue water and illegal connections. Moreover, almost every LED strategy included specific plans for improved wastewater treatment, since water quality is low, and sewerage is generally discharged untreated into rivers (LED Strategies and Albania Water-Sanitation Report). Solid waste management was also identified as a problem in several of the cities. The upgrading and densification of informal urban settlements as well as their integration into the urban system is another vital challenge identified in various cities' LED strategies and will be further discussed in Chapter Five. As an illustration how different cities have characterized the existing constraints of effective urban development, the following table summarizes the urban reform and investment action plans for the cities involved in the LED strategy process, as well as the capital Tirana.37 37Unlike the case of the other cities, which have undertaken participatory LED strategic planning in 2004-05, the information for Tirana here was obtained from a strategic investment study carried out in 2001 by a consulting firm, PADCO, with financing under the World Bank Urban Land Management Project. 29 Table 3-2 Key objectives identified in LED strategies Tirana* Korce Elbasan Lezhe Durres Berati Shkodra Rehabilitation/upgrading of road system e Establish high quality public transport tur uc Improvement of electricity supply astr Upgrading of water supply infrla Construction of waste treatment plant physic Construction of new landfill for urban waste of nt Integration of informal settlements me ove Rehabilitation of public facades Impr Expansion of green areas Setting-up of a "One-Stop-Shop" Improvement of tourism infrastructure Sectore Develop tourism marketing activities Privat Development Development of industrial parks Establishment of local fairs Improvement of urban planning tools Improvement of administrative procedures Public Admin Modernization of civil registry service School/university infrastructure improvement Health care & social services initiatives Human Development Improvement of cultural infrastructure * Key objectives for Tirana are based on PADCO (2001) and are limited to infrastructure and urban planning. 30 The financing gap in urban infrastructure and service provision The current state of functional and fiscal decentralization. Given the recent assignment of greater responsibilities to local governments as well as the identified needs for infrastructure investment and rehabilitation and for increased municipal service provision, the local governments' financial capacity to meet these challenges is a key development issue. In this context the obvious disparity between the local financial expenditure responsibilities and the locally generated revenues can be observed. A dependence on central government transfers is likely to continue for most municipalities, but the intergovernmental relations should become more predictable and feature incentives that encourage the mobilization of local revenues in ways that foster economic efficiency. The decentralization of infrastructure and public service provision has progressed significantly in the years 2001 and 2002, when a number of investment, operating and maintenance responsibilities, for infrastructure and for other public services, were shifted to local government authorities. The following table shows the exclusive functions transferred to the local governments over the last years. Table 3-3 Functions and responsibilities of Albanian municipalities and communes Legal Timeframe for Exclusive Functions of Municipalities/Communes Implementation of Fiscal Infrastructure and Public Services Decentralization Beginning January 1, 2001 · Construction permits (Art. 72, Law # 8652, July 31, · rehabilitation and maintenance of local roads 2000) · sidewalks and public squares · public lighting · public transport · cemeteries and funeral services · city/village decoration, · parks and public spaces · waste management (collection, transport, disposal/treatment) · issuance of construction permits Beginning January 1, 2002 · services of water supply (Art. 72, Law # 8652, July 31, · sewerage and drainage (incl. flood protection canals) in 2000) residential areas · urban planning, land management · housing Source: The World Bank. 2004. Albania: Decentralization in Transition (Volume II): Analytical Report. Although all these functions should have been fully assumed by local governments, certain key legislations like revision of the `Law on Urban Planning', the `Law on Local Borrowing' have been delayed or deferred. Only some municipalities have assumed full responsibility for water supply and sanitation as of mid-2006. 31 Trends in revenues. Until the major fiscal reform package approved in late 2002 local government revenues played a minor role as a source of municipal budgets. Locally generated revenues constituted 4.2 percent of the total municipal budget in 1998 and increased to a share of 9.2 percent in 2002. With the significant extension of local authority over own taxes and fees38, local governments have acquired new revenue sources starting in 2003. The new fiscal decentralization package shifted some formerly national taxes, like the property tax39 on buildings and agricultural land, small business tax, and the vehicle registration tax to the local government level. In addition, new sources of revenue were created to strengthen the fiscal base for local governments. This includes, among others, the property transaction tax and the simplified profit tax (SPT). Although the law on local government introduced the category of national shared taxes which includes the personal income tax (PIT) and the profit tax (corporate income tax ­ CIT), neither of these taxes has been shared with the local government to date, under the argument that this would add considerably to the revenue disparities among jurisdictions (World Bank, 2004). Table 3.4 below shows the evolution and composition of local government revenues over the last years. 38Local own taxes are levied on urban properties (buildings) and agricultural land, property transactions (collected by the IPRO on behalf of the local government), turnover of local small businesses ­ the Local Small Business Tax (LSBT) and the Simplified Profit Tax (SPT), vehicle registration, hotel services, business signs, construction, use of public space , and some temporary activities. Local fees and charges are authorized mainly on business registration, solid waste services, advertisements, slaughterhouses, new residence registration, car parking and hunting and fishing. 39The annual property tax applicable within urban zones is applied to buildings, not land; it is payable by owners and is calculated by size with some variation based on type of use, age and category of urban area. 71 The indicative values specified in current law are similar in nature to a flat tax. Collection rates are low and the tax is not universally applied by municipalities. A World Bank project is planned to support improvements in administration and shift towards a value basis. 32 Table 3-4 The structure of Local Government Revenues before and after fiscal decentralization - local government revenue in million leks 1999 2000 2001 2002 2003 2004 2005* Total Revenues 34,745 33,716 39,343 41,544 46,494 52,811 I. Locally Generated Revenues Total 2,269 2,344 2,911 3,833 9,242 10,363 a. Locally raised Taxes, of which 327 633 768 1,231 6,080 7,311 - Property tax 177 185 326 340 728 1,069 1,218 - Infrastructure impact tax for new construction 60 332 302 732 1,762 1,606 2,298 - Small business tax 1,376 1,204 1,062 - Simplified Profit Tax 1,568 2,687 2,538 - Other taxes on business activities 83 81 121 117 66 62 - Vehicle Registration Tax 7 35 19 22 462 494 502 - Other taxes 1 20 119 188 b. Local Fees Total, of which 683 838 1,461 1,544 2,144 2,548 2,670 - Cleaning and solid waste disposal fee 117 151 465 495 648 751 906 - Registration fee for different activities 153 194 157 127 219 128 335 - Other Fees 413 494 839 921 1,276 1,669 1,429 c. Non-tax revenues, of which 1,259 872 681 1,058 1,018 505 - Property sales 430 361 377 322 455 206 - Property rent 98 126 106 160 154 169 - Privatizations 82 262 137 26 14 5 - Fines and Penalties 2 13 5 45 37 29 - Donations 646 110 56 506 359 95 II. Revenues from National Sources Total 32,477 31,372 36,432 37,712 37,252 42,448 a. Unconditional Transfers 5,659 9,276 6,554 6,611 7,300 b. Earmarked Transfers including wages 32,477 31,372 30,774 28,435 30,698 35,837 - Earmarked Transfer without Wages 20,949 18,437 17,465 14,426 15,748 19,824 18,904 As a share of Total Local Revenues in percent I. Locally Generated Revenues Total 6.5 7.0 7.4 9.2 19.9 19.6 a. Locally raised Taxes, of which 0.9 1.9 2.0 3.0 13.1 13.8 - Property tax 0.5 0.5 0.8 0.8 1.6 2.0 - Infrastructure impact tax for new construction 0.2 1.0 0.8 1.8 3.8 3.0 - Small business tax 0.0 0.0 0.0 0.0 3.0 2.3 - Simplified Profit Tax 0.0 0.0 0.0 0.0 3.4 5.1 - Other taxes on business activities 0.2 0.2 0.3 0.3 0.1 0.1 - Vehicle Registration Tax 0.0 0.1 0.0 0.1 1.0 0.9 - Other taxes 0.0 0.0 0.0 0.0 0.3 0.4 b. Local Fees Total, of which 2.0 2.5 3.7 3.7 4.6 4.8 - Cleaning and solid waste disposal fee 0.3 0.4 1.2 1.2 1.4 1.4 - Registration fee for different activities 0.4 0.6 0.4 0.3 0.5 0.2 - Driver's license permit fee 0.0 0.0 0.0 0.0 0.0 0.0 - Other Fees 1.2 1.5 2.1 2.2 2.7 3.2 c. Non-tax revenues, of which 3.6 2.6 1.7 2.5 2.2 1.0 - Property sales 1.2 1.1 1.0 0.8 1.0 0.4 - Property rent 0.3 0.4 0.3 0.4 0.3 0.3 - Privatizations 0.2 0.8 0.3 0.1 0.0 0.0 - Fines and Penalties 0.0 0.0 0.0 0.1 0.1 0.1 - Donations 1.9 0.3 0.1 1.2 0.8 0.2 II. Revenues from National Sources Total 93.5 93.0 92.6 90.8 80.1 80.4 a. Unconditional Transfers 0.0 0.0 14.4 22.3 14.1 12.5 b. Earmarked Transfers including wages 93.5 93.0 78.2 68.4 66.0 67.9 - Earmarked Transfer without wages 60.3 54.7 44.4 34.7 33.9 37.5 Source: Ministry of Finance data and World Bank staff estimates. Data for 2005 incomplete as of this publication. 33 Starting in 2003 a strong increase in local revenues can be observed, which is largely due to locally raised business taxes and the infrastructure impact tax on new constructions. However, Albanian cities differ significantly in their ability to take advantage of the new revenue opportunities. The rise in business and construction-related taxes is determined by the economic dynamics discussed in Chapter Two and occurs largely in the Tirana- Durres corridor as well as other cities of the coastal area. For example, the overwhelming majority of construction- as well as business-related taxes are raised in Tirana and cities like Durres, Elbasan, Fier and Lezhe, where the bulk of new construction activities are concentrated and the strongest enterprise growth occurred. Figure 3.1 below displays these local revenues dynamics on a per capita basis and Table A.3.3 in the Appendix shows a more detailed picture of the composition of local revenues as well as the divergence in Albanian cities' ability to raise business and construction-related taxes. Figure 3.1 Tirana, Durres and Lezhe are the clear leaders in per capita local revenues. Locally raised revenues per capita across the main Albanian cities, 2004. Tirane Durres Lezhe Property tax Gjirokaster Fier Infrastructure impact tax* Vlore Simplified Korce profit tax Peshkopi Small business tax Berat Other local taxes Elbasan Shkoder Local fees and other sources of income Kukes 0 2 4 6 8 10 12 in lek thousands Notes: Per capita local revenues based on INSTAT 2001 population figures. *Infrastructure impact tax is paid for the issuance of construction permits. Source: Ministry of Finance data and World Bank staff estimates. Overall, locally raised revenues increased twofold since 2002 and accounted for 19.6 percent of the total local authorities' budgets in 2004.40 This increase in the amount of locally generated revenues is a favorable trend because greater discretionary funds imply 40When calculating relative figures the total amount of local budgets including earmarked transfers for wages was used. If local budgets were reduced for specific conditional transfers (e.g. wages for education), the relative figures would appear to be higher. 34 that municipalities have more autonomy of expenditure and thereby ability to meet the specific needs of their citizens--assuming, of course, that such decisions are made responsibly in accordance with good local governance. However, the impact of specific taxes is an important issue. Local "small business tax" can be a deterrent to the growth or formal registration of new firms. The "impact tax for new construction" is a very important potential source of financing the infrastructure requirements of new private buildings, but only if the revenues are used for this purpose rather than to support general administration. Figure 3.2 The increasing clout of local government finances - evolution of discretionary revenues vs. total revenues of local governments in Albania 1998-2004 60,000,000 25.00% 50,000,000 19.88% 20.00% 19.62% sd 40,000,000 sanuoht 15.00% kelt 30,000,000 9.23% enrr 10.00% cu20,000,000 6.53% 6.95% 7.40% 4.18% 5.00% 10,000,000 0 0.00% 1998 1999 2000 2001 2002 2003 2004 Locally Generated Revenues Total Unconditional Transfers Conditional Transfers Locally Generated Revenues in % of total Source: Ministry of Finance data and World Bank staff estimates. Figure 3.2 shows the significant upward trend in locally generated revenues after the introduction of the fiscal decentralization package in 2003. However, even with an increase to approximately 20 percent of total municipal budgets, the share of locally raised revenues ("discretionary" revenues) remains low. In addition, the amount and share of unconditional transfers41 to local governments has decreased since 2002. The 41 The current unconditional transfer system introduced in 2002 allows local governments to spend these funds according to their priorities. The annual total pool of unconditional transfers is determined in the budget process of the government and is largely a formula based distribution system. The pool of unconditional transfers is allocated to the various local governments (regional councils, municipal councils, and communes) according to a multiple step process. (i) The grant pool is first divided into three sub-pools ­ for regions, municipalities and communes (83% of total in 2004), and a "compensation fund" (ii) The share allocated to municipalities and communes is further divided into two sub-pools, while the bulk part of payments is to be distributed according to a specific formula (93% in 2004); (iii) The distribution formula relies on several different factors: an equal share for all communes and municipalities ­ 4%, the 35 share of conditional (or "earmarked") government transfers remains the major source of total revenues--68 percent in 2004.42 When looking at the expenditure needs, it will be observed that the increase in own revenues is by no means sufficient to close the fiscal imbalances between functional responsibility and revenue base. Overall, this should especially be seen in light of the new arrangement stating that capital expenditures are meant to be made autonomously by local authorities. Local governments in Albania are also much more dependent on central government transfers than in the cohort of new EU accession countries (Figure 3.3). Figure 3.3 Albanian local government revenues continue to depend on national government's discretion Structure of local revenues across ECA countries as % of GDP. Slovenia 2002 Albania 2004 Albania 2004 Lithuania 2002 Estonia 2001 Latvia 2002 Czech Republic 2002 Hungary 2002 Poland 2002 0% 2% 4% 6% 8% 10% 12% 14% 16% Taxes on Property Taxes on Income Other Taxes Grants Other Revenues Sources: Ministry of Finance data and World Bank staff estimates (for Albania) and Dillinger, 2005. Local government expenditures. The bulk of local government spending goes to operating expenditures. No relative increase in capital expenditures can be observed, with the ratio of capital to total expenditures hovering around 20 percent. With the major part of local expenditures going for current wages, social contributions and the most necessary maintenance of existing facilities, it is clear that the local authorities have only small resources left to upgrade the local physical infrastructure and public services. relative population size of the jurisdiction ­ 62.5%, area of communes ­ 9%, municipalities other than Tirana distributed on the relative populations of these municipalities, share for Tirana ­ 18%, a tax capacity adjustment which compares the per capita tax collections in each municipality and commune from four local taxes with the average per capita tax collections for the country is a whole (Schroeder, 2004). 42The share of conditional transfers allocated to capital investments has increased over the last years. The rules of allocating these funds have, however, remained rather nontransparent and follow an approach of equitable regional development, rather than reinforcing the growth potential of local economies in secondary cities and focusing on the necessities of matching infrastructure investments with improved urban planning and land management. 36 Figure 3.4 Local governments are falling short of channeling resources to essential capital investments Evolution of composition of local government expenditures 1998-2004 60,000 50,000 Total Operating sk Expenditures le 40,000 n Capital Expenditures - 30,000 41,598 national origin 37,566 30,519 33,663 20,000 28,295 28,518 Capital Expenditures - milliotnerruc 23,571 locally funded 10,000 5,711 5,046 6,995 4,040 6,815 5,472 0 1998 1999 2000 2001 2002 2003 2004 Capital Expenditures, national origin 8.3% 16.6% 12.1% 17.8% 13.5% 11.2% 13.5% Capital Expenditures, locally funded 0.8% 1.2% 2.2% 2.3% 3.7% 5.7% 6.1% Total local capital expenditures 9.1% 17.8% 14.4% 20.2% 17.1% 16.9% 19.6% in % of total local expenditures Source: Ministry of Finance data and World Bank staff estimates. As displayed in Figure 3.4, the national government's share of contribution to local capital expenditures has been somewhat volatile over the last years. The new fiscal decentralization package has allowed for a significant increase in the local governments' own contribution to capital expenditures since 2001, but it remains a very modest share. Although the financial accounts of the water and sanitation utilities are not included with the above local government data, a recent study of the water and sanitation sector confirms that public spending in this area is directed almost exclusively towards recurrent (operating and maintenance) costs. For the time being the utilities' own financing through tariffs typically does not suffice to cover even their ongoing operation and maintenance costs. The utilities' operating efficiency and financial performance need to be improved significantly to increase the prospects for funding some capital investments. Most of the urgently needed capital expenditures to upgrade the dilapidated water and sewerage infrastructure will continue to come almost exclusively from the central government for the foreseeable future (World Bank 2006). 37 Box 3.1 Local investment plans far exceed locally available resources - Case studies: Elbasan and Shkoder The financing gap between ongoing capital expenditures and the infrastructure investments needs is illustrated by the municipalities of Elbasan and Shkoder. First, the contrast between the high level of operational expenditures and insufficient capital expenditures can be observed by assessing the municipal budgets of the two cities. Local capital expenditures have been fluctuating considerably over the last years (see Figure A. 3.1 in the Appendix). In 2005 they only account for 11.6 percent (173.7 million leks ­ US$1.74 million) of total local expenditures in Shkoder, and 11.7 percent (171.7 million leks - US$1.72 million) in Elbasan, respectively. Secondly, the level of capital expenditures is particularly low in proportion to the main capital investment projects identified in the cities' development strategies for the coming years. Following the LED strategies the local municipalities laid out a detailed plan specifying all infrastructure projects, which was a direct result of the investment as well as reform needs identified in the course of the SWOT analysis. In general, the projects are meant to be implemented between 2005 and 2009 and range from the rehabilitation and expansion of the road network, the power supply and water distribution to the provision of business support facilities as well as cultural and tourist infrastructure.43 The total amount of capital investments projects outlined in the LED strategy for the city of Elbasan is 4.36 billion leks (US$43.6 million).44 For the time period of 2006-2009, within which investments are meant to implemented, the volume outstrips the local government's total budgets (1.47 billion leks in 2005) and stands in no relation to capital expenditures realized in 2005. Figure A. 3.2 in the Appendix shows the evolution of the municipal budget and future investment needs for Elbasan, making this financing gap evident. In the case of Shkoder the mismatch between the proposed capital investments and the ongoing capital expenditures is even more obvious (see Figure A. 3.3 in the Appendix). If the LED strategies identified potential external sources of finance for the outlined infrastructure projects (central government or donors), a local contribution is largely missing in the budget plans. For infrastructure projects with immediate benefits to the business community a certain readiness for a private participation in investment can be noticed, however the concept of private-public partnerships is largely left aside. Source: Ministry of Finance data and World Bank staff estimates Even if the local governments keep their momentum and continue to increase the local revenues from business and property tax sources, the volume of revenues will by no means suffice to contribute significantly to financing the pivotal capital investment projects on the cities' agendas for the coming years. Major infrastructure investments therefore continue to be dependent on government transfers or outside sources of funding. This means that, although a decentralization of responsibilities has taken place in theory, the decision-making power for infrastructure investments remains effectively centered at the national government level. It is therefore especially important that the system of conditional capital transfers provides incentives for efficient investment. The local governments could also sharpen their selectivity in investment planning, within the 43For a detailed list of capital expenditure projects see Table A 3.4 and Table A 3.5 in the Appendix to Chapter Three. 44This is a line-up of the local stakeholders' priorities and professed needs, and is therefore subjective and has the character of a wish list. Nevertheless, the projects identified were commonly agreed upon by the city stakeholders and represent the core of their action plan for delivering the local development strategy. 38 limits of their dependence on financing sources, and thereby exercise some measure of autonomy in local investment. Conclusion to Part One As Albania's market economy matures and structural reforms take hold over the next couple of decades, urban growth will continue but at a measured pace, since the major post-transition demographic adjustment is winding down. Internal migration from rural to urban areas will persist as Albania's urban share of the population (44 percent) gradually rises with economic development to a steady state of at least 65-70 percent, as elsewhere in central/eastern Europe. Some of the recorded increase in urbanization will occur from reclassification of formerly rural areas to reflect their increased densification and changing economic character. But as the absolute population increase is low (0.5 percent per annum), unless there is a sharp influx of returning émigrés the growth rates of urban areas overall will continue to calm. Internal population movements, including among/across urban and peri-urban areas, should be expected to continue as a function of evolving economic activities and growing demand for land and amenities. The Tirana/Durres metropolitan region will likely remain the strongest locus of attraction and thus continue to enjoy the highest growth, as its economy has really taken off and has been attracting both foreign and domestic investment in industry. Global experiences have shown that capitals and primate cities rarely lose their dominance and often gain with the growing importance of tertiary sector activities that thrive in large agglomerations. The coastal zones in the south and north will also experience further urbanization, especially driven by agri-business and tourist oriented activities. The Albanian government, occupied by political and structural economic reforms in the early years of the transition, was unprepared to deal with such high rates of inflows and outflows across regions. The local authorities were not able or well equipped to tackle this influx of new migrants. Hence, these migration flows have largely taken foothold in a hectic and unplanned manner, leaving new peri-urban areas disconnected from the central cities and putting services and urban infrastructure under serious stress. Facilitating a continued shift in production from low-productivity to higher productivity activities, including modern services and tourism, trade-oriented light manufacturing, and high value-added agricultural processing, will require stronger urban management. In particular, greater flexibility will be needed in reallocating land use and making urban real estate available and affordable to new firms, and ensuring affordability of land and housing to residents. Part II of the report will address these issues in greater detail. 39 Part II: Urban planning and land management Two of the defining experiences of Albanians in the past fifteen years have been the opening of the economy to the private sector and the spatial relocation of the population. One of the major implications of these momentous changes has been the increased demand for urban land for housing and for business premises, as well as radical shifts in the uses of land within and on the outskirts of urban areas. The national government was evidently unable to cope with the rapid growth of cities during the 1990s. With decentralization most of the responsibilities for urban planning and managing urban land use have been formally passed to the local governments, who are not yet adequately equipped in human or financial resources to meet the challenges--nor do they yet have the backing of a consistent and conducive legal and administrative framework for urban planning and land management. The options available to address these issues are very much influenced by the recent history--not only the legacy of socialism, but also the experiences of the early years of transition. Chapter Four discusses some of the main developments in the process of urbanization and urban land development in this historical context, focusing on the evolving land market and some of the apparent implications for efficiency and welfare. Chapter Five describes the development of informal settlements in more specific terms and outlines alternatives and recommendations to regularize these settlements, including to provide needed infrastructure. Chapter Six proposes priorities for reforms in urban planning and regulation, and identifies some of the legal issues that remain to be resolved as Albania moves towards a broader strategic framework for urban land management. This future perspective focuses on the overall aim of ensuring that the cities develop in ways that support formal land markets and a vibrant formal economy, with services and amenities available and affordable to all residents and firms. 