Report No. AAA18-AL Albania Strategic Policies for a More Competitive Agriculture Sector October 25, 2007 Sustainable Development Sector Unit Europe and Central Asia Document of the World Bank CURRENCY Albania Lek (ALL) Exchangerate as of July 31,2007 USD 1=ALL 91 EUR 1=ALL 124 ABBREVIATIONS AND ACRONYMS CAP Common Agricultural Policy (EU) CEM Country Economic Memorandum CPI Consumer Price Index DB Drainage Board EAFRD European