40 Chapter 4 The emerging real estate market: implications for efficiency and welfare Urbanization in Albania has gone through three distinct phases since the fall of communism. The first phase was dominated by the informal sector. The second phase saw the consolidation of the informal sector and the emergence of a formal sector. The third and current phase consists of consolidation of the formal sector and regularization of the informal sector. The main government objective during this third phase would be to formalize the operation of the real estate market. The design of new regulations and urbanization procedures, including land use plans, will have to take into account the historical process of the first two phases. A key concern will be to ensure that low income households are not excluded from the formalization effort. The new constructions and urbanization of the first two phases were often spontaneous and occurred without much government intervention. By contrast, during the current phase the local governments will have to play a major role in designing appropriate regulations, enforcing them, monitoring urbanization and market prices, establishing a local tax base to finance the operation and maintenance of urban infrastructure and services, and finally creating a mechanism for financing primary infrastructure. One of the main goals for the formalization of the real estate sector is to provide fiscal resources to municipalities while implementing a simple set of regulations that does not paralyze the functioning of the nascent formal real estate market. To fulfill that role, municipalities will have to understand how real estate prices are generated and how markets function, in particular in providing shelter to low income households. This chapter seeks to describe, in a preliminary and approximate way (given data limitations), the workings of the urban real estate market as it has been responding to effective demand within an environment where institutional and legal features of more developed market economies are not fully in place. The aim of the analysis is to identify and begin to estimate, at least suggestively, some of the implications of the practice for economic efficiency and welfare. A main message of the chapter is that the informal and spontaneous development of real estate has achieved in many respects a reasonable approximation of how the market should have proceeded in a formal economy. At the same time it is essential for the country to promote a more mature system with better safeguards and opportunities for affordable land use, consistent with the economy's formal integration. The urbanization process in Albania: the phased transition from a command economy to markets To understand the current urban spatial structure of Albanian cities ­ including their problems and opportunities ­ it is necessary to review the successive urbanization phases which have shaped the cities as they exist today. The practical policy options for further 41 urban development are determined by the existing urban structures and their potential for evolution. The first phase of urbanization: the indispensable role of the informal sector in creating a real estate market. The first phase of urbanization, between 1991 and 1997, was dominated by massive internal migrations from the northeastern and rural areas of the country toward the western and coastal urban areas, as outlined in Part I. Prior to 1991, the strict state control on internal migration resulted in a highly artificial and inefficient spatial distribution of population. At the start of the transition the population of Albania was 75 percent rural--an astonishingly high proportion of rural population for a European country at the end of the twentieth century. The socialist regime also had severely suppressed housing demand. As of 1991 state owned rental apartments constituted 70 percent of the urban housing stock. Consumption of floor area was around five m2 per person in urban areas (compared to, for instance, 16 m2 per person in Bulgaria at the time of transition). The migrants from rural areas settled quickly around major cities in the western parts of the country. The uncertainty of land tenure and the legal framework vacuum created by the collapse of the communist regime made it easier to claim a lot on vacant land in the immediate periphery of cities. Indeed, in the absence of laws and regulations, the only way to develop land and build houses was to do it informally. The new migrants brought with them few skills usable in urban areas except for the skill of building sturdy and spacious houses with whatever materials they could find locally. Not surprisingly, the cities at the receiving end of the migratory flow were not ready to develop land in sufficient quantity to accommodate the new migrants. Within the cities themselves, drastic land use changes were already taking place to accommodate the new market economy. Large areas of new floor space had to be built to accommodate the new commerce and services which were necessary to create new jobs. In addition, a number of urban households living in exiguous apartments in state owned public housing began looking for more spacious private apartments or houses built to more modern standards. A new flow of remittances fueled this building boom. Land development and construction during this first development phase was practically entirely informal. Municipalities did not have adequate authority, staff or resources to develop appropriate regulations and institutions to provide the required infrastructure and legal framework to support or guide urbanization. This first phase in the urbanization of Albania in the post communist period is not to be deplored. It contributed to subdivide and distribute state land in small parcels expeditiously, and it created a large urban housing stock of sturdy houses which could be subsequently traded, creating the embryo of a real estate market. The second phase of urbanization: consolidation of the informal sector and emergence of the formal sector. The second phase saw a consolidation and partial regularization of the informal sector areas (discussed in Chapter Five). The municipalities started to become better organized and it was possible to reclaim some public parks and river banks, which had been encroached and developed illegally, as public lands. The 42 second phase saw also the emergence of a formal real estate sector, with the creation of new professions ranging from real estate brokers to developers which did not exist in Albania under the command economy. During this second phase, the formal sector started to operate mostly in the center of cities by redeveloping the land occupied by obsolete buildings. Most of the buildings constructed by the formal sector were multistoried apartments or office buildings and commercial establishments. Meanwhile the informal sector continued to increase the housing stock in the form of detached houses in the periphery of cities. To this day, the formal real estate sector is still struggling because of the partial nature of laws and urban regulations and inadequate enforcement. The third phase of urbanization: the formalization of real estate development. Albanian cities are now at the beginning of a third phase of urbanization, during which laws and regulations have to be developed and enforced so that all real estate ­ whether existing stock or new construction ­ will eventually become entirely formal. Designing new regulations adapted to Albania will be a challenge. Just copying regulations and urban planning process from other countries of Europe will not do. Any new urban regulation will have to take into account households' income and the large existing informal sector stock. Failure to take into account the specificity of Albanian urbanization, in particular by designing or adopting regulations that do not take into account current household income will just result in an increase in the informal sectors and a possible return to the free-for-all that characterized the first phase of urbanization. It is important to note that the transition from informal to formal has to be mostly voluntary. No government can enforce laws which require costs in time and money that most households and firms cannot possibly afford. For the majority of households and firms there should be a clear financial incentive to choose the formal sector over the informal one. An assessment of the current state of development of Albanian cities Albanian cities have gone through a decade and a half of rapid social and economic change. Understandably, the spatial transformation of these cities under the pressure of political and economic shocks has not followed a smoothly planned transition path. However, the outcome of this apparently chaotic process is rather positive. Albanian cities are certainly looking better than they were 15 years ago; the amount of new floor space built and the number and quality of new dwellings added to the housing stock in such a short time is quite astonishing. For instance, the average floor space consumption per person has risen from the extreme low of about five m2 per person at the time of the transition to about 19.62 m2,45 in cities of the Coastal zone, like Durres, Fier and Vlore46. 45LSMS (Living Standards Measurement Study) 2005. 46In this chapter the welfare-related analysis of land and housing will focus mainly on the urban Coastal zone (which includes most prominantly the cities of Vlore, Durres and Fier). Representative data from LSMS are also available for urban areas in aggregate of the Central zone (notably including Shkoder, Elbasan, Berat, Korce) and Mountain zone, as well as for Tirana. As the Mountain zone does not have significant urban areas it is not referenced further here. The Coastal zone is the area that has been experiencing most rapid growth (along with Tirana), thus it seems most useful for the real estate market discussion to focus on these coastal urban areas. As secondary cities they also face economic and institutional challenges somewhat distinct from than those of the capital. The focus on these three coastal cities here is 43 (Table 4-1) Less than 10 percent of all households surveyed in this coastal zone reside in dwellings smaller than 40 m2, while about one-third fall into either the 40-69 m2 or 70- 99 m2 size categories (Figure 4.2 below). Table 4-1 The average dwelling space per capita in m2 across quintiles and regions. Quintile Region 1 2 3 4 5 average Coastal 11.24 17.18 17.50 23.78 28.42 19.62 Central 13.09 16.95 20.01 23.15 29.53 20.54 Mountain 10.17 14.14 16.61 21.76 25.08 17.55 Tirana 10.80 14.82 19.66 23.10 32.13 20.10 Source: 2005 LSMS The quality of housing and the amount of floor space consumed have improved for all income groups, although detailed longitudinal data are unavailable. The distribution of average floor space per dwelling in the cities of the Coastal area shows that the majority of the poorest households, within the first quintile of the urban consumption distribution, have been able to acquire a significant amount of floor space per dwelling. For instance, as shown on Figure 4.1, three-quarters of household in the first quintile have dwellings between 40 and 100 m2, and only 18 percent of households in this group have dwellings below 40 m2. This picture is very similar in the Central zone, while in Tirana the share of the first quintile in the smallest size units is somewhat larger (26 percent). The informal sector therefore has been very successful at distributing land and housing in an equitable way. therefore not meant to suggest that they are necessarily typical of most other secondary cities, but they are illustrative and of particular interest for analytical and policy purposes. 44 Figure 4.1 Distribution of dwellings by size within each consumption quintile in urban Coastal region 100% 80% 60% More than 130 m2 100-130 m2 40% 70-99 m2 40-69 m2 20% Less than 40 m2 0% 1 2 3 4 5 Source: 2005 LSMS The graph of Figure 4.2 shows the consumption quintile distribution within each size category of dwelling. Although the smallest dwellings are occupied largely by the two poorest quintiles and the 100+ m2 dwellings by the two richest quintiles as might be expected, there is a much more even distribution of the middle-sized (and dominant) category of houses. The graphical pattern is largely the same for the Central urban zone and for Tirana. Two other variables of housing condition from the LSMS are of interest here. First, in terms of age of dwelling, very old housing (built before 1945) is overwhelmingly in the poorest quintile, more so in the Central zone and Tirana. Dwellings built in the transition period (post-1990) are skewed towards the richer groups, especially in Tirana where the 4th and 5th quintiles comprise over half of the occupants and the 1st quintile represents only 8 percent. However, the consumption breakdown of occupants in this newer housing in the Coastal zone is much more even, as it is in Central. Second, indoor plumbing is shared quite evenly across the quintiles in both the Coastal and Central zones, but is more concentrated in the highest quintile in Tirana. Not surprisingly, three- quarters of the dwellings with outdoor plumbing are in the two lowest quintiles, in all the urban zones. While virtually all of the dwellings are built in sturdy and permanent materials, the quality of infrastructure for identical size dwelling is thus not equivalent. The poorest households may have relatively large dwellings but in unserviced areas on the outskirts of town, while the higher income groups have on average somewhat larger dwellings but in areas that are fully serviced. The ability of the lower income groups to have access to relatively large, well built dwellings ­ even if in unserviced areas ­ is a significant achievement. In many countries with household income similar to that of Albania, the majority of households in the lowest quintile are usually able to afford dwellings only below 40 m2 in unserviced areas, and the gap between the dwellings of rich and poor is 45 much wider. While inequality in housing assets has increased since the transition relative to its greatly suppressed level under socialism, the benefits of greater living space have at least been enjoyed fairly widely by urban families even during this period of very rapid urban growth, which is quite remarkable. Figure 4.2 Distribution of total dwelling floor area by size and consumption quintile in urban coastal areas 40% Housholds' income range 35% more than 750,000 lek/year - 5 th quintile from 475,000 to 750,000 lek/year - 4 th quintile from 375,000 to 475,000 lek/year - 3 rd quintile 30% from 275,000 to 375,000 lek/year -2nd quintile less than 275,000 lek/year -1 st quintile 25% k octsl taotfo 20% % 15% 10% 5% 0% Less than 40 sq meters 40-69 sq mtrs 70-99 sq mtrs 100-130 sq mtrs More than 130 sq mtrs size of dwelling (m2) Source: 2005 LSMS The quantity and quality of new offices and commercial buildings, extraordinarily scarce at the time of the transition, are now clearly responding to demand. The evolving spatial structure of Albanian cities resulting from this largely unplanned growth is compact and rather efficient, as seen by the average built-up densities between 80 to 200 p/ha.47 The credit for this positive outcome, in particular for the large increase in the number of urban dwelling units, is due to the enterprising spirit of the Albanian private sector ­ formal and informal ­ that was unleashed by the collapse of the command economy in 1991. While households and developers have played a major role in building entire new neighborhoods within cities' cores and at their periphery, the public sector has often lagged behind in developing infrastructure, and in creating a clear legal framework for the real estate industry. In addition, municipalities have not been able to create a flow of 47 For example, the average built up densities, based on the built-up area from satellite images, are about 128 persons/ha for Fier (with a built up area of 642 ha) and 84 persons/ha for Vlore (built up area of 834 ha), in the Coastal zone; and 161 persons/ha for Shkoder (with a built-up area of 683 ha), in the Center. These are rather high densities for cities of this size, about 100,000 residents; in other parts of Europe, the density of cities of this size range is usually between 40-60 persons/ha (Source: mission estimates). 46 municipal revenue which would allow a proper maintenance of the infrastructure already created. The lack of protection of the urban and natural environment, in particular in the costal areas, has been one of the major regulatory failures. However, some municipal interventions were successful: the city of Tirana managed very successfully to recover and maintain the public land lost to informal developers squatting in public parks and along river banks in the 1990s. During the 1990s, because of the ambiguous legal framework resulting from the transition from a command to a market economy, the informal sector ­ by definition functioning at the margins of laws ­ has been playing a crucial role in developing Albanian cities. While some land parcels still get developed informally in a number of cities, formal entrepreneurs are now taking over the major role as suppliers of new floor space for housing and commerce. These entrepreneurs are increasingly making use of the resources offered by the new financial sector and as a consequence have an incentive to operate within a clear legal framework to secure solid collateral guaranties. Their main problem is to get access legally to new urban land and to connect to a network of primary urban infrastructure that cannot possibly be developed privately. After 15 years of unplanned growth the spatial structure of Albanian cities is relatively compact, predominantly monocentric48, and displaying a clear pattern of high density in the center and progressive lowering of densities in the suburbs. This decreasing gradient of densities, considered efficient and demand driven, is usually associated with urban structures in cities with a much longer tradition of market economies. (Bertaud and Renaud, 1997) The combination of the spontaneous informal development process with the "land recycling" accomplished by formal developers, as described below, is mimicking the outcome of a well functioning market. The land development process in Albania in 2006: response from the informal and formal sector to current regulations The neighborhoods developed informally during the first phase of urbanization still form an important part of the existing stock. A large share of the new constructions built during the 1990s were informal and consisted of individual houses built by new migrants from rural areas or by households, already living in apartments, who wanted a house of their own. At that time developing vacant land formally and legally was ­ and to a large extent still is ­ practically impossible. Vacant urban land at the edge of cities was either officially belonging to the government and as a consequence not for sale, or was frozen until claims made by families who had been dispossessed by the former regime could be evaluated and cleared by the courts. New migrants' households invaded these vacant areas at the city periphery, quickly delimited plot boundaries, and immediately started building solid houses in stone, bricks or cement blocks. The layout of a typical informal settlement in Berat is shown on Figure 4.3. 48The monocentric characterization is based on observation and the fact that the formal private sector operates only in the center or close to it, and requires densities around 600-800 p/ha (net residential, or 250-350 p/ha in built up density), while the informal sector in the periphery as measured in several sample observations is around 100 p/ha net residential (40-50 p/ha built up). The way the private sector operates in Albania, "recycling" property within the center cities, reinforces the monocentricity. In other countries the private developers often prefer to operate in suburban areas as greenfield, thus tending to disperse population. 47 Figure 4.3 Typical informal settlement in Berat Notes: The map above shows a typical layout in an informal settlement area in Albania. The density is around 100 people per hectare, which is an efficient suburban density (saving on land requirement). However, while the spontaneous network of streets representing about 13 percent of the total real area developed is adequate for pedestrian circulation and to provide basic infrastructure, it is inadequate to carry car access and bus traffic. Besides, no area has been reserved for community facilities and open space. A large residential area with this range of density would require about 18 percent of land reserved for streets and 10 percent for community facilities to insure a minimum of car accessibility, a bus route and kindergartens and primary schools. These new informal houses, with often more than 100 m2 of floor space on two floors, were much larger and better built than most of the existing apartments in which most urban dwellers were living. Plot sizes varied between 300 to 600 m2. The amount of land claimed by each family was limited to the area of land they could enclose and build with very limited resources. The only way to maintain a claim on land was to live permanently on the site and build. This process insured that no household could claim more land that it could built and occupy. In a way, the informal process was similar to a rationing system or to a self regulating mechanism to distribute land "to each according to its need"! As the de facto security of tenure was increasing in the same proportion as the house construction progressed and the density of new communities increased, it created a powerful stimulant for the quick development of new land and for increasing the supply of new housing. In Tirana, for instance, the built-up area more than doubled in size between 1990 and 2000 (PADCO 2001)49. 49The threshold density used for identifying an urban area in the 2001 PADCO report was 1 to 2 dwelling units per hectare, which was probably lower that that used in 1995. This might lead to overestimation of the built-up areas. The administrative area of Tirana was 10.6km2 in 1950 and has been 31km2 since 1970 (General Data for the City of Tirana, http://www.tirana.gov.al/?cid=2,74). 48 Many have deplored the anarchic and illegal character of the new urban developments springing spontaneously around Albanian cities. In fact, this spontaneous process may have been the best and most efficient way of distributing land quickly and equitably among a large number of households. The dwellings which were built informally were durable and constituted an addition to the urban housing stock which was badly needed after years of underinvestment under the old regime. The structures were built by using the labor from the neighborhood's households, which, at the time, had little opportunity cost. Figure 4.4 below shows another example, in Fier where the informal areas represent about 38 percent of the total built up area. One should note that most of the informal area has been built in a compact manner within the official municipal boundary, the so-called "yellow line". In the informal areas most streets, however, are not paved and some houses have no connections to the water network. Still, the houses built in the informal areas are durable and constitute a real asset for the city. During the transition from command economy to markets it would have been impossible to develop formally the same area of land and build so many houses in such a short period of time. 49 Figure 4.4 Fier- Areas occupied by informal settlements The lack of infrastructure and the insufficient space left for roads and community facilities are the main problems in these informal neighborhoods. The phased construction of a basic infrastructure network by the municipal government, as was done in Bathore (Tirana district), discussed further in the next chapter, has shown that these new informal neighborhoods could quickly become viable communities with a minimum of public investments. The rights of way of primary streets can be widened with community participation, and lots and buildings purchased for schools and other community facilities. In short, the areas developed informally have resulted in a surprisingly efficient pattern of urban development with respect to the private investment, although clearly missing a well planned and well funded program of public infrastructure investment that was infeasible in the 1990s. The large amount of floor space built by the new migrants greatly increased the average floor space consumption per person in the Albanian cities as noted earlier and relieved housing shortages. Paradoxically, in the case of Albania, rapid migration has 50 contributed to increased residential floor consumption per person rather than decreasing it, as it is often the case in cities subjected to high in-migration. The spontaneous distribution of suburban land into small parcels was a quick way of distributing real assets to poor migrants, enabling them to integrate more quickly into the urban economy. This informal land asset distribution contrasts to what is happening in many other low- medium income countries where recent migrants stagnate in overcrowded temporary shelters and are unable to accumulate real assets for decades. In 2006 the areas occupied by informal settlements form an important part of the built-up areas of Albanian cities, although only parts of these informal neighborhoods are serviced with infrastructure. These informal areas have densities ranging from 80 to 120 people per hectare. This is a rather high density for suburban areas, showing that the informal areas make an efficient use of land. This range of density will allow public transport to operate efficiently in the future. As can be seen on the map of Fier ( 51 Figure 4.4) the built-up area here, like most secondary cities in Albania, is quite compact. After upgrading, an informal neighborhood's density will be somewhat lower when primary roads would have widened and some open space and community facilities would have been provided. The density after upgrading might be between 70 to 100 p/ha50, still a very efficient density that will contribute to keeping Albanian cities from encroaching too much on agricultural land or natural sites. The formal real estate sector in 2006. In the last few years a new dynamic formal housing sector has emerged. Currently formal developers face the same problems that the wave of migrants faced in the 1990s: how to obtain legal access to undeveloped land. Even in 2006 it is practically impossible to purchase vacant land legally in or at the periphery of cities because of the uncertainty over tenure or because of the lack of infrastructure at immediate proximity. A number of regulations also contribute to the impossibility of developing vacant land legally. For instance, land designated as "agricultural land" cannot be subdivided and developed without the permission of the Ministry of Agriculture in Tirana, even when the land is located in the immediate urban periphery inside the "yellow line"51. Formal developers build mostly apartments in buildings from 4 to 6 floors high. Formal developers do not normally compete with informal developers who build detached houses in the suburbs on land with fuzzy legal status. But as the formal developers are also unable to buy vacant land, they have to purchase the land necessary to build apartments from owners of detached houses on sites usually developed informally in the past. Land tenure, if not previously obtained by the household who developed the land informally, is then legalized before transfer from informal households to the developers. Developers also manage at times to "recycle" sites occupied by privatized but dilapidated public housing blocks built at the time of communism. In many of these cases the land is bartered against new apartment floor space through negotiations between developers and households owning the informal houses. The object of the barter is the percentage of total new floor area developed that will revert to the owners of informal dwellings. The simple example shown on Figure 4.5 and Table 4.2 illustrates the "land recycling" process. In this simple case a group of four informal parcels occupying a total area of 2025 m2 and containing four detached houses with a total floor area of 500 m2 is bartered by a developer in exchange for 11 apartments in the new building with a total area of 1417 m2 , representing 35 percent of the total floor area built on the 2025 m2 site. In this example, informal households more than double the amount of floor space they own (from 125 to 354 m2), and they obtain new apartments with modern bathrooms and kitchen. The developer does not disburse cash to purchase the land but the implied land costs, corresponding to 35 percent of the floor space, is roughly equivalent to what a developer would pay for urban land in a country where the land market function 50For comparison, American suburbs have a typical density ranging from 5 to 20 people/hectare, a density much below the threshold which allows public transport to operate efficiently. 51The "yellow line" is a perimeter of urbanization around Albanian cities which marks the outer limit allowed for urbanization. It is the legal equivalent of the urban growth boundaries (UGB) used in some US cities like Portland, Oregon, for instance. Most studies have shown that the practice of strict urban growth boundaries increases the price of land and the cost of housing (Anas 2005, Brueckner 2000, Richardson 2000) 52 efficiently (in most market economies the cost of developed urban land represents between 25 to 50 percent of the total sale price of new housing). Figure 4.5 Schematic representation of the land recycling process Figure 4.5 provides a schematic representation of the transformation of a low density informal development into a high density formal development. The owners of the original houses in the informal development are resettled in the new apartments and are compensated in kind, in the form of free apartments for the house and the land that they contribute to the project. The developer introduces also a formal infrastructure and road right of way as negotiated by the municipality. The originality of the process in Albania is that it happens through negotiations between the informal owners and the formal developer without government involvement and without using eminent domain. 53 Table 4-2 The land recycling process Table 4-2 above illustrates the land use transformation in more detail. In this example the formal developer compensates the households occupying the four original houses to be demolished by giving them 1417 m2 of floor space in exchange for the 500 m2 they occupied originally. The profit of the developer comes from the sale of 18 additional apartments built on the same site. This table shows that this recycling operation is financially feasible only within the boundaries of some land use parameters. For instance, in this specific example, if land use regulations were to limit the floor area ratio (FAR)52 to 2.0, the recycling of land would not be financially feasible, or the informal settlers would have to accept a much smaller compensation for their land. The informal-to-formal land redevelopment system described above has three main advantages: a. Equity: it avoids the asymmetrical information which often exists when a developer buys land from a small unsophisticated property owner. In this case it is 52The floor area ratio (FAR) is the ratio of the constructed floor area of a building to its ground plot area. For example, if the "footprint" of a building covers 50 percent of the plot area, then a one-story building would have a FAR of 0.5 and a 5 story building of the same footprint would have a FAR of 2.5. Land use regulations may be defined in terms of the plot footprint rate (0.5 in this case), or in terms of number of permitted floors or building height, or the FAR itself. In any case the allowable FAR has major implications for land development costs and affordability. 54 not important to know the price of land in the area to strike a bargain, only to negotiate a percentage of equity in the building. This equity is totally liquid: as soon as the building is complete the former owner of land can then sells or rent the redundant apartments. During construction the developer pays the rent of the households whose land is used. b. Land use efficiency: the land is recycled at a higher use and higher density--in this example the original net residential density was 100 p/ha and becomes 700 p/ha after development53. c. Regularization of informal title: finally, the operation formalizes land titles for all the occupants of the apartment building and therefore the former owners of informal houses get also a formal title for their condominium apartment. This process ­ formal private developers "recycling" informal areas while giving an equity share of the formal development to informal occupants ­ appears to be unique to Albania. In most other countries developers recycle land by buying formal properties and redeveloping them. What is unique about Albania is the transformation from informal to formal done by private developers without government intervention. This practice is not promoted by government but has developed spontaneously and is initiated by private contract agreements between formal developers and informal occupants. The recycling system facilitates the formal building process in Albania as it is almost the only legal way available to formal developers to obtain land. While it has several advantages it also has limitations, as seen below. It may entail serious contractual risks for the households, particularly in the event of an unscrupulous developer or one who goes out of business before the land transformation is completed. The constraints limiting the activities of the formal real estate sector in Albania While at present the formal real estate sector seems to be expanding its activities faster than the informal sector, its expansion is nevertheless severely limited by three main factors: · absence of recent "regulatory plan" for most cities (in Albanian terminology, a land use plan, elsewhere known as a master plan) and approved local regulations · The lack of funded municipal programs to build primary infrastructure · The practical impossibility of acquiring undeveloped land, officially and legally, for construction. Absence of legal-regulatory framework. The redevelopment process described above in a simplified manner is in reality much more complex. In fact, in many cases (in Shkoder and Vlore, for instance) in the absence of a regulatory plan the developer is asked to prepare a plan for an entire block, even if he/she doesn't develop the entire block. Municipal urban planners might even ask developers to prepare several alternative plans for them to choose from. This is a bizarre arrangement; the developer is working as a consultant to the local authority to which he/she is asking a building permit! The few 53Net residential density = number of people divided by area of residential lots. This should not be confused with the built-up density mentioned earlier. Built-up density is calculated by dividing number of people by the total urbanized area, including roads, small parks, community facilities and non residential areas. 55 master plans in existence date from communist times, do not correspond to modern land use requirements and are maladapted to a market economy. When plans exist, they concern only a few blocks in the city center and focus mostly on urban design rather than contain precise land use regulations and streets alignments. Because land use regulations are not contained in an approved and published plan, many regulations like set backs, width of major roads, floor area ratio, and maximum heights have to be negotiated project by project. This practice increases the cost of construction by creating lengthy delays and creates the impression of arbitrariness and possibly corruption. According to developers, the entire administrative process (not including design and construction) for developing one block of flats may take up to 2 years prior to the design stage. At present, there do not seem to be any regulations for land subdivision 54. Land subdivision regulations are essential for urban expansion in the city periphery. The standards used in subdivision regulations should be closely linked to the affordability of the new stock developed and to the compatibility of newly developed neighborhoods with public transport. An existing legal framework to prepare urban plans has been defined by the Council of Ministers' Decree, No. 722 (November 19, 1998). This decree defines the content of a "Master Plan", "Regional and Environmental Urban Planning Study", "General Urban Planning Study", "Partial Urban Planning Study" and "General Plan of construction sites". However, few if any plans seem to have been prepared following the definitions contained in this decree, which seems to be more relevant to a command economy than to a market economy like Albania. The decree has a normative approach to planning and does not allow variations in land use regulations depending on cities and location. For instance, the decree imposes 14.5 m2 per person for floor space in residential areas and a uniform land use index between 0.7 and 0.85 for residential areas in city centers.55 Fortunately, it seems that no planners in Albania are taking these norms into account when giving building permits. A new legal framework to define regulatory plans in Albania should urgently be prepared, possibly with a new decree. This framework should be much simpler than decree No 722, which even specifies the number of parking spaces to be provided in commercial centers and cinemas. It should take into account the fact that Albania is a market economy and that regulatory plans should define only the broad spatial regulatory framework within which the private sector is supposed to develop and redevelop existing cities. Norms of land or floor consumption should never be set at the national level. The most important document contained in a regulatory plan is the zoning plan, which establishes the regulations which will have to be followed by the private sector when 54Land subdivision regulations differ from zoning regulation because they involve provisions of public space like streets, open space and community facilities, and infrastructure, which have eventually to be turned over to the local authority. Land subdivision regulations describe the standards to be used for various public facilities and the manner by which these will eventually be transferred to the local authority or the utility company. 55What the decree calls the "land use index" is the permitted "footprint" rate of a building on its plot. For a one-story building the land use index is the FAR (the ratio of the total construction floor surface to the plot where the building sits) as explained earlier. 56 building on private lots (no zoning plan is mentioned in decree No 722). When preparing their zoning plans, municipalities should define the maximum floor area ratio which should be permitted within a given zone. Within the same city the FAR could range from, say, 0.2 to 10. Location, land prices, infrastructure and at times environment or historical factors could influence the value of the FAR in a given zone. The implications of a given FAR for costs and affordability of developed land should also be monitored as part of enforcement and review of the implementation of planning. Lack of primary infrastructure. Albanian cities lack the resources for initiating a long term program for developing their primary infrastructure network. Because future infrastructure projects are uncertain and depend on transfers from the center there is currently no systematic way of recovering their costs through land development or redevelopment. For instance, a developer who projects to increase the density seven fold, as in the example above, has to connect his project to the existing roads, water and sewer networks. As the existing network lines might be not be adjacent to the property being developed ­ in most cases they are not ­ developers are often obliged to built at their own cost an off-site infrastructure linkage between their project and the existing network. This off site cost might serve in the future a wider area than the project being developed, but in the absence of an infrastructure plan and of a cost recovery system the cost of the off site infrastructure will be borne entirely by the developer. Because of this, developers build only the capacity they need for their project. A subsequent new project in an adjacent plot will have to be linked to existing infrastructure by an additional line. This practice is uneconomical and will result in the long run in a network that is expensive to maintain, in particular for water supply. Developers are currently paying an impact fee to municipalities ranging from 2 to 5 percent of the cost of construction. The revenues from this fee are going into the regular budget of the municipality but could be used to finance a capital investment fund to pay for primary infrastructure. De facto impossibility of formally developing vacant land. As we have seen, formal developers exclusively redevelop land which has been either developed previously informally or has been developed formally in the past during the communist regime. In Albania formal developers cannot find vacant land to acquire and develop because most vacant land around cities is either encumbered by disputes over title or claims for restitution, or belongs to a ministry and is therefore not on the market. If developers could acquire vacant land legally they would face two additional hurdles: (i) most vacant land ­ even within the yellow line ­ requires a permission from the Ministry of Agriculture to be developed and the procedure is lengthy and uncertain, and (ii) municipalities have no subdivision regulations. Therefore, in the case where land could be acquired and permission obtained, developers would face the uncertainty of having to negotiate the development standards with the municipal urban planner. In the absence of published and realistic development standards concerning, e.g., minimum plot dimensions, streets width, floor area ratios, etc., the undeveloped land price would be difficult to establish. The promulgation of clear land use regulations, including land subdivision regulations, would reduce a lot of uncertainty and risk in the land market, 57 facilitating a more integrated market and eliminating some of the opportunities for corruption. Market parameters: demand, supply, prices, and affordability Demand and supply for land and housing. In the majority of cities outside Tirana the population has been growing slowly since 2000. Shkoder, for instance, has been growing at about 1.2 percent annually while the population of Berat has stayed constant. However, there is still a large demand for urban land and construction propelled by a combination of factors: the historic backlog of poor quality housing, the demand for new office and commercial premises in the center of cities, and finally the decrease in household size (which declined from 3.98 to 3.92 persons for all urban areas between the 2002-2005 LSMSs56). Remittances are also fueling activities in the building sector, and housing demand is normally quite income-elastic. At this moment, new housing supply is virtually all private and comes mainly from the formal and informal sector. The only exception to privately supplied housing is the very small scale public housing construction under the "social housing" program following the new Social Housing Law of 2004, discussed further below. The formal sector as explained above is limited to redeveloping land which has been already built by either the informal sector, or on land occupied by older obsolete buildings. This "land recycling" by the private sector is possible only when the density and floor area ratio allowed are much higher than the current built one. The formal sector is therefore adding floor space mostly in central locations. The informal sector does not develop as much land as it used to do in the 90s when there was still a large migratory movement; however, in 2006 there is still land being developed and housing being built by the informal sector, usually at the periphery of cities. The relative share of new housing supplied each year by the two sectors is not known. Costs and Prices. The cost of construction for formal apartments is around Lek 30,000 per square meter. This is a relatively low price given the quality of construction currently in the formal sector, and the GDP of Albania, and suggests that the industry is becoming reasonably productive and competitive. The sale price of formal apartments is about Lek 60,000 per square meter. 57 The difference between the cost of construction and the sale price is constituted of about Lek 20,000 for land and Lek 10,000 for design, supervision, overheads, financial costs and the profit of the developer. The proportion of the various price components suggests also that the building industry operates in a competitive environment. Therefore the issues of 56Average household size is lowest in the urban Central zone and declined further between the surveys, from 3.84 to 3.79, and in the Coastal zone fell from 3.90 to 3.84. The Tirana average household size actually rose very slightly, from 3.81 to 3.83. 57Estimates obtained in March 2006 ranged from about L60,000/m2 in the center of Durres and Vlore, or about L50,000/m2 nearer the beach; to about L70,000/m2 in the "middle ring" of Tirana (about one km from the center, although prices in the center for premium apartments can be twice that). The average apartment size on the formal market in Tirana is about 125 m2, with the minimum about 70 m2. 58 affordability discussed below are not attributable mainly to inefficiencies on the industry supply side, but more to the policy environment in which it operates. Building costs in the informal sector are difficult to assess as many households do the work themselves or hire relatives at non-market prices. It is assumed here that the costs of construction on average in the informal sector are about half of those of the formal sector ­ this is not due to structural inferiority but to difference in sanitary installations and finishing. Affordability. It is difficult to assess the affordability of the current housing stock and of the houses and apartments being built in 2006 in relation to wage and salary data because of the effect of remittances and the prevalence of informal sector income. As is standard practice in most analysis of poverty and living standards, the household consumption estimates from the 2005 LSMS serve as the welfare indicator in lieu of income. One caveat worth noting is that the LSMS consumption measures are based on household expenditures without including the value of housing, for which many households may not make current payments for either rent or mortgages, and no value of their housing consumption is imputed. The non-housing consumption figures may therefore underestimate welfare for families that are "house-rich" but "cash poor"--a status not uncommon in formerly socialist countries where housing was previously allocated on administrative and political criteria. Because affordability analysis will inevitably be rough given data shortcomings, two approximations are offered here (Table 4.3). The first approach relates housing costs to putative urban income levels based on some benchmark salaries corresponding to various skills. For illustrative purposes these benchmarks are taken as the base salary of a school teacher, an unskilled laborer, a middle level employee and a skilled worker. We have assumed that a household in these job categories will get 1.5 times the base salary per year (one adult working full time, one other adult working half time). For present purposes it is assumed that these salary benchmarks are equally applicable in the urban Coastal zone as in Tirana or other main urban areas. The second approach relates these "income benchmark" levels to percentiles on the consumption distribution obtained from the 2005 LSMS58 (see Figure A.4.1 in the Appendix). This is not to say that the rough salary benchmarks here translate directly into consumption levels because of the qualifications noted earlier (household income may be more than formal salaries, and consumption levels may be overestimated by not imputing housing components). However, relating both rough income and consumption comparators to housing costs helps to ground the following "thought experiment". 58This consumption distribution has been calculated from the LSMS quintiles by the team but should be checked. 59 Table.4-3 Household's income benchmarks based on typical salaries Note: Fourth column refers to estimated distribution of household annual consumption given in Appendix Figure A4.1 and Figure 4.6, from 2005 LSMS data. A tentative affordability for the current housing stock has been calculated separately for the informal and formal housing for different size of plots, houses and apartments in Table 4-4 below. The affordability is based on house price-to-annual household income ratio. A price-to-income ratio below 4 is considered affordable, and an indicator of an efficient housing market (World Bank 1993). The results of the affordability calculations are presented in Figure 4.6. 60 Table 4-4 Affordability Table based on Price-to-Income Ratio 61 Figure 4.6 Affordability of various types of new housing in urban areas in the Coastal zone (Durres, Fier, Vlore) 100% 90% 45 m2 apartment in a newly developed formal 5 story high apartment block 80% 75 m2 house on a 250 m2 plot in an informal settlement 70% ds 60% 60 m2 house on a 200 m2 plot in an informal settlement usehol Ho of 50% % veti la mu 40% Cu 45 m2 house on a 150 m2 plot in an informal settlement 30% 20% 10% 0% - 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 Yearly consumption in Lek/Year/Household Sources: LSMS, 2005. Price of housing based on data collected during mission. It appears that in 2006 the cost59 (about 1 million lek) of the smaller informal house of 45 m2 on a plot of about 150 m2 would be at the limit of affordability for a school teacher household and for an unskilled laborer household, or would be affordable to households with an income above 350,000 lek per year (the 35 percentile on the consumption distribution curve). A middle level employee's household could afford a 90 m2 house on a 300 m2 plot (the most common size of houses and plots encountered in informal subdivisions), while a skilled laborer household could afford a 120 m2 house on a 400 m2 plot. By contrast, in the formal sector, a minimum size apartment of 45 square meters would be affordable to neither a school teacher, an unskilled laborer, nor a middle level employee, and would be barely affordable to a skilled worker (income of 900,000 lek/year or 86 percentile). Most of the apartments on the formal urban market seem to be only affordable to households above the 80th percentile (or about the 15 percent richest households). 59We base the affordability calculation on cost rather than sale price as there is no current data on transactions in informal settlements. Market prices should of course exceed construction costs. 62 Although the figures above are approximate, the ball park is probably about right.60 Houses in the informal sector are the only ones whose standards are flexible enough to be affordable to the lowest income groups. The average size of apartments in the formal sector is about 80 m2 ­ not affordable to any of our benchmark groups ­ and the minimum apartments are usually not below 65 m2. It is possible that the private sector when reaching a saturation of the market for higher income group will start building smaller apartments. In the land recycling examples discussed earlier the private builder compensates the informal households by providing them from 50-100 percent more floor space than they currently have, but this approach is not a mainstream response to housing demand of this population group. The LSMS 2005 survey has established that the average floor space for households in the first consumption quintile (275,000 lek/year, i.e. well below our schoolteacher benchmark of income) is around 56 m2. With land for new informal settlement no longer as available around the main cities, the cost of housing may be increasing for low income households. The spectacular increase in floor consumption due to the growth of informal settlements in the past decade is now abating for the poor. A large number of poor households occupy houses that they could not afford to buy if they had to acquire them in 2006. With less land available for informal development and an increase in the share of formal development, the supply of houses affordable to the poor (below the 30 percentile or below 325,000 lek per year) is therefore decreasing. The challenge facing the government is therefore to allow formally the development of settlements which mimic in many aspects the informal settlements of the past. Housing for low income households. One of the major problems for low income households in Albania, and for young households in general, is the very small proportion of rental housing units on the market61. This low proportion could be explained by the absence of laws allowing owners to expel tenants in the case of rent default. In the long run, government policy should encourage more rental housing by providing the necessary legal framework. The recent social housing law (Law 9232, On Social Programs for Housing the Urban Inhabitants of 2004) provides for a wide range of housing subsidy and support measures, including public land development (often called "sites and services"--public investment in basic infrastructure to prepare sites for self-help construction), housing certificates or vouchers, housing allowance, interest rate subsidies, and social housing. Publicly financed housing production (funded by state grants to the municipalities) consisted in 2005 of an apartment building of 24 flats in both Berat and in Vlore62, for example, at the cost of L 25,000-35,000/m2 (assuming minimum size of 70 m2). 60Some likely sources of error may cancel each other out: as explained above the income or consumption figures used here may be underestimates, implying greater affordability, while the use of cost data may overestimate affordability. 61The exact proportion is not known, but several sources are mentioning figures around 5 percent of the housing stock in Albania. In most market economies, the rental stock is between 30 and 50 percent- of the total housing stock. Many transition economies currently lack adequate rental options because of the policy emphasis on housing privatization and ownership (Dubel, Brzeski and Hamilton 2006). 62As compared to estimated eligibility of at least 1400 families in Vlore and 1100 in Berat, according to the municipalities. 63 In the experience of other market countries some of the instruments outlined in the law have proven more effective--well-targeted to need, fiscally affordable, replicable at scale, non-distorting to the housing market--than others. Notably, sites and services and housing vouchers have been judged by many housing policy experts as preferable to interest rate subsidies or social housing by such criteria (World Bank 1993). Albania's social housing law is quite new and it is unlikely that the administrative or fiscal requirements for implementing the array of measures will be met for sometime, particularly in terms of the implications for municipal participation. Many provisions of the law as drafted are quite sound in principle, e.g. the basic condition for household eligibility is based on assessment of ability to pay for market housing within a reasonable threshold (normally 25 percent of household income). However, the municipalities visited by the mission appeared to understand "social housing needs" more in terms of entitlements based on household characteristics or circumstances, such as families affected by restitution decisions. In a country with the GDP of Albania, social housing provided by the government should be limited to social cases ­ households who very little earning possibilities because of age or disability. The government could not afford to subsidize housing for a large segment of the population which falls below a certain fixed income, as it is done in some richer countries of Europe. Given the competitive prices for houses in the formal and informal sector in Albania, the obvious solution for social housing would be a voucher system, as used in Chile and many Western European countries (Boelhouwer 1997). Under this system, beneficiary households receive a rental allowance representing a part or the entirety of the rent and are free to use this allowance to rent or buy any dwelling on the market. This is a much more rational solution than the traditional social housing program where the central government or the municipalities build and manage large housing estates for low income families. However, a private rental market will have to be encouraged first, to allow the voucher system to function. It is clear that the social housing law cannot be the main policy response to the problems of affordability for most lower income families. Care will be needed to ensure that implementing certain provisions, such as public investment in a small number of apartments, or subsidies for mortgage interest (which are better avoided entirely), do not become a fiscal drain or a source of distortion and negative incentives to a well- responding housing market and a well-targeted social policy, as has been the unfortunate experience of many other countries. To be able to reach households in lower income groups like the school teachers and employees mentioned above, the government will have to allow the development of formal private subdivision which would replicate legally the current informal settlements. This would not require subsidies but would require land subdivision standards to be adapted to the income of the lowest income households. This point is further developed in the recommendation section in Chapter Six. To conclude, this chapter has described and evaluated the functioning of the real estate market in both its informal and formal character since the transition. The assessment is 64 largely very positive, finding that an entrepreneurial and largely unfettered market has managed to absorb a massive increase in demand for urban property and improve quality of housing products quite dramatically. Yet it is clear that the public role has been to a great extent missing, both in terms of the needed public infrastructure investment and a well-focused and light-handed regulatory guidance that would permit a better integrated property market, wider sharing of benefits, and protection of the public interest. The next chapter delves further into the particular challenges posed in addressing the needs of informal settlements. The final chapter lays out some of the basic considerations and elements proposed for a renewed but carefully targeted role of public planning and regulation. By committing to such a role Government (central and local) could better assist cities to become environmentally, socially and fiscally sustainable and able to support the country's continued economic success. 65 Chapter 5 Informal settlements in Albania-- origins, past approaches, and new directions The previous chapter argued that in the context of Albania's need to rapidly confront massive demographic and economic change in the early 1990s, informal settlement was a natural, practical and quite successful response. Relative to other countries at a similar level of income and institutional development, the settlements represent more solid housing investment and no obvious evidence of worse social or environmental problems than other such spontaneous informal developments present in those countries. Although the pace of their expansion has apparently slowed, regularizing these settlements, both legally and through linkage to the urban systems, remains one of the key challenges for Albania if it is to modernize and integrate its urban economies. Both the central and local governments are aware of the need to find solutions to the informal settlements for several reasons: · they represent significant shares of the urban population and urban space (containing up to one-quarter of the population of some cities in which they are located), · they present significant hardship for many of the residents, particularly due to the lack of adequate social and infrastructure services, · they perpetuate a spatial form of social exclusion that is damaging to society and to the younger generation especially, · and, given the absence of adequate sanitation, they risk weakening the environmental sustainability of the urban areas. It is in the informal settlements where spatial and demographic growth is happening and where the policy and legal conflicts all came together. Historical Background and Current Situation The legal legacy affecting urban settlement. In Albania, informal settlement in and around urban areas started to emerge right after the collapse of the communist regime in 1991 with the removal of restriction on internal migration. As documented in Chapter One, many people in the north/northeastern region, mainly Kukes, Puke, and Tropoja migrated to the center-coastal cities, especially Tirana. While the socialist government had established a few industries such as mining in the northeast, most of them had already ceased operation by 1991. Due to the severe climate conditions and mountainous topography, the region is not suitable for agriculture and employment opportunities were severely limited. People therefore moved to the largest cities, mainly to the capital, looking for economic opportunities. Under the extreme form of Albanian socialism, all urban housing was state property. While the urban housing had been fully privatized by 1992, there was no supply of new housing in the urban area, as private housing development was non-existent due to the shortage of capital. The Government established a national housing agency (NHA) in 66 1992 to promote the supply of urban housing, but the NHA produced approximately 500 houses in the Tirana Area during 1992-1995, which was a mere fraction of the demand for housing created by the new settlers. Chapter Four explains that informal settlement was the inevitable, and quite successful, response of the spontaneous market demand to this dearth of supply. But while informal housing provision is ubiquitous in low and middle income countries experiencing very rapid urban growth, the development in Albania reflects a particularly complex legal history in the initial transition years which continues to constrain options for resolution. As early as 1991 agricultural land was transferred in two different ways (under Law 7501, On Land): cooperative farms were privatized to ex-employees, while on the state farms ex-employees were given only the use rights. While the intent was to restore agricultural output as quickly as possible, other technical and institutional problems in the sector impeded that objective and many of the occupants gave up farming and started building housing and looking for other livelihoods. Soon many of the new agricultural land holders transferred their land, both on former cooperative and former state farms, to new settlers in the zones surrounding urban areas that were attracting migration; these settlers further divided the land and constructed more and increasingly solid housing. In some cases the land became annexed to the municipalities and was designated as an urban zone. In 1993 the issue of restitution to pre-socialist owners came to the fore, resulting in the passage of two new laws. 63 The legislation stipulated that undeveloped urban land could be subject to restitution to the original owners, while claimants to agricultural land would only receive compensation in money or in land of equivalent productivity, but not their original plots. This distinction proved highly problematic. It exacerbated contention over which lands were urban and which agricultural (when the actual usage had long departed from the formal classification of the land), and whether the "urban" or "agricultural" designation applied at the time of the original land transfer or at the time the law was enacted, or when the restitution claim was filed. The restitution law also contained loopholes that permitted claims to be submitted indefinitely into the future. These flaws have created considerable confusion on land tenures of informal settlements in both peri-urban and urban areas. In peri-urban areas, where the land was designated as agriculture land, concerned ex-owners have opted not to file restitution claims until the agriculture land is classified as urban land, as otherwise they would be given agriculture land equivalent in terms of productivity (i.e. soil and slope) somewhere else in Albania. In the meantime, the Government has not been able to provide informal settlement residents with infrastructure services as long as the area has been designated as agriculture land. In late 1995, there were a few incidents of fatalities over conflicts between the police and residents in informal settlements when the police tried to demolish some houses in Bathore, outside Tirana. Afterwards, the Government has given up any effort to curb informal settlements. 63Law 7698, On Restitution and Compensation of Properties to Ex-Owners (1993); and Law 7699, For Compensation in Value for the Former Owners of Agricultural Land (1993) 67 After 1995, the informal settlements have continuously grown rapidly, but rather on the former state farms further outside the urban areas where the land is still designated for agriculture use and therefore with less potential for conflict over restitution. However, the Government as well as the municipalities are still not able to provide these settlements with any infrastructure services as their lands are classified as "agricultural". In short, the arriving urban migrants were caught between threats and conflicts over potential restitution if they settled in designated urban areas, and inability to obtain infrastructure services if they settled in designated agricultural areas. The existing residents of informal settlements feature a wide array of tenure status that varies with the origin of their land as cooperative or state farm, how they acquired it, and type of documentation obtained, if any. As the government has not been able to resolve restitution or compensation claims, nor update all the urban plans needed to recognize changes in land use, nor finance infrastructure investment in step with the growth in urban population, the informal settlements have become literally a "no-man's land" at the frontier of the urban management challenge in Albania. Past initiatives to regularize and upgrade informal settlements. In mid-1997, this impasse created major social tensions in peri-urban informal settlements, particularly in Bathore. By that time, the population of the Bathore had reached approximately 10,000 people, most of them with severely limited access to infrastructure as well as social services. Through extensive policy dialogue between the World Bank and the Government, the Government decided to start regularization (urbanization) of the informal settlements through providing access to urban and social infrastructure, mainly in Bathore, and launched the implementation of the World Bank financed Urban Land Management Project (ULMP). In early 1998, as a necessary precondition for these improvements, a special law was passed in Bathore and in another settlement of the Tirana district, Lapraka, to exempt the area from restitution of the original lands to ex- owners. 64 The project was modestly successful. On the positive side, it played a catalytic role in urbanization and eventual integration of Bathore through defining the right of the way within the informal settlements, and enabling extension of infrastructure networks such as access roads, water supply, and sewage. At the same time, the project attracted other donors who provided financing for schools and kindergartens. The project also provided a demonstration of practice in developing informal settlements and developed a database for the current occupants to assist in future legalization. On the other hand, however, the project was not able to help the residents in the informal settlements obtain a clear title, as it has been found that there are many types of existing land tenure and a single prescription cannot be adopted to legalize them. The cost of urbanization and integration, mostly civil works for infrastructure networks, were significant but not out of line with experience of other countries for this kind of investment (discussed further below). At completion of the project in 2005, the most acute urban issue identified by all stakeholders was to sustain the delivery of infrastructure services. While the population of Bathore has continued to increase (currently reported at more than 30,000 residents), 64Law on Bathore and Lapraka, Law No. 8398, September 1998 68 correspondingly adding to the responsibilities of the Kamze Municipality for service delivery, the fiscal basis of the municipality has not increased proportionally. In addition, under on-going decentralization, local governments, including the Kamze Municipality, have assumed responsibilities for providing education and health services. The level of service delivery is already alarmingly low, and unless there is a mechanism to link population increase and fiscal resources, it is evident that the municipality would fail to deliver adequate services to its residents. This issue is discussed in more detail in the next section. Other major informal settlements. Besides Bathore, similar informal settlements have occurred in all major secondary cities such as Durres, Shkodra, Elbasan, Fier and, to a lesser extent, Vlore. 65 Residents in these informal settlements are relatively poor compared to those in formal urban areas. No formal household survey data targeting informal settlements is currently available66, but anecdotal evidence collected by a few NGOs as well as a rapid survey carried out under the ULMP suggested that: (a) while the income level varies depending on remittance from family members, the remaining family members have marginal and fragile jobs, often working on a daily job offered by construction firms in the city67, and (b) asset liquidity of the families is low, as these families have often put all wealth into houses and therefore are vulnerable in the event of crises requiring access to savings. The major informal settlements are summarized below. Keneta (Durres). The settlement in Keneta started fairly late (1997) when it became apparent that there was no more vacant land without outstanding land conflicts elsewhere. The area used to be a drained marsh just outside the Municipality of Durres, and historically there were no original land owners68. So even though the area is prone to natural hazards (flooding), informal settlement occurred there to avoid other threats (restitution). As of now, while reportedly more than 10,000 people live in the informal settlements, they have very limited access to infrastructure services as the area has not been classified as urban. The access to infrastructure is severely limited as rights of way have been vaguely defined. There is no school within the area and the risk of social exclusion is considerable. Urgent action to integrate the informal settlements through regularization needs to be taken. Ksamil (Saranda district). Informal settlement in Ksamil started in the early 1990s on the former state olive farm, located just adjacent to Butrinti National Park. The situation there is rather complicated. Privatization under the Law 7501 did not take place seemingly because the land was considered to be valuable. In the meantime, based on the 65Based on a study made by the Soil Research Institute it is calculated that the informal constructions have occupied about 20,000 ha in total at the national level (Bardhi ­ exact source?). 66Note that the 2005 LSMS oversampled urban/periurban households in Tirana, so hopefully analysis of this source approximating the conditions of some of the informal settlements will become available later in 2006. 67The going rate for day labor in Durres in March 2006 was reported to be Lek 1000/day. Assuming employment for 20 days/month, annual income from this source alone would be Lek 240,000 which (notionally) falls below the 20th percentile of the consumption distribution curve (see Figure 4.6). Of course, such households are not necessarily depending on one wage earner. 68Strictly speaking, there are restitution issues for part of Keneta which are close to the ocean. 69 implicit government decision, about 350 families mainly from Tepelena had received land and built houses. The state land has eventually been restituted. Currently there are serious conflicts among ex-owners, ex-state farm workers, and occupants. Most of the residents have at least one family member working in Greece, sending remittances to their families. The current number of residents in the informal settlements is estimated at 4,000 people. While the Municipality, which counts a further 4,000 residents in the formal settlement, has already started to urbanize part of the informal settlements, legalization would be extremely difficult due to the complexity of the land tenure issue. The informal settlements have also resulted in deteriorated infrastructure services, which, due to the lack of maintenance and repairs on trunk infrastructure lines, were already unreliable before the informal settlements occurred. Shkodra. Approximately 5,000 families (or 25 percent of the total city population), spread over seven areas totaling 150 hectares, have informal status. Most of the informal settlements occurred on former cooperative or state-farm land during the early 1990s, and these settlements were attached to the city in early 1994. All seven informal areas, in the direct surrounding of the formal area, seem to have assimilated into it. The density has reached the similar level of formal settlements (approximately 40 houses per hectare), and clear rights of way have been established. While there is no social infrastructure within the informal area, access seems to be reasonable. However, infrastructure services, supplied through illegal connections, are strictly limited. The municipality does not have information on the land tenure situation. Fier. Informal construction started in 1992 and is concentrated on both sides of the main national road. There are more illegal settlements at the entrance of the city and on the other side in the direction of the cities of Vlora and Patos. It is calculated that the informal settlement in this area covers about 250 ha or 38% of the total built-up area. Elbasan. Approximately 5,000 families (or 20 percent of the total city population), spread over 2 areas totaling some 180 hectares, are considered to be in informal status. Similar to Shkodra, informal settlement occurred in the early 1990s and has been incorporated as part of the municipality. However, unlike Shkodra, informal settlements have developed extensively across a large area. Because of this reason, access to infrastructure is generally worse than, for example, in Fier, and there are no main networks nearby. While the municipality intends to extend the infrastructure network, it would be costly. The municipality does not have information on the land tenure situation. It should be noted that development of new informal settlements has slowed down particularly after 2003, primarily because there is no more agricultural land in peri-urban areas available for encroachment. Urbanization has entered into a different phase through: (a) densification of the existing informal settlements, (b) rapid development of high-rise buildings in the city center (described in Chapter Four), and (c) sporadic construction on agricultural land. The remainder of this chapter focuses on the future evolution of the informal settlements. 70 As explained above, much of the incursions into agricultural land occured due to distored incentives created by the restitution/compensation framework. But as countries urbanize and its cities grow, which, as outlined in Chapter One, is the case in Albania, the economic pressure for land coversion at the urban periphery to satisfy the demands for commercial and residental markets intensifies. It will be critical for this conversion to take place through a modern process of planning that is flexible, market-responsive and transparent, as discussed in Chapter Six. Typologies of Informal Settlements There are a few typologies of informal settlements in Albania from viewpoints of size, location, and land tenure. As these typologies have different socio-economic backgrounds and implications, it is important to understand the typologies in order to develope realistic and practical measures for eventual legalization. This section provides a brief description of each identified typology of informal settlement. First, informal settlements should be strictly differentiated from individual illegal buildings (see Appendix 5.1), such as houses on agriculture land, restaurants in the protected zones, and buildings not in conformity with the building permits (e.g. buildings with more floors than permitted). Informal settlements in Albania are more systematic and social phenomena with potentially considerable social, economic and environmental consequences and warrant serious attention. Second, from viewpoints of location, informal settlements can be largely classified into the following two categories69: (a) peri-urban, and (b) within-urban areas, which have different implications for land tenure and infrastructure issues. Thus, the paths for the eventual legalization and integration would be different. In short, the main issues for peri-urban informal settlements are lack of infrastructure and social integration, whereas the issues for urban settlements are complicated land tenure (and restitution) issues which are clearly major obstacles for eventual legalization. The detailed description for each category is as follows. Informal settlements in peri-urban areas. As of March 2006, there are still a few informal settlements in peri-urban zones in most major cities such as Kamze, Selita and Shkoza (Tirana), Durres, Fushe Kruje, Kurbin, Lezhe, Elbasan, Shkodra, Fier, Vlora and Saranda. These settlements were built on ex-state and cooperative farm land but density is not high enough for them to be officially urbanized. However, significant densification has occurred through informal transactions (mostly to related families and peer villagers) particularly during the last five years. Today most of the buildings in such informal settlements are permanent concrete structure with multiple floors, on typically 300 ­ 400 m2 plots of land. However, due to the fact that these settlements are outside the designated urban zone and still rated as "agricultural", these settlements have limited 69The current Law 9402 On Legalization, Urban Planning and Integration of Illegal Buildings (approved May 2006) defines the informal settlements as follows (Article 3): (a)informal zone ­ areas more than 5 hectares covered by illegal buildings, (b) informal habitation block (from 1to 5 hectares, including ), and (c) isolated informal buildings (less than 1 hectare). 71 access to infrastructure services. As the areas do not have nearby infrastructure networks, extension would be too costly for the municipalities. Because of their distance to formal urban zones, these communities cannot even afford to have illegal connections, as often seen in informal settlements in the formal area. Access to social infrastructure (e.g. schools) is also limited, as there are no schools or kindergartens within the settlement, and children have to walk some distance to nearby facilities in the formal urban areas. Consequently, the school attendance rate is considerably lower than in the formal settlements. Underlying land tenure issues vary case by case, but in general, the issues are less complicated than for informal settlements within urban areas. While there was a difference in initial privatization procedures between former cooperative farms and state farms under Law 7501 as explained earlier, ownership of both types of land was later privatized by Law 8053 in 1995.70 However, there are reportedly cases where some ex- cooperative works have encroached more than their entitlement under Law 7501. The situation has become more complicated if transactions have taken place since the first privatization (as is often the case), involving `good faith' buyers. Informal settlements within urban areas. Among the first areas settled by immigrants from the northeastern region after 1991 were the cooperative and state farms adjacent to the city boundary. In Tirana, these were medium-sized cooperative and state farms such as Alias, Mihal Grameno, and Selita. These farms became quickly urbanized within a few years, and many areas have been formally converted to urban areas by 1994. In many of the secondary cities, roughly 20­25 percent of the residents are estimated to live in such informal settlements. Most of these settlements have adequately defined rights of way and reasonable access to infrastructure, including through informal (illegal) connections. Therefore, the prominent issues in these areas are not access to infrastructure but rather: (a) the lack of residents' fiscal contributions to the municipalities, and (b) unresolved land tenure complicated by restitution claims. 70Law 8053, On Transferring Agricultural Land into Ownership without Compensation (December 1995) permitted the shift from user rights to freehold for ex-state farms outside urban areas. 72 Figure 5.1 Informal settlement of Kineta (Durres) While the residents have access to infrastructure services, most of them do not have formal connections and thus do not pay proper tariffs to the utility firms. In the absence of a working property tax system or adequate fees for infrastructure development, the respective municipalities do not have sufficient financial resources to extend infrastructure networks and formalize the access to infrastructure. It is crucial to establish a mechanism which ensures the residents' contributions towards investment, operation and maintenance of infrastructure networks. Land tenure can be particularly contentious within the urban zones. When Law 8053 provided the ex-employees of state farms with full property rights for the former state land outside the urban area, it also stipulated that restitution was possible for former state farms within the urban area. This law has created serious conflicts between occupants and original owners.71 At the same time, this law has also encouraged proliferation of informal settlement outside the urban boundary where the land tenure issue is clearer. In addition, there are certain ex-industrial areas in the designated urban zones, where informal settlements have developed in an outright illegal manner during the early 1990s. These areas were not privatized under Law 7501 and have been eventually restituted to the ex-owners, resulting in conflicts and disputes over land tenure. The Law 9402 On Legalization, Urban Planning and Integration of Illegal Buildings of May 2006 may add 71For example, in Mihal Grameno (Tirana), 46 families are living on the land restituted to 28 owners through the decision of the restitution committee. There are additional 124 families living on the land for which the restitution claim are being processed. 73 further to the already complicated land tenure issues, as the text has not explicitly stated the applicability of the law in cases with such disputes.72 Main issues As stated in the previous section, informal settlements in peri-urban and urban areas are causing serious primary urban issues, most notably: (a) severely limited access to infrastructure and possible social exclusion, and (b) fiscal burden to the municipalities. Further, in the absence of formal land and housing markets, the use of scarce urban land is often suboptimal. Figure 5.2 Informal settlement in Skodra Limited access to infrastructure. This is a main concern among residents. Most of informal settlements in peri-urban areas have limited definition of rights of way and no formal access to water services or electricity. Residents often coordinate with neighbors to construct illegal connection lines to nearby infrastructure. This has caused secondary problems of overall low cost recovery and decreased service standards for utility companies. It should be noted that such illegal connections relate to the weak governance of the respective utility firm, as they are often conducted in association with employees of utilities themselves. 72The draft was rejected by the President in March 2006 because the law could be considered anti-constitutional, as it would `expropriate' the lands owned by the restituted original land owners for the benefits of the current occupants. The Albanian Constitution stipulates that the property rights can be restricted only for the benefits of general public. 74 Inadequate access to social services, mainly education, is another serious issue. In Bathore, where an estimated 20,000 residents live, it was only in 2000 when the first school was opened. The second school was opened in 2005 and both are overcrowded. There is no secondary school in Bathore, and students have to spend more than one hour to commute to the nearest secondary schools which are overcrowded, too. Reportedly, the drop out rate is higher than in the formal urban area, but no concrete research has been conducted. Many families have been living in the informal settlements for a considerable amount of time, often more than 10 years, which bears a serious risk of social exclusion for the next generation of the settlements current youth and children. Fiscal burden to the municipalities. Informal settlements have overwhelmed the budgets of the concerned municipalities which are responsible for delivering municipal services. In Albania, municipalities have not yet fully established a solid fiscal basis such as property tax, and the major part of the municipal budget, including operation and maintenance costs, is still based on central government transfers (see Chapter 3). While there have been sharp increases of residents in some municipalities during the last 10 years (such as Kamza, which comprises Bathore, where the number of residents has increased from 5,000 to nearly 100,000), the central government transfers have increased much less. Currently, the municipality does not have adequate resources to develop new infrastructure networks or even operate and maintain them. Other municipalities such as Durres do not have much fiscal or political incentive to allocate their scarce human and monetary resources in order to prepare an urban plan, extend the infrastructure networks and improve service delivery, without the assurance of adequate tax revenues in return. Absence of formal land and housing market. Judging from observations on densification and increased levels of investment in housing, it is obvious that the informal land market has already been established for some years, and there is some sense of land tenure security. Therefore, the development of a housing and land market is not a primary concern of residents or municipalities. However, the peri-urban area would become an integral part of the city once infrastructure investment is provided, and the development of a formal land and housing market would become necessary to ensure economic use of urban land. During the last years the land registration offices carried out about 30,000 transactions, of which 3,000-3,500 transactions were for agricultural and the remainder for urban land. Government's attempts towards regularization and legalization Regularizing and legalizing informal settlements has considerable benefits for urban development.73 Such benefits include: (a) integrating informal settlements into the city fabric and preventing social exclusion, (b) promoting economic use of urban land, (c) strengthening the fiscal basis for concerned municipalities, and (d) resolving overdue restitution claims. This section briefly reviews the past attempts, followed by recommendations on concrete steps to be taken towards full regularization and legalization. 73For a set of strategies and successful policies contributing to the challenge of efficiently integrating informal settlements into the urban facric while improving the lives and opportunities of the urban poor see for example UN Millennium Project (2005). 75 In fact, there were no serious efforts by the Government to regularize and legalize the informal settlements until 1998. The first significant effort was adoption of Law No. 8398, On compensation of ex-owners of agricultural land and occupied land in Lapraka and Bathore in September 1998, which grants occupancy right to residents in informal settlements in Bathore and Lapraka and stipulates the monetary compensation to the original land owners. On the positive side, this law has successfully provided residents with confidence in their land tenure security through avoiding potential disputes between the original land owners and occupants. With investment in infrastructure provided by the World Bank financed project, the area has been largely urbanized. However, the Law has been considered a special case, and similar attempts have not been carried out for other informal settlements areas. In addition, the part of the Law which entitles the original land owners to monetary compensation has never been implemented due to the lack of funds in the state budget. At the same time, the Government has never engaged in dialogues with neither the land owners nor the occupants to determine an amount of monetary compensation and the price of the land which the current occupants would have to pay for legalization. In October 2004, towards the completion of the World Bank financed project, the Law 9304 On Legalization and Urban Planning of Informal Zones was adopted. The law aims at legalizing illegal buildings in general, including those in informal settlements, provided that the owners of the buildings pay the market prices. The law sets out the following procedures for legalization: · Submission of the declaration by owners of illegal buildings; · Review and decision on legalization on a case by case basis by the concerned municipalities; · Preparation of an urban plan, if applicable, by the concerned municipalities; · Appraisal of the land and determination of the market land price; · Payment of the land price by the owners. While approximately 57,000 requests have been submitted, most of the requests are from either those who have no land tenure issues (e.g. building on the owner's land but without building permits) or outright illegal buildings (e.g. building on public land). Very few residents in the informal settlements have submitted the requests74. The law was not prepared in consultation with stakeholders, particularly with residents in the informal settlements (who should be the major beneficiaries of the law). The residents were particularly concerned about the obligation to pay for land at the market price. Establishing nation-wide methodologies for land price valuation was found politically sensitive and subjective, and eventually, the effort was suspended due mainly to the lack of resources. By summer 2005, the effort to implement the law was effectively aborted by the election and subsequent change in the government. 74For example, reportedly, less than 10 percent of the families in Bathore have submitted the requests. 76 The new Government established in September 2005 expressed strong commitment to amend the law in order to start implementing the legalization, particularly for informal settlements. The law was revised and renamed as Law 9402 (On Legalization, Urban Planning and Integration of Illegal Buildings) and adopted in May 2006 as mentioned above. The following are the summary of main amendments from the previous law: · exclude illegal buildings within the designated tourism area (mainly coastal area) from legalization; · facilitate the administration of payment for title land and increase affordability for illegal building owners by greatly simplifying the methodologies and reducing the effective price per square meter. The law no longer requires the market valuation of the concerned land or detailed survey of the occupied lands. The law stipulates a list of lump sum payments for occupants depending on the area (urban/peri-urban) and size of the plot (large, medium, small). The per-square meter price has been greatly reduced from the earlier law.75 In specifying payment according to a fixed rate scale the new law does not attempt to meet market prices, and in that respect could appear to condone the illegal building. The fixed rate approach was apparently chosen, however, to expedite payments without disputes over land valuation, and to minimize opportunities for corruption in the process. While the new law can be an enabling framework for eventual legalization of informal settlements, it has also the following flaws which may result in serious difficulties in its implementation. · Recognization of the date of illegal buildings. While the law stipulates that illegal buildings built after the adoption of the law would not be legalized, in reality, the proof would be difficult as many illegal buildings have only foundations at the time of adoption of the law. In fact, a number of officials indicated sharp increase of illegal construction as individuals hope for eventual legalization under the law. · Inadequate financial contribution from illegal building owners towards compensation for original land owners. Since the new law has greatly reduced the payment from building owners, it will produce much less potential funds for compensation to the original land owners. An illustrative analysis carried out for Bathore Pilot (13 hectares) indicates that contributions from the sample of families would amount to no more than US$ 1.3 million equivalent, considering the right of the way (about 20 percent of the total area), implying US$10 per hectare. It is questionable if the original land owner would be satisfied with this level of compensation, even if the current occupants pay immediately. · Cases with disputes between occupants and land owners. The new law does not address cases where conflicts between the restituted land owners and occupants already exist. In fact, the law stipulates that the priority would be given to the 75For example, an illegal building owner with 500 m2 in Bathore would pay Lek 400,000 equivalent for legalization, implying the land price of Lek 800/ m2, whereas the market value would be within the range of Lek 4,000-5,000 /m2. 77 occupants. Despite the rejection by the President for possible anti-constitutionality, this section has been kept intact. There are a number of such cases within the yellow line (urban zone), and in reality, municipalities, which would be responsible for implementation, will find it difficult to legalize such cases due to the social and political pressures. · Sequencing urbanization and legalization. Unlike the previous law which stipulated the sequencing of urbanization first and legalization second, the new law appears to legalize illegal buildings first. This would lead to the difficulties in securing rights of way for infrastructure and public facilities, as according to the law, expropriation of the land would be required. Concerned municipalities would have a negative incentive for legalization, as they will first have to legalize illegal buildings with a heavily discounted price, and then appropriate the land at fair market prices. · Infrastructure provision and affordability. Lastly, the law did not envisage the large financial needs for providing infrastructure networks in association with legalization. The social assessment carried out at the completion of the ULMP suggests that residents in the informal settlement are seriously concerned about deficiency in infrastructure, and their pressures would be even stronger with legalization. The typical infrastructure cost for upgrading is estimated based on analysis of the actual cases in the ULMP (Table 5.1). Table 5-1 Estimated costs of informal settlement upgrading and infrastructure provision in Albania Cost elements per hectare cost (US$) Urban design 2,000 ­ 3,000 Gravel roads 15,000 ­ 25,000 Water supply (including primary) 15,000 ­ 35,000 Drainage/sewage (including primary) 20,000 ­ 30,000 Electricity (secondary) 15,000 ­ 20,000 Street lights 7,000 ­ 10,000 TOTAL per hectare 74,000 ­ 123,000 Land size (square meter) 300 Right-of-way allocation 20% Cost per household 2,664 - 4,428 Note: Based on actual costs under ULMP. As shown in Table 5-1 it would typically cost US$74,000 to 123,000 per hectare to upgrade informal settlements and provide the necessary infrastructure. For a house with 300 m2, the pro-rated cost would amount to approx.US$3,000 or Lek 300,000 (at an average of 25 households/hectare). The wide range of cost is due to the fact that extensive primary infrastructure networks are needed for some cases such as Bathore and 78 Keneta. These figures conform to the general range of such costs for recent upgrading projects in other countries, taking account of density of households/land area.76 It is anticipated that many households in informal settlements would not have adequate liquidity when asked to contribute towards infrastructure development at the time of legalization. Also, the experience under the ULMP suggests that infrastructure development would take a number of years as it would require community consensus as well as contribution, even if it would be limited to co-financing by the residents (of for example 20 percent). It is also clear that the municipalities do not have adequate fiscal capacity for such large investment (see Chapter Three). For example, it would cost approximately US$ 10 million for Shkodra to fully urbanize the informal settlements and provide infrastructure, whereas the city's investment budget has been approximately US$1.5 million a year. While the operation and maintenance costs for water supply and electricity would be recovered through user charges (except for some households who may be too poor and require assistance), it is the respective municipalities who have to finance operation and maintenance of roads, sewage and drainage, collect solid waste, and provide essential social services (i.e. primary education). At this moment, in the absence of a fully established property tax system which would link the occupancy (or ownership) and respective municipalities' fiscal basis, the municipalities are unable to assume the added financial challenge of integrating the settlements through upgrading. Clearly, there is a need to establish an overall vision on schedule and financing arrangements to permit legalization and integration of informal settlements at the scale required. Recommendations for legalization and integration of informal settlements In Albania, despite several attempts by the previous and current governments, the progress in legalizing and integrating informal settlements has been slow. The informal settlements, which represent almost one quarter of the urban population in some secondary cities, are unable to realize their potential contribution to the social, fiscal, and economic life and future productivity of the cities in Albania. Integrating informal settlements would eventually bring about tremendous benefits to the country. Experience under the ULMP suggested not only considerable social and economic impacts77, but potential for fiscal benefits through the property tax system. However, as explained in the previous section it is apparent that the current law would face difficulties in implementation. The law was prepared to resolve all outstanding issues concerning informal settlements: compensation to ex-owners, illegal buildings, complicated land tenure conflicts, lack of infrastructure without prioritizing or sequencing these issues. Unfortunately, there is no simple panacea. It appears that the only way out is to take a holistic analysis on the current urban issues, develop a vision for 76Based on communications with Cities Alliance technical staff, May 2006, and comparative project data. 77 Through rapid assessment carried out at completion, it has been revealed that urbanization entails improved access to workplaces and schools in addition to better infrastructure services. The economic rate of return of the urbanization, including infrastructure investment, has been estimated at 20-22 percent without including secondary benefits from improvement of primary infrastructure networks. 79 future urban management, then prioritize issues, and sequence the solutions. It is also recommended that a pilot project be adopted to test the hypothesis and fine tune the underlying laws and regulations. This final section offers some recommendations to help the Government's initiatives and commitments to legalize informal settlements. Step 1: Develop Visions and Strategy towards Sustainable Urban Development. First, it is crucial for the Government to develop a strategy to achieve sustainable urban development. One of the key pillars would certainly be integration of informal settlements, but there are other important elements such as strengthening fiscal capacity of local governments, establishing socially and economically sustainable urban regulations, and deepening local governance through community participation. These points are discussed further in the next chapter. Step 2: Prioritize Actions by type of Informal or Illegal Settlement. Integration of informal settlements is one of the main pillars for the vision mentioned above, and it is also crucial to develop priority action plans. In this process, it is important to recognize that different approaches for legalization should be applied to different typologies of informal settlements and illegal buildings (described further in the Appendix 5.1), as they have different starting points as well as social and economic needs: · Large scale informal settlements in peri-urban areas. Priority should be given to providing adequate infrastructure services and social services within a reasonable time frame, even before eventual legalization. In this sense, an inventory of large scale informal settlements in peri-urban area should be developed, and securing rights of way for future construction of infrastructure and public institutions should be carried out immediately. · Medium- sized informal settlements within urban areas. Here the priority should just as well be the improvement of infrastructure services (e.g. legalizing the connection, upgrading the networks), but the legalization process should be started where there are no conflicts on land tenures in order to enable the collection of property tax. This is especially the case for Bathore and Lapraka, where some infrastructure investment has been made under the ULMP and where there are no conflicts of land tenure. · Illegal buildings without conflicts of tenure. In most cases these buildings should be legalized without any delays--however, penalties should be charged to account for externalities and the need to develop infrastructure. · Illegal buildings on third party property with conflicts or on public land. In principle, the law on legalization should not be applied blindly. In case of existing private property, the application of the law would not be consistent with the Constitution. In case of the illegal buildings on public land, legalization might have serious negative externalities (in terms of right of way or environmental impacts), or yield moral hazard for further encroachment of public land. 80 Step 3: Develop Practical Procedures through Pilot Programs. Once priority is set, for each identified category it would be useful to develop a pilot program to define more concrete procedures for implementation of the law. Developing such a pilot program would encourage the concerned municipalities to implement the project with the assistance of the central government and local NGOs (and potentially donors), give opportunities to try out innovative methods, facilitate the establishment of standard procedures, and share the procedures among peer municipalities. For each category identified above, a pilot program should be developed jointly with the interested municipalities, and the scope of the project, costs, timeframe, and implementation responsibilities should be defined. Step 4: Develop a Practical Timeframe and Financially Feasible Compensation and Infrastructure Development Scheme. Past experience suggests that it would be extremely difficult to achieve all of the following objectives--paying off compensation to ex-owners, legalizing the current occupants, and investing in new infrastructure networks--at the same time. Through pilot programs it would be more practical to develop a sequence among these three objectives. For example, the Government could focus on the legalization of illegal buildings and integration of informal settlement as the first step, while it should also commit to resolving the outstanding restitution claims largely through compensation in a well-determined medium-term framework (up to 10 years). While there is a clear developmental imperative to resolve the problems of informal settlements it must also be recognized that there are many other urban neighborhoods that have a backlog of public investment, also creating negative spillovers to the rest of the city. Identifying priorities for public expenditure in upgrading of informal settlements should therefore take account of needs for investments to expand or rehabilitate secondary and primary infrastructure networks for regular neighborhoods that have rapidly densified in the post-transition period and outgrown their existing facilities. Ideally, informal settlement upgrading should be planned in the context of citywide assessments of infrastructure networks and environmental implications. 81 Chapter 6 Towards a redefined framework for urban planning and land management Despite the many legislative reform efforts that have touched on aspects of urban planning and land management in Albania in the transition period to date, most of what is happening on the ground in terms of real estate development retains a spontaneous and ad hoc character. This is true both of land development that is "formal" (by formal sector builders), as well as that recognized as "informal". This chapter argues that, although the country's legal order has significantly evolved and important legal institutions have been created in many fields over a short period, insofar as the matter of urban development control is concerned, there is still significant room for improvement. In particular, the legal-urban order in Albania needs to find a more adequate balance between public and private interests in the development of land and use of property. As discussed in the sections below, this new balance needs to be reflected in changes in the urban planning law and regulations governing the uses of land and real estate, and in a concerted effort to regularize the informal settlements. Equally important, a more nuanced mix of public and private interests in urban planning and land management needs to be embedded in systems for good governance, requiring some adaptation of roles for both central and local governments and greater participation by citizens. Preamble: issues and missing links in the legal framework for urban planning and land management78 In Albania the debates on land and urban development policy and action have been dominated by the so-called three "R"s--restitution, registration, and regularization (or legalization)--leaving aside several other complex legal issues. There are several national and international bodies dealing with these three issues already, including the World Bank--and, even given due credit to the achievements so far, it is widely recognized that there remain many legal problems and other constraints affecting these respective processes (World Bank 2006c). It is also apparent in Albania that because of rather frequent changes in certain prevailing legislation (e.g. the multiple versions of laws passed pertaining to land privatization, restitution/compensation, and legalization of informal and illegal developments), confusion and inconsistencies have occurred in the past that have permitted and perhaps encouraged behavior to take advantage of uncertainty and even gamble for favorable future changes in the legal framework. As many other documents have elaborated the matter of restitution and registration these are not further discussed in this report. The previous chapter elaborated the challenges regarding regularization of informal settlements. It is increasingly recognized in Albania that there is a much broader legal agenda to address regarding land development, particularly urban land development and urban 78Complementary studies consulted for this section, which go into greater detail on the subject, include McAuslan, Patrick, Land and Natural Resources Law in Albania ­ Part 1; Review of the Laws, unpublished manuscript, 2003; Valetta, William Legal Analysis of a Proposed Land Use Plan for the Lake Ohrid Watershed Region in Albania, unpublished manuscript, 2003; Kelm, Katherine, Case Study on Albania, Regional Workshops on Land Issues in Central and Eastern Europe, Budapest, Hungary, 3-6 April 2002. 82 planning. To summarize what is missing in general terms: it is crucial that Albania moves from the current approach that, by all accounts, has subordinated the public interest to private rights, reduced "urban development" to "construction", and limited "urban planning" to "physical design". The current pattern of urban development has resulted from a largely unqualified civil law approach to property rights, thus restricting the scope for state intervention through urban planning and management. As explained in Chapter Four, under the powerful momentum of private investment since 1990 Albanian cities have actually developed remarkably well in absorbing new migrants, responding to pent-up demand for housing space, and achieving more efficient densities. The virtual absence of urban planning in the early years of the transition was probably inevitable given the legacy of extreme socialism which had devastated the economy and institutions. And recognizing the serious welfare costs that many countries have seen from inappropriate and excessive urban regulation (Buckley and Kalarickal 2005), the evidence of Chapter 4 suggests strongly that Albania was much better off during the first decade of transition in letting urban land development follow the lead of the emerging private demand rather than misguided administrative control. But fifteen years into the market economy and facing a future of greater integration into European practice, it is time for the country to redefine and reestablish the public role in urban development. While the Albanian cities represent a real success story of serving an unprecedented demographic and economic transformation, ensuring their future success--as in livability and environmental sustainability, ease of movement, and social integration of the low income population--may be a greater challenge yet, as it will require striking more of a balance between private and public initiatives in future urban development. Conceptual issues in urban planning law. There is ongoing in Albania an energetic debate on legal paradigms regarding the matter of urban development control. Probably as a natural reaction to a long history of total denial of private property, the overall legal system has not yet found a proper public-private balance. As has happened in several formerly communist countries, in Albania the notion of individual property rights has been widely assimilated as if it meant only individual rights, and not also individual and social obligations. The resulting problem is excessively limited scope for government intervention in the process of urban land development, in the face of the prevailing constitutional and legal definitions of private property rights. The current emphasis on (residential) construction and on the formation of a land and property market certainly has strong historical and sociopolitical, as well as economic, reasons, but it has been made possible by the way the prevailing legal-urban order works. By the same token the urban development process is dissociated from the conditions of, and distribution of responsibilities for, financing urban development. Although it has been instrumental in helping boost the national economy, the current system of unbridled construction has generated higher land and property values with little being given back in return by landowners, in a growing process of "privatization of gains and socialization of costs" of the land development. 83 Attempts at urban planning have not fully confronted the roots of the problem, being restricted to physical design and specific interventions and policies, such as the beautification of central Tirana and the demolition of many buildings illegally built on public land in the city.79 On the whole, the incipient planning system has been capitalized upon by private interests, legally and illegally. In fact, to a significant extent property capital formation has been made possible by the transfer of costs, since there are no legal mechanisms in force ­ other than limited and politically vulnerable property and business taxation ­ to enable the recovery of increased values generated by urban development and by public intervention in urban areas. 80 Such costs are of all sorts: spatial, environmental, social, cultural, and also economic, as some of Albania's most significant physical assets have been jeopardized in the process. In this context, the legal-urban order in Albania has still to evolve significantly beyond the scope of the 1998 Urban Planning Law and its amendments81 in order to address the current state of urban affairs in a rapidly evolving society. Above all, an urban legal framework that permits the protection of public interests is needed to modify the emphasis on largely unqualified property rights that still dominates in Albania. Both the 1998 Constitution and the country's civil legislation still express a conservative, classical legal approach to land and property rights, which is essentially conducive to a laissez faire attitude insofar as urban development is concerned.82 Moreover, with the right to construct being widely perceived as a mere accessory of the property right, the basis of a process of uncontrolled speculation was set. A strong, old-fashioned legal culture of unqualified individual rights was thus created and disseminated into public opinion, with the dismissal of the social responsibilities which are inherent in a more contemporary approach to property rights. Such a redefined legal-urban order should be inspired by the main legal principles underlying the laws of the member countries of the European Union, in which individual public interests are better reconciled with private ones in the determination of the possibilities of economic exploitation of land and property, with organized communities having legal rights to participate in the decision- making process at whatever level it takes place. As is immediately evident in many Albanian cities, buildings have been constructed without much consideration to road systems, in-between spaces (walkways), equipments, other plots, etc. The question that concerns thoughtful public officials is how to tell the builders to do something--or not to do something--because of the interest to the city and the collective citizens. Yet as there is little scope for public intervention through regulatory planning, the radical measure of expropriation is the main legal way recognized. 79The demolition of illegal buildings on private land is naturally more complicated still; as the coastal land has been excluded from the 2006 Legalisation Law, 2,400 buildings along the Southern coastline have been identified for demolition by the General Construction Police Directorate (Tirana Times, 10 March 2006, p. 14). 80As noted in the Valletta report, none of the legislation currently in place provides that urban redevelopment or regularization of informal construction requires that some of the resulting gains in property values be transferred (through a tax or user fee) to fund the necessary infrastructure, as is common practice in market economies. (World Bank 2006c, Appendix 12) 81Law no. 8405/1998 has been subsequently modified several times, the main changes being promoted by Laws no. 8453/1999, no. 8501/1999, no. 8682/2000, and no. 8991/2003. 82Article 41 of the 1998 Constitution defines the right to private property. 84 It is in this adverse broader context that the urban planning legislation has to be understood. Local authorities have been very reluctant to deal with land and property related matters, and have mostly assumed only a traditional approach to urban development control, based on fragmented notions of physical planning, in which there is little attention paid to land management. Even larger and more politically assertive municipalities such as Tirana have failed to intervene in the heart of the ongoing urban development processes led by uncontrolled private interests. The same emphasis placed on the demolition of illegal buildings on central public land has not been translated into the creation of regulatory mechanisms to establish a better balance between individual and collective interests regarding the use and development of land and other natural assets and resources. With national and local governments not pursuing a proactive vision for the cities through land management ­ mainly because they feel constrained by the mentioned civil law approach ­ large-scale local interventions are still mostly based on expropriation measures, which fundamentally limits the possibilities for state action. Land use criteria ­ including criteria for land conversion ­ are still underdeveloped. Private sector investors report that given the absence of clear criteria for land use, requests for purchase of properties for factories or other commercial uses meet with excessive delays and sometimes reversals.83 New legal instruments (widely available in the legal systems of many countries) should be created or redefined for intervention in the urban land and property markets, thus reflecting the notion of the social function of property, such as preference rights for the public authorities; compulsory orders to use, build on, develop and/or subdivide urban land; and prescriptive acquisition rights favoring those who use vacant or abandoned land and property. Another important dimension to be better treated in a redefined legal-urban order refers to systemic articulation of urban laws at the national level. Urban laws need to be closely reconciled with environmental laws, which do exist in Albania but are also not properly enforced. Housing and construction laws, legal provisions governing the use and development of public land, the legal regulation of the coastal land, legal rules for the protection of historic heritage (so important for cities such as Berat) ­ all such laws need to be integrated under the same system, and interpreted according to the same legal principles. As Albania gets ready to discuss integration into the EU, this broad legal system will need to be reconciled also with the prevailing EU directives. Refinements are also needed within the domain of private property rights, despite their relatively greater emphasis in Albania. A very significant, and growing, problem concerns the lack of a proper legal framework to deal with the matter of condominiums. This gap of condominial law has also appeared elsewhere in South-Eastern and Central Europe.84 In Albania's main cities, more and more people are living together in a regime of co-ownership, and increasingly the family ties that in the past had kept relatives in the same building have been broken. As a result, the potential for legal conflicts and judicial litigation involving strangers has greatly increased, especially as there are no established legal mechanisms to deal with the issues resulting from common areas and equipments, 83Interview with Foreign Investors Association of Albania, March 2006 84For more information, see http://www.stabilitypact.org 85 and related expenses and necessities. The legislation on rental practices should also be reviewed to fit properly into a redefined legal-urban order. Political-institutional issues in urban management. There are a number of important outstanding issues in this area, including especially those concerning the relations among urban laws enacted at different government levels, and the dynamics of intergovernmental relations. The Ministry of Public Works, Transport and Telecommunications (MPWTT) has a general coordination function in the field of urban development through its department of urban planning. This unit has been seriously under-staffed, even relative to the planning units of individual municipalities. Strengthening and clarifying the role of the Ministry will be essential to design and implement the reforms recommended here. There is currently a disconnect between the political and fiscal developments that have followed the 2000 Decentralization Law, and the treatment of local government by the 1998 Urban Planning Law. If the decentralization process has progressively empowered municipalities (with proposals for further authority for municipal taxation and borrowing under discussion), local government still does not have the same legal statute insofar as the process of approval of urban development plans, decision-making and licensing of activities are concerned. The 1998 Urban Planning Law requires the formulation and enforcement of statutory plans for both the overall area within an urban boundary ("general urban planning studies" and "general regulatory plans"), intended to apply for 10-15 years; and for specific urban areas within the urban boundary (detailed zoning plans, called "partial" urban planning studies or plans). Although local governments have been given the responsibility to produce and enforce such regulatory plans, few municipalities have the skills or financial resources to produce full coverage. The general regulatory plans are very outdated or nonexistent in many municipalities, which have at best recent partial urban studies for the downtown area or certain neighborhoods. The absence of an applicable regulatory plan, or its lack of enforcement, is the proximate cause of much of the illegal construction. When a regulatory plan is inexistent an applicant for a building permit is often asked to prepare a plan for the specific neighborhood, block or site where he/she wishes to build. Aside from adding to the costs and delay incurred by the applicant, this practice can certainly create conflict of interest. And because the plans that do exist do not have a binding legal status on private land owners and developers, every new proposal for use of land undergoes a site-specific approval to establish the rights of use and development parameters. This system creates uncertainty for every potential land user and embeds opportunities for corruption and rent-seeking into the planning and approvals process (World Bank 2006c, Appendix 17). While the local government has the responsibility but not the means to prepare the specified plans, it also lacks much authority. In fact, the urban planning and management system in force is still pyramidal and highly centralized. The national government still 86 has to approve and license most urban development plans, projects, and activities. For example, according to the Urban Planning Law 8405 Article 9, the national Territorial Adjustment Committee of the Republic of Albania (TACRA) is required to approve, in addition to studies/constructions of obvious regional or national significance "....master plans of zones of more than 10 ha...partial urban studies for tourist zones....general plans for cities of more than 10,000 inhabitants.....urban studies for city centers of cities with more than 50,000 inhabitants...partial urban studies of above 15 ha within cities...building sites of more than 0.5 ha...outside the limit lines of cities....and construction permits for important objects in city centers approved by urban studies...." It seems that, if the law is observed, there is very little that the national TACRA is not involved in approving. This appears to leave relatively little role for the regional TAC, or for the municipal TAC. The TAC for Tirana is actually comprised mainly of representatives of national government agencies. A major revision of the urban planning law is underway, in part with the aim of reconciling with the overall decentralization process. The central government will need to find ways to support strengthening the competence of local government in the area of urban development control, as in other decentralized functions. One possible solution to this conundrum would be the enactment of national guidelines to be expanded on, and adapted, by local laws. It would also be worth making the legally required approval of municipal plans by the national TAC more of a formality if it cannot be eliminated entirely, e.g. a rapid "no objection" type of review, to minimize delays and opportunities for unnecessary intervention in municipal planning. Another institutional challenge to be tackled within the context of a new regulatory framework on urban management is the question of metropolitan administration. Tirana has clearly become the centre of a dynamic metropolitan area, involving at least three municipalities, and a framework for inter-jurisdictional coordination is necessary, especially insofar as the matters of territorial organization, development planning and service provision are concerned. Some interesting experiences of inter-municipal cooperation seem to be happening ­ for example, the one in Shkodra regarding waste disposal - in a clear recognition of the need. The legal criteria for such inter-municipal arrangements, however, have not been defined yet, and the legal status of the contracts signed by the municipalities involved ­ documents of private law ­ could be questioned, especially as regards the use of public resources. Rules for the creation of inter-municipal consortia ­ of public law ­are therefore necessary. Voluntary associations of municipalities exist in Albania but could become more proactive to articulate the needs and concerns of local government. In many countries local government associations participate in deliberations on proposed legislation affecting their members, mobilize training, and share lessons and good practices. Partnership with international associations such as the Union of Cities and Local Governments (UCLG, based in Barcelona) can become a valuable avenue for raising capacity and awareness of the Albanian municipal authorities and their staffs. Political-social issues of urban management. This broad area is yet another dimension of the urban planning and management system in which there is a significant gap between 87 the legal-urban regulatory order prevailing in Albania and the sociopolitical practices common in the EU. While the recognition of individual rights is clear, there is no clearly defined recognition of collective rights, and therefore the scope for organized civil society and the prosecutors for the government to guarantee the enforcement of the urban legislation is very limited. However, with the growing rates of urban development, increasing potential for social conflicts, and the gradual maturing of sociopolitical institutions in Albania, it should be expected that the demand for a broadened legal scope for political participation would increase at the same pace. Popular participation in the discussion and formulation of urban plans does happen in many cases, especially at the local level, and there are a few examples of participatory budgeting processes. However, whatever the political quality of the existing initiatives, participation is not yet a recognized collective right--for example, the urban planning legislation does not require public hearings. A redefined legal-urban framework should also include criteria for the legal recognition of collective organizations of public interest, that is, community based organizations (CBOs) and nongovernmental organizations (NGOs). While some CBOs and NGOs have become vocal and active in urban development issues, as they become more involved in matters such as public tenders for projects the legal nature of nonprofit organizations will need to be clarified, particularly in so far as the transfer of public money is concerned. Another legal area that needs significant attention arises from the contracts relating to property transactions, in order to introduce the still unheard-of legal notion of consumers' rights. With more and more property transactions happening, and especially given that future development and construction significantly alters the original product offered by developers and promoters, the potential for conflict is enormous: for example, a new building may create problems of circulation, ventilation, obstructed views and difficult access to infrastructure and service to people living in a previously existing building. Finally, it is worth noting the limited participation of the judiciary in the process of urban development control. A new role will need to be carved for the courts in the defense of collective rights and social interests. Progress in this area is impeded by the very low esteem in which prosecutors and judges are held by the public according to recent perception surveys, indicating that there is a much wider agenda for judicial reform (USAID 2006). Recommendations regarding urban strategy, urban planning and the regulation of land development Urban vision and strategy. The basic first step should be to articulate a vision and strategy aiming at a sustainable and inclusive character of urban development. It is the national government's role to set this tone and the legal and policy conditions for urban development, through the process of parliamentary democracy. The municipal governments, for their part, should have the responsibility to define, through a local participatory and democratic process, the vision for the kind of city that the local stakeholders want to create. The local planning and regulatory activities, coupled with 88 local tax and investment policies, should support the realization of this vision by facilitating and guiding the local private sector. It is suggested that in setting the broad directions for urban land use policy (and for the general regulatory framework) the government, both central and local, should articulate clear objectives or principles such as the following, which would be key to achieving an urban system which is efficient and equitable85: · There should be a legal housing product affordable without subsidies to the vast majority of the urban population (70-80 percent are shares expected in most developed market economies); · Infrastructure should be available to all residents, e.g. convenient access to water and sanitation, good roads, drainage, and social services such as schools; · Every settlement and new development should be formal, i.e. the system should allow the land user to have a recognized land title and building permit; · Cities should develop spatially in a compact manner, allowing a maximum use of public transport, for economic and environmental sustainability. Thus the central and local governments, and the private sector, all contribute to defining and realizing the vision for cities. But it is important to stress that governments do not build cities--cities are built by the private sector. The spatial development of cities is dictated by the interaction between constantly changing consumer demand and land use regulations, infrastructure development, and taxation. Designing regulatory plans cannot imply creating blueprints for city development. So the systems of planning and regulation as legislated by the central government and as applied and implemented by the municipalities can aim to enable, "incentivize", and guide private investment, but not to make decisions for private investors. To meet its overall urban objectives as mentioned above, governments have three tools: · land use regulations · primary infrastructure development, and · local taxation, users and impact fees A government urban policy would therefore require an approach which is internally consistent in these three areas, as outlined below. Land use regulations. Recommendations proposed here pertain to the regulatory plan and zoning plan; subdivision regulations; the urban boundary; monitoring of the real estate market; regulatory enforcement; and training of urban planners. (i) The planning process: regulatory plan (including zoning plan) Each city should have a regulatory plan (land use plan) containing the following elements: · a list of municipal plan objectives 85These points do not imply sequencing of priorities, i.e., it is not always necessary to provide title before infrastructure services. 89 · a demographic study showing past and projected urban population · a map of the existing built-up area (all secondary cities visited during the mission have already a recent detailed digital topographical map showing the location of every building in the city, including informal buildings) · a map of population densities by sub-districts based on the most recent census · a zoning map showing the different zones, built or vacant, which have a specific set of regulations (more on the design of these zones below) · a document describing the land use regulations in each zone: restricted use, minimum plot size, set backs, maximum heights or number of floors, floor area ratio, lot coverage. · a map showing the expected current price of housing in each residential zone based on the minimum standards established in the plan. · a map showing the existing and planned right of way of the primary road network. Ideally, these roads should follow roughly a grid pattern with from 600 to 800 meters distance between primary roads. In developed market economies with a tradition of market-based planning, such a regulatory plan could be a simple document prepared relatively quickly at modest cost. The most elaborate part of the process is the public discussion and review, as the regulatory plan needs to be widely understood and publicly available. While manpower, experience and data are more scarce in the Albanian municipalities, the aim should still be to produce regulatory plans as above as simply as possible. Given that a topographical base map already exists in each city, a new regulatory plan for a city of around 100,000 people could be prepared by a team of 2 to 3 planners in about three months (this timeframe does not include public participation nor the legal approval of the plan). The most important part of the document is the zoning plan, which would also include the right of ways of primary roads. It should be kept minimal, with as few zones as possible. The zoning plan of Warsaw, Poland approved in 1999 is a good example of a modern market oriented zoning. The concept of the zoning map of Warsaw is simple and transparent. It responds to a trade-off between three conflicting objectives: · Preserve the historical areas of Warsaw from encroachments · Preserve the most important environmental features (river banks of the Vistula, forests, bluffs overlooking the Vistula) · Allow a market driven economic development of the city with strong incentives to recycle obsolete buildings. Warsaw planners first delineated the areas which should be protected for historical or environmental reasons. The next step was to identify the areas for major utilities and noxious industries. The areas which did not fall under any of these categories, representing 48 percent of the municipal territory, were zoned for mixed used with a minimum of regulations. This approach recognizes that while planners have a responsibility to identify specific areas which should be protected from market forces, they are not omniscient and cannot anticipate future consumer preference and prices variations (See in Appendix to Chapter Six the zoning map of Warsaw and a brief description of the zoning plan). 90 A similar approach should be used in developing regulatory plans for the secondary cities of Albania. There should be few and simple regulations; these regulations should be developed with public participation; once approved they should be widely published and well known; and they should be enforced. In the past, there has been too much emphasis on localized urban design, not enough on setting up city-wide transparent regulations. The first priority is to establish a legal framework clear enough that any investor would know what type of building and what floor area would be allowed to be built in any part of the city. Finally, land use regulations affect housing prices by restricting the supply of land and limiting the volume of construction that can be built on a given lot. It is important that planners be aware of the price effect of the regulations they propose. The growth of informal or illegal settlements is often linked to unaffordable regulations. This is why every regulatory plan should contain a map showing the expected price of housing units if minimum standards authorized by the regulations are used. If a large part of the population cannot possibly afford the standards contained in the regulations they will be obliged to develop informal illegal subdivision. No amount of law enforcement can force households to pay more for housing than what they can possibly afford. (ii) Subdivision regulations Subdivision regulations establish the way large tracts of land can be subdivided into plots and streets. These regulations include minimum plot sizes, width of streets, areas to be left for community facilities, etc. Very often these regulations are overly ambitious and as a result they are not affordable, and therefore not enforceable. Chapter Four showed that in Albanian secondary cities even households with formal sector employment but with low income could only afford a house in an informal settlement. It would be important to design subdivision regulations that more or less mimic the land use of informal subdivisions, with somewhat larger street rights of way. Subdivision regulations should allow plot subdivision and legal titles for plots even in the absence of infrastructure. The experience in Albania and in many other countries shows that the priority is to clearly demarcate the boundaries between private lots and streets and other public space. Infrastructure can be installed at a latter date under contract with utility companies for cost recovery. The government's main urban policy objective should be to promote, from now on, legal land development for all income groups. The design of realistic land subdivision regulations will be a key factor in achieving that goal. (iii) Urban growth boundary: the "yellow line" Most Albanian cities have a "yellow line" boundary which theoretically limits the expansion of permitted urbanization and construction, and within which urban infrastructure networks will be expanded, for a 15-year horizon.86 Some other cities in 86The planning legislation also calls for a "suburban" line to be established in the regulatory plans of a city indicating the outer area which retains a rural classification and may be made available for future urban development under subsequent master plans. As described in Chapter Five, informal settlements in this "suburban" ring cannot obtain 91 the world (Portland, Oregon in the U.S., for instance) have tried this approach in order to contain sprawl and achieve more spatially compact cities. Research suggests that urban growth boundaries contribute to increase housing price significantly while not being very efficient in limiting urban extension (see footnoted references in Chapter Four). Because affordability of land is a key issue in Albania, it is recommended that the legal obligation implied in the yellow line be relaxed in the future. (iv) Monitoring prices and volume of construction Because affordability is so important in designing and enforcing land use regulations, it is essential that the municipal planning office monitor regularly land and housing prices, as well as the supply and demand for different income groups. As part of the planning process the municipality should provide a regularly updated map showing building permits, volume of construction, and prices in different neighborhoods. The function of price monitoring could possibly be contracted-out to the private sector which, once a fully integrated housing market is established, might generate and maintain much of these data for its own purposes anyway. However, market information is essentially a public good and may need to be provided by government, since no private agency may be willing to undertake the effort except for its own use. Data on prices and transactions should be made publicly available to inform potential participants in the market and add transparency to the process of valuation for tax or other administrative purposes. (v) Implementing the regulations: construction permitting and enforcement The municipalities are responsible for implementing the regulatory plans, by handling applications for building permits and by inspecting construction work for compliance. The current urban planning law (original and amended Law 8405) outlines an approval process that is time consuming for the applicant and provides numerous opportunities for rent-seeking by officials. As one illustration, applicants for a building permit have to obtain all the relevant approvals or licenses from the utilities, fire department, property registration agency, and possibly others before they can even apply for the building permit. Municipal officials in Vlora and in Tirana report that it can take up to six months to collect all this material. There are few "one-stop shops" where these approvals can be collected together, and most of the public enterprises and agencies required to give the necessary documentation are not subject to the municipality, so follow their own processes. Any review of the urban planning law should scrutinize and attempt to simplify the types of documentation required to obtain building permits, or at least streamline the procedures. It may also be the case that the urban planning law requires building permits when they should not be needed. The law's Article 48, for example, specifies that "Building permits are required for (interalia)....placing existing objects on the first floors....restoration of outer components, plastering and painting...." By requiring permits unnecessarily the law may be adding opportunities for corruption as well as costly delays in property development by individuals and firms. infrastructure because they fall outside the yellow line and are not recognized as urban until a new master plan recognizes them as such. 92 Enforcement of building regulations has been erratic at best in Albania, carried out by the so-called Construction Police which operate under ministerial rather than municipal authority. The manpower invested in the construction police appears to outnumber what most municipalities can devote to their planning and regulation efforts. The focus of this national enforcement is on demolition, obviously an extreme and costly solution. Rather than overseeing the application of building regulations by municipalities it would be preferable for the MPWTT to provide guidelines and promote adequate resources for enforcement by the municipalities. Problems of noncompliance with urban plans and regulations are best addressed much farther upstream than at the stage of construction inspection, through: · regulatory planning and zoning that better serves the dynamic of the market rather than works against it; · adequate public participation in and publicity of the plans and regulations, to ensure general support and transparency of the process; and · a more streamlined permitting process that encourages builders to obtain appropriate approvals with minimal transactions costs and discourages corrupt behavior of officials. (vi) Training of the urban planning profession The changes in urban planning described here imply a "paradigm shift" in the nature of urban planning taught and practiced in Albania to date. 87 Implementing the recommended urban planning reforms will require over time significant reorientation in the attitudes and professional education of urban planners. Enabling this transformation, and meeting the demand for urban planning skills in the near and medium term, will require changes in the formal training and licensing of planners, greater exposure to international good practices in simplified, market-oriented urban planning, as well as involvement of expertise from qualified NGOs and international firms, and support from donors. Non-regulatory mechanisms for land development: infrastructure investment and use of fiscal and financial tools. In addition to the regulatory plans and permits, governments have at their disposal two other instruments for influencing urban land use: (i) development of primary and secondary infrastructure, whether through direct investment or through public-private partnership (PPI); and (ii) taxation and fees, both as a means to finance infrastructure and to affect incentives for private land use. This non- regulatory agenda is the least developed dimension of the legal-urban order in force in Albania. (i) Infrastructure development. An important part of municipal planning is to develop a grid of the primary infrastructure needed to develop new land and to support increased densities in the city center. A plan of investments in new roads, water and sewerage should be published and updated regularly by the municipality. Investments in infrastructure are indispensable to keep 87The university engineering faculty prepares about 10 urban planners per year, but their training is mainly in physical design. There are similar skill limitations in the national Urban Planning Institute. 93 housing prices affordable in the long run. The resources for these investments should in large part derive from local taxes and impact fees. Infrastructure (roads, drainage, and water and sanitation) is the key missing ingredient in the informal settlements as discussed in Chapter Five. Linking these areas to the primary and secondary networks is the essential task to integrate the settlements into the fabric of the city, along with clarifying their tenure and providing more adequate access to social services such as schools and clinics, and public transport. Chapter Five explains that adopting a program at scale to regularize the settlements will require addressing a multiple typology of tenure and illegality, and further piloting of workable procedures for variations in local conditions. However, it is essential that the local and central governments include the informal settlements in their planning and financial provisioning for infrastructure investments. There is much talk about the need for public-private partnership schemes to be developed for infrastructure provision and land development, but as yet no clearly defined legal criteria exist. This is worrying, given the potential for new forms of mismanagement, political abuse and corruption. There are many lessons of international experience in private sector participation in infrastructure on which Albania can draw to avoid potential pitfalls and promote the benefits of mobilizing private financing and management expertise, especially for tariff-based services. (ii) Enhancing fiscal and other means of financing urban development. It is also crucial to explore more options for financing urban development, both for investment as well as for operations and maintenance. As discussed in Chapter Three, the main revenue sources for municipalities have been the infrastructure impact tax and business and profit taxes, as well as some fees and tariffs for local services. However, for investment municipalities depend heavily on financial transfers from central government, and in some cases on contributions from foreign donors. The local taxation sources, including the annual property tax, have been used only to a minimal degree to date, whether because of legal constraints (unfinished property restitution and registration), or political decisions (for example, the tax exemption recently given by central government to small businesses). These fiscal sources could be exploited more, for example by applying property tax on the basis of occupancy where ownership has not been clearly established. To be most efficient a property tax requires that all land development be legal and registered with the municipality--which underscores the importance of having land subdivision regulations that encourage people to develop land legally even for low income households. 88 Property taxation also has nonfiscal benefits, by discouraging speculation and idle land holding (currently vacant land is untaxed). Some municipalities are considering contracting-out the collection of certain taxes to improve efficiency. But some ideas for 88A recent review of the current practices in property valuation and taxation found great potential to create a more equitable annual property tax system and to improve the revenue generation framework. The currently proposed Land Administration and Management Project includes a property tax component aiming to improve the existing system (Hilton 2006). 94 new local taxation may be questionable, such as the suggestion to introduce a public lighting tariff.89 One of the most important local fees is the "construction impact fee". Municipalities in secondary cities levy an impact fee varying from 2-5 percent of construction costs, collected at the time of the construction approval. Normally the fee should be reserved for capital investment in physical or social infrastructure. However, it appears that the impact fee is currently absorbed into the municipal budget, leaving no special allowance for infrastructure needs. In the light of the relevant international experience it can be expected that, even if there were in Albania a fuller utilization of the possibilities of the existing taxation system, the demands of urban development require a variety of financing sources to reduce the dependence of local administrations on transfer from other governmental levels. Investment in infrastructure, which is a long-lived asset generating a cash flow of tariff revenues, can be a good candidate for financing through borrowing on similar tenure. Legislation is under consideration that would allow creditworthy municipal administrations to borrow nationally and internationally, with a clearly defined legal context of fiscal responsibility. Urban investment that does not generate a flow of specific revenues could also be financed to a limited extent through the "full faith and credit" funding (i.e., as a general obligation) of the local government, with recourse to intercepts of central government transfers as added security. Borrowing may be only a medium- to long-term possibility for many municipalities which currently lack creditworthiness, and it should only be undertaken within a proper institutional framework. As a first step to becoming eligible for borrowing the municipalities should improve their mobilization of own revenues as currently permitted by law. 90 Other financing opportunities in the case of Albania, where the dynamics of the construction sector are so intense, could be explored, such as development gains and construction credits. In other countries instruments exist enabling public authorities to capture the increment in land values generated not only by the investment in public works and services, but also by legal changes in the possibilities of using the properties (e.g. changes in zoning). The conversion of rural land into urban land, for example, is immediately translated into higher land prices. A redefined legal framework for urban development in Albania should be based on the notion that the cities are produced collectively, and that there should be no unqualified or disproportional appropriation of the benefits of urbanization by one socioeconomic group to the detriment of the community as a whole. In legal terms, this would imply separating the right to build from the right to property, as well as the introduction of 89As mentioned to the mission in Berat. Public finance theory and good practice in market economies holds that as a classic public good (benefits cannot be excluded and are shared equally by all), public lighting should be funded by a general revenue source such as property tax. 90The World Bank is currently preparing to assist the municipalities in implementing a simplified valuation system for property taxation and improvements in collection. 95 betterment levies, extra-fiscal instruments, and other forms of capturing increases in property value for the public revenue. Local governments in Albania will also need to become more proactive in the management of municipal real property. Municipalities have been given the authority to own and manage the public land in their jurisdiction, apart from lands needed for the national interest, but few do so actively.91 A major constraint is lack of knowledge and awareness, especially about land markets and the basis of land value. In the first instance local governments should become more engaged in managing their own real estate assets (both buildings and land) by inventorying them, and assessing their potential value for use, rental, sale, leasing, and so on. There would also be considerable potential for local governments to engage in partnerships with private landowners and developers to assemble land for urban projects, through mechanisms variously called land readjustment or land pooling. Under such arrangements, as practiced in Germany, Japan and other countries, private owners pool their properties for redevelopment projects with public and/or private developers and then share in the benefits of the enhanced land values. Albanian cities also have well-located properties remaining from failed or closed industries and "brownfields", which could usefully be redirected to meet higher value uses for new commerce, industry or housing. At present most of the larger cities have little non-privatized land remaining, resulting in a scarcity of sites for public uses such as parks and social facilities, and much of the privatized land is highly fragmented.92 Land pooling would require further legislative reform to promote the formation of property owners associations, and a more favourable attitude towards a public management role in land use. 91One factor that may tend to discourage such forward-thinking behavior is the relatively short (three-year) term of local government officials. 92A further limitation is outstanding restitution claims and unclear registration of urban properties. 96 Appendix to Chapter 1 Appendix Table A 1.1 Migration from prefecture to prefecture. Total numbers and percentage of total regional migration, 1989-2001. Prefecture of Prefecture by destination departure Berat Diber Durres Elbas. Fier Gjirok. Korce Kukes Lezhe Shkod. Tirane Vlore Total Berat 0 97 4241 951 5824 1034 1148 348 164 529 8773 2567 25676 In % 0.0 0.4 16.5 3.7 22.7 4.0 4.5 1.4 0.6 2.1 34.2 10.0 100.0 Diber 72 0 10997 964 1144 47 116 153 2134 281 32898 278 49084 In % 0.1 0.0 22.4 2.0 2.3 0.1 0.2 0.3 4.3 0.6 67.0 0.6 100.0 Durres 51 62 0 149 221 38 232 18 902 108 5397 110 7288 In % 0.7 0.9 0.0 2.0 3.0 0.5 3.2 0.2 12.4 1.5 74.1 1.5 100.0 Elbasan 826 64 5191 0 5618 197 2313 38 197 105 11076 1020 26645 In % 3.1 0.2 19.5 0.0 21.1 0.7 8.7 0.1 0.7 0.4 41.6 3.8 100.0 Fier 1881 117 2042 1201 0 443 444 39 126 65 7560 2618 16536 In % 11.4 0.7 12.3 7.3 0.0 2.7 2.7 0.2 0.8 0.4 45.7 15.8 100.0 Gjirokaster 600 5 1817 183 2074 0 705 15 30 85 7634 3950 17098 In % 3.5 0.0 10.6 1.1 12.1 0.0 4.1 0.1 0.2 0.5 44.6 23.1 100.0 Korce 324 31 3718 2170 1545 272 0 8 99 44 13848 1410 23469 In % 1.4 0.1 15.8 9.2 6.6 1.2 0.0 0.0 0.4 0.2 59.0 6.0 100.0 Kukes 42 287 6728 79 1489 47 117 0 1106 1285 31769 229 43178 In % 0.1 0.7 15.6 0.2 3.4 0.1 0.3 0.0 2.6 3.0 73.6 0.5 100.0 Lezhe 62 361 3390 184 693 38 163 79 0 1137 5522 316 11945 In % 0.5 3.0 28.4 1.5 5.8 0.3 1.4 0.7 0.0 9.5 46.2 2.6 100.0 Shkoder 47 543 2670 79 726 30 180 223 5758 0 8892 260 19408 In % 0.2 2.8 13.8 0.4 3.7 0.2 0.9 1.1 29.7 0.0 45.8 1.3 100.0 Tirane 142 81 3647 667 632 139 309 95 138 122 0 379 6351 In % 2.2 1.3 57.4 10.5 10.0 2.2 4.9 1.5 2.2 1.9 0.0 6.0 100.0 Vlore 213 34 418 140 1377 401 147 23 43 54 3207 0 6057 In % 3.5 0.6 6.9 2.3 22.7 6.6 2.4 0.4 0.7 0.9 52.9 0.0 100.0 Total 4260 1682 44859 6767 21343 2686 5874 1039 10697 3815 136576 13137 252735 In % 1.7 0.7 17.7 2.7 8.4 1.1 2.3 0.4 4.2 1.5 54.0 5.2 100.0 Source : INSTAT 2004, 13. 97 Box A. 1. 1 Comparing the rank-size distribution of cities across "Western economies" and transition countries In many countries the distribution of city sizes is well approximated by a Pareto distribution. This is evident from a plot of the logarithm of city sizes against the logarithm of their ranks (with the largest having a rank equal to 1). On such a graph the points appear to follow a straight line, hence the name "rank- size rule" for this empirical pattern. The pitch and slope of the line correspond to the parameters of a Pareto distribution, and these parameters vary somewhat across countries. The pitch of the line increases with the size of the economy (with the intercept being the logarithm of the size of the largest city), and the slope of the line, often referred to as "alpha," typically lies between -0.6 and -1.5. When alpha is equal to -1 the rank-size rule is referred to as "Zipf's Law." This more general rank-size rule provides a convenient framework for comparing the size distributions of cities across various countries. For "Western" economies, which developed organically and were subject to market forces over long periods of time, Zipf's law in general provides a good fit to describe the rank-size distribution of cities. In developed market economies, there is a tendency for the largest one or two cities to be "oversized" with respect to the line. In many cases this includes the capital city. Generally speaking, cities in most European transition countries largely follow the rank-size rule. In other words, urbanization occurred in a similar manner and over a similar period as in Western Europe and socialist initiatives did not lead to major distortions of the size distribution. This is because the exposure to central planning was much shorter compared to the long periods of time underlying the development of most cities in the Continent. The former socialist economies, however, differ considerably from their western counterparts in one important respect: most of their largest cities are not oversized outliers. Rather, they tend to be smaller than predicted by the rank-size rule. This reflects the legacy of the central planning where privilege of living in the capital was strictly regulated and the movement of population was highly restricted. Moreover, there was a high degree of imposed specialization by region/city in the various sectors of secondary industry, which dictated the population movement in a forceful way (Clunies-Ross and Sudar, 1998). Since the opening of the economy, foreign investment in these sectors has tended to go to where they are already established. Source: World Bank (2005) The size distribution in selected Western and Transition countries United States France French cities > 40,000 US cities > 50,000 slope = ­0.65 slope = ­0.71 ln(Population) 15.00 ln(P opulation) 16.00 14.00 15.00 14.00 13.00 13.00 12.00 12.00 11.00 11.00 10.00 10.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 0.00 1.00 2.00 3.00 4.00 5.00 ln(Rank) ln(Rank) 98 Box A. 1.1 ......continued. Poland Russia Polish cities > 50,000 Russian cities > 40,000 ln(Population) slope = ­0.82 17.00 slope = ­0.98 ln(Population) 15.00 16.00 14.00 15.00 14.00 13.00 13.00 12.00 12.00 11.00 11.00 y =-0.9845x+16.5 10.00 10.00 0.00 1.00 2.00 3.00 4.00 5.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 ln(Rank) ln(Rank) China Chinese cities > 70,000 ln(Population) slope = ­0.80 17.00 16.00 15.00 14.00 13.00 12.00 11.00 y =-0.8025x +16.4 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 ln(Rank) The experience in other SEE transition countries - divergence from a market based city-size ranking. A comparison with other SEE transition countries ­ Croatia, Macedonia and Moldova ­ confirms that Albania fares relatively well in its convergence towards the market-based city-size rule. Cities in the three countries shown below, most notably Moldova, show a stronger divergence from Zipf's law in their rank- size distribution. The graphs exhibit that the largest city in Croatia (Zagreb) and in Moldova (Chisinau) are "too large" in terms of what Zipf's law would predict, while secondary cities appear to be "too small" in all three countries. (Data from latest census.) Macedonia, 2002 Census. Croatia, 2001 Census. 14 14 cities > 5,000 13 cities > 5,000 13 slope = -1.1314 slope = -0.9993 )noita 12 12 on)i at ul 11 11 op (PnL opulP 10 Ln(10 9 9 8 8 0.000 1.000 2.000 3.000 4.000 5.000 0 1 2 3 4 5 Ln(Rank) Ln(Rank) 99 Box A. 1.1 continued. Moldova, 2002. 15 14 cities > 5,000 13 on)ita slope = -0.9656 puloP 12 Ln(11 10 9 0 1 2 3 4 Ln(Rank) 100 Appendix to Chapter 2 Table A 2. 1 Relative frequency and average amount of remittances across regions, 2005. Coastal Central Mountain Tirana Total Region Region Region Urban Rural Internal Remittance payments % of households with payments to 9.44 3.89 5.22 6.14 6.49 5.74 relatives in past year % of households with payments to 6.41 3.54 3.66 8.48 7.58 2.93 non-Relatives in past year % of households with payments to 14.01 6.70 8.48 13.02 12.50 7.87 relatives or non-relatives in past year Average amount of payments/ gifts 53,610 39,531 23,512 84,199 66,909 35,404 to relatives in leks Average amount of payments/ gifts 52,035 15,799 31,129 80,387 58,428 16,530 made to non-relatives in leks External Remittance Receipts % of cash remittance recipient 35.87 29.03 22.18 27.42 29.05 31.51 households % of in-kind remittance recipient 11.65 10.22 5.77 10.81 11.09 9.64 households % of cash or in-kind remittance 39.14 31.80 24.01 31.02 32.61 33.92 recipient households Average annual international cash 181,889 127,486 217,387 176,845 149,681 169,538 remittances Average annual international In- 58,023 42,654 48,590 74,591 62,308 43,490 kind remittances Total amount of average annual 183,963 130,058 212,452 182,313 154,526 169,859 international remittances Internal Remittance Receipts % of cash remittance recipient 3.19 2.22 2.26 2.76 2.97 2.28 households % of in-kind remittance recipient 7.72 10.74 7.08 15.89 11.24 9.14 households % of cash or in-kind remittance 9.91 12.06 8.50 17.65 13.33 10.43 recipient households Average amount of 32,201 37,014 21,777 39,343 34,819 37,078 remittances/gifts received from within Albania in leks Source: LSMS 2005. 101 Table A 2. 2 Albania ­ Districts and major Regions based on LSMS 2002. Regions Districts of Regions Major Cities Region 1 Lezhë, Durres Coastal area Kurbin Fier Kavajë Vlore Mallakaster Lushnje Delvine Sarande Durres Fier Vlore Region 2 Devoll Shkoder Central Area Kolonjë Elbasan Pogradec Berat Mirdite Korçë Puke Malesi e Madhe Mat Kuçove Skrapar Krujë Peqin Gjirokastër Permet Tepelenë Shkoder Elbasan Berat Korçë Tirana (rural) Region 3 Kukes no major cities Mountain Area Has Tropoje Bulqize Diber Gramsh Librazhd Tirana Tirana urban Tirana other urban 102 Appendix to Chapter 3 Table A 3.1 Base SWOT analysis for the cities' strategic investment plans (S=Strengths, O=Opportunities, W=Weaknesses, T=Threats) SWOT Tirana Durrs Berat S/O Infrastructure Infrastructure · Biggest port in Albania · Favorable geographical and strategic position · Integration of municipality in the region's - centre of the region international transport system · existing constructions favor creation of new · Access to EU markets through proximity to businesses (more specific) developed European countries Private Sector Development Private Sector Development · Optimal potential to further develop Potential for tourism agribusiness and respective SMEs through · Favorable climate utilization of potential in production, · Kosovo and Macedonia interested in Durrs processing and marketing seaside tourism · Presence of banks ­ access to finance for · Development of Durres' cultural and SMEs archaeological heritage Excellent potential for further tourism Human Development development (family, historical and cultural · Well-qualified work force tourism) · Historical and cultural heritage · High level of education and existence of · high level of hospitality technical schools and research institutes, · mild Mediterranean climate university about to be inaugurated · Naturally beautiful environment (river Osum, Mount Tomorri, etc.) · unique architecture · Most expectations of businesses in terms of improvement do not involve large costs, mainly improved procedures Human Development Young population with good level of education, well qualified work force 103 W/T Infrastructure Infrastructure Infrastructure · Poor electricity supply (overloading of sub · Poor electricity supply · Poor electricity supply transmission facilities, illegal connections, · Lack of regular water supply · Uncontrolled urban development etc.) · Port is not well integrated into city · Destruction of the old historic town and its · Poor infrastructure coverage in the periphery · Inadequate sewerage and drainage systems unique architecture through lack of financing · Inadequate land titling · Inadequate waste management and illegal constructions · Extensive leakages in water system, storage · new residential areas without infrastructure tanks and pumping stations are in poor · Insufficient recreational areas and facilities Public Sector conditions · Insufficient greening of the city · High taxes · Large number of illegal connections to the · Poor image of cooperation of municipality water distributing network Public Sector with business · High percentage of population in peri-urban · Corruption and illegal practices area does not receive formal wastewater · Lengthy bureaucratic procedures Private Sector Development collection services · Chaos in territorial jurisdiction and · Continuous migration of businesses away · Lack of capacity sewerage system administration, overlapping of jurisdictions, from the city · Raw wastewater is discharged directly to the illegal buildings · Informal business competition rivers in populated areas · Lack of urban plan and mixing of urban and · Public transport in financial distress because industrial areas Human Development of lack of market pricing · Poor image of cooperation of municipality · Specialists leaving city and moving to Tirana · Continued urban sprawl of informal with business or abroad settlements which lack basic physical · Worst city in terms of license renewal infrastructure · Public open spaces are few and far between Private Sector Development · Informal business competition Private Sector Development · Informal business competition Human Development · Large and chaotic population movement Public Sector · Lack of urban plan and urban development essentially out of control · Legislative deficiencies in all services sectors have led to tariffs that d not reflect true cost of services 104 SWOT Lezhe Korce Elbasan Shkodra S/O Infrastructure Infrastructure Infrastructure Infrastructure · Favorable geographical position · Favorable geographical position two · Favorable geographical location · Favorable geographic location · Important transport hub neighboring countries · Existence of abundant and · Easy access into national and · Good infrastructure connection · Relatively good quality network of qualitative water resources international transportation network roads in comparison to other regions · Existence of several projects to Private Sector Development · Functioning sewage and drainage Private Sector Development improve electricity, water and · Relatively good business climate systems · Potential for promotion of the sewage infrastructure · Presence of banks ­ access to finance · Electricity supply was upgraded agribusiness sector for SMEs significantly in 2004 · Existence of light processing Private Sector Development · Most expectations of businesses in · Significant investments made in industry · Existence of unique natural resources terms of improvement do not involve water supply and sewage systems · Strong historical and cultural and large water resources large costs, mainly improved resources with potential for the · Favorable resources for development procedures Private Sector Development development of historical and of agribusiness and tourism · Great potential for historical and · Potential to develop tourism cultural tourism · Space for development of business leisure tourism · Potential to develop agro-processing · Vacant industrial areas provided with parks · Existing tourism infrastructure businesses existing physical infrastructure for · Potential to develop River Drin · Cooperation among municipality, the development of agro-business Human Development waterfront business and rest of community · Presence of training, research and · Qualified labor force · Region renowned for its agricultural · Most expectations of businesses in financial institutions supporting · Presence of University produce terms of improvement do not involve business development · Possibility to expand agribusiness large costs, mainly improved · Existence of projects and interests sector procedures from third parties to fund education · Around 40% of the non-metal · Established banking services, and cultural heritage mineral reserves of the country in the presence of foreign banks city's territory Human Development Human Development · Qualified labor force Human Development · Qualified labor force · Presence of university · Qualified labor force · Presence of university · Large area of live plantations and · Qualitative Health Service effective · Returning emigrants pine forest as a potential for the in region · High per capita income creation of city microclimate W/T Infrastructure Infrastructure Infrastructure Infrastructure · Poor electricity supply · Poor electricity supply · Poor physical infrastructure lacking · Poor electricity supply · Poor sewage infrastructure investments and not covering the · Inadequate sewage systems · Road to port in poor condition whole city · Poor water supply · Insufficient flood drainage system Public Sector · Significant informal settlements not · Inappropriate trading environment · Lack of urban plan integrated in city Public Sector · Insufficiency of green areas · Corruption · Poor public transport service · Lack of public security, law and · Ambiguities and lack of measures to order Private Sector Development define administrative borders of · Low level of local revenues (check Public Sector · Lack of professional marketing communes and municipalities in comparison with other cities) 105 · Absence of urban regulatory plan · Lack of initiatives for starting new · High level of air and water pollution · Lack of capacity of municipal · Delay and imprecision in registration business · inherent threat for inhabited areas institutions (registration of public of private and public properties · Existence of monopolies from floods property, urban cadastre keeping, · Lack of stimulating policies for · lack of waste treatment civil registry, etc.) businesses · unsatisfactory service delivery · Endemic corruption Private Sector Development · High degree of informal competition · Level of non/differentiated taxes · Division of land into small plots Public Sector Private Sector Development does not stimulate business (national · High level of bureaucracy from · Lack of diversified economy and or municipal) Human Development public institutions in addressing existence of outdated technology · Continuous migration of businesses · Emigration of professionals crucial issues and licensing · Lack of favorable climate and image away from the city businesses to attract businesses · Informal competition · Ambiguity with property issues and · Lack of communication between conflicting property titles local government and business · High degree of corruption and · Local government does not have the Human Development monopolies affecting private sector appropriate means or authority to · Lack of professional education and development assist the development of SMEs training · Insufficient funding · Informal business competition · Emigration of people · Shortcoming in urban planning law and national spatial plan Human Development Private Sector Development\ · Lack of promoting the city's · Emigration of people historical heritage and resources · Lack of knowledge in service provision and marketing of tourism · Tradition of heavy industry inherited from the previous system · Lack of access to finance for SMEs · Informal business competition Human Development · inherent pollution from the heavy, old industry · massive emigration of highly educated people 106 Table A 3.2 Investment priorities identified in Local Economic Development Strategic Plans Investment Durres Berat Shkodra Needs Roads/ · Improvement of infrastructure of the road and · Road constructions · Rehabilitation of road infrastructure Transport rail network connecting the port with the city · Improvement of street lighting · Rehabilitation of existing road system · Upgrading and modernizing Durres port · Rehabilitation of street lighting Energy · Improvement of electricity supply · Reconstruction of electricity power supply line · Improvement of electricity supply Water · Construction of a sewage treatment plant · Reconstruction of the city's drinking water and · Rehabilitation of city's water drainage and · Rehabilitation of the surface water drainage sewage systems and provision of a sewerage system system concessionary, agreement for system · Rehabilitation of water supply and management management · Reconstruction of high and storm water drainage systems Communication · Extension of the city's existing fixed line · Installation of new telephone lines and renovation telephone network of existing network Wastemgt · Construction of a landfill to contemporary · Improvement of the management of municipal standards solid waste · Construction of a landfill to contemporary standards Education · Rehabilitation of schools and kindergarten · Rehabilitation of schools · Rehabilitation of schools and kindergarten · Improvement of university infrastructure and establishment of sustained partnerships Health Care & · Establishment of a system of social services · Orphanage construction · Improvement and increase in the number of social Social Services reaching all citizens in need service provided for the community · Improvement of primary health care services Culture and · Building of various new recreational, · Reintroduction and promotion of traditional Recreation educational, cultural and entertainment historical events and cultural heritage facilities · Construction of new, and rehabilitation of existing · Increase number of activities which promote public recreational and sports facilities cultural, historic and archaeological values of 107 the city · Extension of tourist season through prolonged calendar of cultural and artistic events · Involvement of businesses in the maintenance and development of the city's archaeological monuments Private Sector · Setting-up of a "One-Stop-Shop" · Setting-up of a "One-Stop-Shop" · Setting-up of a "One-Stop-Shop" Development · Construction of a fish market · Increase in the service standards of hotels and · Construction of business fair center · Construction of business fair center and other tourist related businesses · Creation of new activities and promotional promotion of export business · Need for tourism information centre and strong materials to facilitate the development of new · Creation of new activities and promotional marketing SMEs materials to facilitate the development of new· Strengthening of capacities of city · Strengthening the existing system of retail and SMEs administration to support businesses wholesale public markets · Strengthening of capacities of city · Establishment of trade centre for artisan products administration to support businesses · Increase in the service standards of hotels and · Increase the number of sites where businesses other tourist related businesses can locate · Establishment of structures to encourage and · Development of physical infrastructure in support cross-border activities support of tourism (beach service, greenery, etc.) Environment · rehabilitation of public facades · Rehabilitation of the facades of buildings on the · Expansion of the number and size of green areas in · Expansion of the number and size of green city's main streets the city areas in the city · Achievement of optimal environment standards Public · Improvement of the planning tools for urban · Improvement of the planning tools for urban · Improvement of the planning tools for urban Administration development and management of the city and development and management of the city development and management of the city its surrounds · Modernization of the civil registry service · Modernization of the municipal tax collection system Urban upgrading · Urbanization and integration into the rest of the city of the community and area of Keneta · Increasing the number of housing units 108 Investment Tirana Korce Elbasan Lezhe needs Roads/ · Establish good quality public · Rehabilitation of road · Upgrading the existing road system · Upgrading of the existing road Transport transport (bus lanes, railway, etc.) infrastructure keeping in mind the economic system · Improving urban traffic · Rehabilitation of public lighting impact of corridor 8 · Construction of a city ring road management system · Create new integrated public · Rehabilitation of public lighting · Upgrading of existing road system transportation system · Bridge reconstruction · Design and construction of middle · Development of infrastructure than city ring road (current status??) connects Elbasan with tourist and · Improved local control of traffic natural sites management, traffic enforcement, parking, and public transport. Energy · Rehabilitation of the electricity · Build hydroelectric plant together supply with flood control system Water · Strengthen water distribution · Rehabilitation of the sewerage · Building of a river flood control · Construction of a sewage treatment system and improvement of water system infrastructure plant management (started in 2001 with Italian technical assistance) · Need for extension and upgrading of capacity of city sewerage and water drainage system · Program to terminate illegal water connections Waste- · Construction of new landfill to · Construction of new landfill for · Construction of new landfill and · Construction of new landfill for management contemporary standards urban waste rehabilitation of the current urban waste (funded by Italian · Rehabilitation of the present waste garbage deposit on the riverbed gov.) management facility · Integrated management of solid waste Education · Improve infrastructure of schools · Improve infrastructure of schools · Improvement of university · better linkage of pre-university and infrastructure university education · Extend the capacity and existing infrastructure of the university Health Care & · Active employment program for · Development of a series of Social low income groups initiatives to further protect public Services health Culture and · Need for tourism information · Rehabilitation and development of · Improvement of the city's Recreation centre and strong marketing historic sites in the city (fortress, recreational facilities (youth center, · Rehabilitation and development of etc.) cultural center, sport centre) 109 the city's historic and cultural sites · Improvement of existing cultural · Rehabilitation and development of (Old Bazaar, History museum, AZ infrastructure and building of new the city's historic and cultural sites Cajupi Theatre, etc.) cultural facilities (History and Ethnography · Building of modern recreational · Reconstruction of central square Museum, medieval castle) facilities in public-private · Restoration of buildings and partnership artifacts Private Sector· Ensuring sufficient supply of · Setting-up of a "One-Stop-Shop" · Creation of business incubator · Setting-up of a "One-Stop-Shop" Development industrial land with proper · Construction of a multifunctional · Provision of conditions, incentives · Provision of support to businesses infrastructure access centre to accommodate local and and spaces for development of to increase the service quality · Setting up a special industrialized regional fairs and other activities SMEs · Establish key tourist promotion zone Development of partnerships · Establish key tourist promotion activities and marketing material among the municipality, businesses activities and marketing material · Reactivation of the food processing and the community · Setting up of tourism committee industry · Promotion of clusters within the and information center · Construction of public market agro-processing sector · Organization of regional and places for food products national tourist trade shows · Coordination of the public and · Development distribution and private actors to plan tourism processing centers for agribusiness development · Easing access to finance and creation of an SME fund Environment · Expansion of the number and size · Expansion of the number and size · Expansion of the number and size · Expansion of the number and size of green areas in the city, of green areas in the city of green areas in the city of green areas in the city protecting existing green areas and · Establishment of a system for · Alleviate trash disposal along lakes from urbanization monitoring air quality in the city riverside · System to monitor air pollution Public Admin · Improvement of the planning tools · Improvement of the planning tools · Development of new Urban · Improvement of the planning tools for urban development and for urban development and Regulatory Plan and Capital for urban development and management of the city and its management of the city and its Investment Plan management of the city surrounds surrounds · Resolve administrative boundary · Modernization of municipality and conflicts between Elbasan and of the civil registry service other cities Urban · Urban infrastructure upgrading and · Urban infrastructure upgrading of · Urban infrastructure upgrading of upgrading densification of informal settlement informal settlement areas and informal settlement areas and areas and integrating them into the integrating them into the city integrating them into the city city · Urban renewal of pilot housing development 110 Figure A. 3.1 Local capital expenditures fluctuate annually in Shkoder and Elbasan 200 180 160 ons illi 140 m 120 113 113 k 63 letnerruc 100 38 109 80 82 60 18 20 83 19 17 40 25 20 58 53 32 15 42 23 41 21 22 0 11 2002 2003 2004 2005 2002 2003 2004 2005 Shkoder Elbasan Urban Roads Water Other Capital Expenditures Source: Ministry of Finance data and World Bank staff estimates, and data from municipal governments of Shkoder and Elbasan Figure A. 3.2 LED Strategies with clear ambitions but uncertain funding - Local Revenues and Expenditures*, Municipality of Elbasan 3,000,000 Financing gap 2006-2009 2,500,000 dsna 2,000,000 oushtkle 1,500,000 nterruc 1,000,000 500,000 0 v p v p v p v p v p v p v p v p Re Ex Re Ex Re Ex Re Ex Re Ex Re Ex Re Ex Re Ex 2002 2003 2004 2005 2006 2007 2008 2009 Total Revenues Operating Expenditures Capital Exp from Own Revenues Capital Exp from State Transfers Required Capital Expenditures Notes: The required capital expenditures are based on Elbasan's LED strategic plan. No municipal budget projections were available for the years 2006-2009. The operating expenditures were assumed to remain constant, while the positive growth rate of local revenues was extrapolated. Source: Ministry of Finance data and World Bank staff estimates. 111 Figure A. 3.3 Local Revenues and Expenditures, municipality of Shkoder 3,500,000 Financing gap 2006-2009 3,000,000 2,500,000 ndsas 2,000,000 houtkle 1,500,000 nter urc1,000,000 500,000 0 v p v p v p v p v p v p v p v p Re Ex Re Ex Re Ex Re Ex Re Ex Re Ex Re Ex Re Ex 2002 2003 2004 2005 2006 2007 2008 2009 Total Revenues Operating Expenditures Capital Exp from Own Revenues Capital Exp from State Transfers Required Capital Expenditures Notes: The total volume of the intended capital investments for the future planning period years is 7.04 billion leks (US$70.4 million), as against 173.7 million leks (US$1.74 million) of annual capital expenditures based on the figures of 2005. The required capital expenditures are based on Shkoder's LED strategic plan. No municipal budget projections were available for the years 2006-2009. The operating expenditures were assumed to remain constant, while, like in the case of Elbasan, the positive growth rate of local revenues was extrapolated. Source: Ministry of Finance data and World Bank staff estimates. 112 Table A 3.3 The structure of local government revenues across Albanian cities, 2004. Local government revenue in thousand leks Small Total Local Local fees Property Infrastructure Simplified Other local and other Total locally tax impact tax* profit tax business tax raised tax taxes revenues sources of income revenues Berat 9,877 3,571 53,114 21,878 25,027 113,467 33,298 146,765 Peshkopi 2,238 2,250 22,173 8,320 5,082 40,063 12,995 53,058 Durres 65,664 36,459 238,839 125,794 172,108 638,864 77,420 716,284 Elbasan 21,489 28,751 104,074 39,575 60,042 253,931 36,275 290,206 Fier 27,838 31,044 99,876 31,757 47,991 238,506 51,976 290,482 Gjirokaster 10,637 5,833 36,936 16,087 24,548 94,041 25,749 119,790 Korce 27,292 7,680 97,055 36,346 58,485 226,858 30,940 257,798 Kukes 1,975 1,782 9,283 3,583 6,288 22,911 11,840 34,751 Lezhe 5,107 28,689 27,864 7,356 16,284 85,300 14,585 99,885 Shkoder 6,740 13,306 76,961 27,394 41,496 165,897 40,766 206,663 Tirane 282,578 966,884 964,573 489,430 715,974 3,419,439 473,711 3,893,150 Vlore 29,714 1,474 113,618 33,572 68,862 247,240 125,145 372,385 As a share of total local revenues in percent Berat 6.7 2.4 36.2 14.9 17.1 77.3 22.7 100 Peshkopi 4.2 4.2 41.8 15.7 9.6 75.5 24.5 100 Durres 9.2 5.1 33.3 17.6 24.0 89.2 10.8 100 Elbasan 7.4 9.9 35.9 13.6 20.7 87.5 12.5 100 Fier 9.6 10.7 34.4 10.9 16.5 82.1 17.9 100 Gjirokaster 8.9 4.9 30.8 13.4 20.5 78.5 21.5 100 Korce 10.6 3.0 37.6 14.1 22.7 88.0 12.0 100 Kukes 5.7 5.1 26.7 10.3 18.1 65.9 34.1 100 Lezhe 5.1 28.7 27.9 7.4 16.3 85.4 14.6 100 Shkoder 3.3 6.4 37.2 13.3 20.1 80.3 19.7 100 Tirane 7.3 24.8 24.8 12.6 18.4 87.8 12.2 100 Vlore 8.0 0.4 30.5 9.0 18.5 66.4 33.6 100 *for issuance of construction permits Source: Ministry of Finance data and World Bank staff estimates. Table A 3.4 Elbasan - selected planned capital expenditures identified in LED plan Project Cost in US$ Cost in Timeframe Project ('000) lek ('000) in years Reconstruction of flood control infrastructure 22,625 2,262,500 3 Building of a landfill 8,800 880,000 3 Revitalization of green belt and reconstruction of the river flood control infrastructure 2,313 231,250 2 Urban renewal of 45-yr old housing development 2,050 205,000 2 Preservation and urban renewal of fortress neighborhood 1,569 156,875 5 Enhancing Big Krasta park 1,531 153,125 5 Revitalization of Thoma Kalafi street into a "great street" & sme corridor 1,325 132,500 2 Building of an archeological museum 631 63,125 1 113 Reconstruction of Elbasan's central square 513 51,250 1 Reconstruction of sport palace 513 51,250 2 Opening of an education museum 381 38,125 1 Reconstruction of Skampa theater 381 38,125 1 Enhancing livability and improving infrastructure along Elbasan south ring road 309 30,875 1 Development of the physical infrastructure for the address system 309 30,875 1 Opening of a business incubator 175 17,500 3 Reconstruction of the hospital incinerator 126 12,625 1 Opening of a regional development agency 73 7,250 3 Total 43,623 4,362,250 Source: LED Strategy Elbasan, 2005. Table A 3.5 Shkoder - selected planned capital expenditures identified in LED plan Project Cost in US$ Cost in Timeframe Project ('000) lek ('000) in years Rehabilitation of the rest of the main water distribution network 37,500 3,750,000 3 Reconstruction of 15 streets of the city 11,511 1,151,063 5 Establishment of a system for integrated management of Lake Shkodra ecosystem 5,000 500,000 5 Installation of auxiliary equipment for main water management 3,125 312,500 1 Rehabilitation of 5 surface water drainage outlets from the city 1,810 181,040 Construction in the city of new fruit, vegetable, fish and meat retail market places 1,495 149,486 1 Establishment of a regional business training centre 888 88,750 2 Complete construction of mains water supply reservoirs in Tepe Hills 875 87,500 1 Construction of a business fair centre 850 85,000 3 Construction of new pipelines for sewer system 734 73,400 5 Construction of a landfill for urban solid waste disposal 625 62,500 1 Construction of a new library in Luigj Gurakuqi University 585 58,523 1 Improvement of the technology for collection, transportation and management of municipal solid waste 560 56,000 1 Reconstruction of the public lighting of 8 streets 520 52,040 1 Establishment of a trade centre for artisan products 500 50,000 1 Improvement of the electricity supply within Industrial Zone 430 43,000 1 Rehabilitation of surface water drainage and sewage systems in Industrial Zone 372 37,200 1 Installation of new telephone lines and renovation of existing network within Industrial Zone 300 30,000 1 Construction of a Youth Centre in the city 300 30,000 4 Installation of new valves in the mains water distribution system 250 25,000 5 Construction of three social centers for marginalized community groups and provision of social services in partnership with local NGOs 224 22,369 1 Improvement of sewage system maintenance technology 210 21,000 1 Improvement of the environment of the Migjeni Theatre 202 20,211 1 Construction of an indoor athletics stadium 200 20,000 1 Improvement of street lighting within Industrial Zone 174 17,400 1 114 Rehabilitation of P. Jakova Secondary School 150 14,951 1 Rehabilitation of Luigji Gurakuqi Park 136 13,640 Rehabilitation of the city's sewage pumping station 124 12,400 1 Rehabilitation of the greening of the city's main streets 85 8,500 2 Rehabilitation of the city's Cultural Centre 64 6,376 1 Establishment of a business services centre 56 5,625 1 Construction of public and private sports facilities 50 5,000 1 Construction of a wrestling gymnasium 50 5,000 1 Construction in the city of a public wholesale market place for fruit and vegetables 45 4,500 1 Construction of a green area in the Zdrale neighbourhood 37 3,700 1 Rehabilitation of road infrastructure within Industrial Zone 30 3,032 2 Rehabilitation of the green space by the Bazaar 30 3,000 2 Development of a database, and relevant computer software, of all addresses in Shkodra 30 3,000 1 Reconstruction of a community health centre in Tre Heronjt 30 3,000 1 Construction of a new health centre in Vojo Kushi 30 3,000 1 Reconstruction of health centres in Zogaj and Shiroke 25 2,500 G3:O2:PG1:p2: Rehabilitation of Skenderbeg 9-Year School 24 2,427 1 Rehabilitation of Guerrile Kindergarten 23 2,348 1 Computerization of the Civil Registry Office 23 2,270 1 Improvement and expansion of green spaces within Industrial Zone 21 2,100 1 Establishment of a `One-Stop-Shop' in Shkodra City Hall 20 2,000 1 Construction of a new green space along Isuf Sokoli Street in the Bacja e Cakajve residential area 20 2,000 1 Rehabilitation of the sports facilities in the city's schools 18 1,800 Reconstruction of a community health centre in Partizani 15 1,500 1 Construction of a new green space in the Xhabije residential area 12 1,244 1 Total 70,389 7,038,895 Source: LED Strategy Shkoder, 2005. 115 Appendix to Chapter 4 Figure A. 4. 1 Distribution of Consumption per Household per year (Coastal urban areas: Durres, Fier, Vlore) 116 Appendix to Chapter 5 Box A. 5. 1 Classification of Individual Illegal Buildings It is useful to classify cases of individual illegal buildings into the following categories; (a) Buildings built by land owners but without building permits. Among this category, there are following subcategories: · Buildings within the designated urban zone, but without building permits; · Buildings built on designated agriculture land (mainly along the main roads); · Extensions made without proper building permits; · Buildings not in conformity with the given licenses (e.g. more floors than permitted) (b) Buildings built by those who do not own the land. This problem was caused mainly due to the delayed restitution and illegal issuance of the building permits (explicitly or implicitly) by the respective authorities. · Buildings built on the land owned by third parties: Due to the delayed restitution action, there are a number of buildings in the urban areas where construction started in early 1990s and was restituted to the original land owners in mid/late 1990s. In many case, the buildings (and land) have been resold by the original builders in the informal markets for further development; · Pseudo-legal Buildings. There are a number of buildings which obtained either explicit or implicit permits from officials (central or local governments) , mainly in mid 1990s, for areas where these officials have no juridical authority. Most of the buildings are for commercial uses such as hotel and restaurants. Once encroachments are established, densification and proliferation occurs through transactions in informal markets. Examples include: shops and restaurants on the irrigation and drainage canals (Lushnje and Lezhe), restaurants in the coastal zones (southern coast), restaurants in the national parks (Divijaka), and kiosks in the park (Tirana). The Law 9402 implies that these buildings would be eventually legalized93. 93Article 2 of Law 9402 stipulates that the criteria defining the exception for legalization would be determined by the Council of Ministers (Article 2, para. 1). 117 Appendix to Chapter 6 Box A. 6. 1 The master plan and zoning plan of Warsaw94 In 1999 the Municipality of Warsaw published a development strategy covering the period until 2010. Many aspects of the strategy, which defines a series of economic and environmental objectives, have direct implication on the spatial development of the city. Warsaw, a metropolitan area of 2.5 million, spreads on a radius of about 45km. The population of its suburbs is growing, while Warsaw municipality is losing population. This urban development trend disperses the metropolitan population over an area significantly larger than the one occupied by greater London but with only one third of the population. The underlying spatial trend is not inherent to the functioning of markets but resulted from distortions created by a number of administrative, regulatory and infrastructural failures inherited from Poland's communist past. Within the Warsaw municipality (the central area of the city), inadequate or imprecise land use regulation, uncertainty about property rights, as well as the underutilization of large government landholdings contributed to fragmentation of land use and of labor market mobility. Correcting failures in land planning with market driven solutions and halting or reversing the dispersal of metropolitan population was a major task in the implementation of the Warsaw city strategy. It seemed essential that regulations and infrastructure investments allow the rapid redevelopment of obsolete land use in the central areas of the city and the development of about 100 square kilometers of land still vacant but located within the municipal boundaries. If land continued to be wasted in the center, more land would have to be used in the periphery at a longer distance from economic activities. The largest area possible needed to be submitted to market forces to promote land recycling and increase land use intensity. To succeed in reversing the trend of urban sprawl and implementation of the municipal strategy a number of actions had to be taken, either by the municipality itself or higher levels of government. A pivotal step was to create a new administrative and political layer called the Warsaw metropolitan area, which could coordinate land use regulations across administrative boundaries. The Warsaw municipal territory was then divided into three zones according to a master plan (see map below). The concept of the zoning map of Warsaw is simple and transparent. It responds to a trade-off between three conflicting objectives: to preserve the historical areas of Warsaw from encroachments; to preserve the most important environmental features of the city (river banks and overlooks on the Vistula); and to allow a market driven economic development of the city with strong incentives to recycle properties to new uses. 118 Box A. 6.1......continued. W a r s a w - M u n ic ip a l Z o n in g P la n M a r k e t d r i v e n Z o n i n g c a te g o r ie s c 1 : C B D m u : M i x e d L a n d U s e S e g r e g a te d N o x io u s u s e s tp : In d u s tr i a l A r e a s u t : u ti l it ie s P r o t e c te d Z o n i n g C a te g o ri e s c 2 : C e n tr a l H i s to r i c D i s tr ic t N c 3 : C e n tr a l A c a d e m i c A re a c 4 : C e n tr a l R e c r e a ti o n D i s tr ic t m u 1 : R e s i d e n tia l w it h C o v e r a g e re s tr ic ti o n s m u 2 : A c a d e m ic A r e a o 1 : G r e e n a r e a , n o c o n s tr u c t io n s o 2 : G r e e n a r e , r e c r e a ti o n o 3 : G r e e n a r e a , r e s id e n t ia l l o w d e n s it y o 4 : S p e c i a l g r e e n a r e a s r: r i v e r s u m : H o u s i n g a n d s e r v i c e s fi le : W a r s a w _ n e w .a p r S o u r c e :M u n ic ip a li ty o f W a r s a w - U r b a n P l a n n i n g D e p a rt m e n t 5 0 5 1 0 1 5 2 0 K i lo m e te r s The Warsaw municipal territory is divided into three basic zones: · A zone where development is mostly market driven (sub-zones C1 and MU), where mixed land use is allowed and with few restrictions on densities, except for relatively generous height limitations. (48 percent of the total municipal area) · A special activities area where obviously noxious activities are segregated (sub-zones TP and UT). (14% of the total municipal area) · A zone where market forces are seriously constrained to preserve historical, cultural and natural landmarks. (37% of total municipal area) The proportions of the municipal area that are allocated to the three main zoning categories are consistent with the municipal objectives and their spatial implications. About one-third of the area of the market driven zone is still vacant. This gives a lot of opportunities to reverse the past demographic trend where the areas outside of the municipal boundaries were developing faster. It was deemed necessary to expand the work done in the municipal master zoning plan to the entire metropolitan area, as well as develop and monitor spatial indicators to guide future metropolitan strategy. 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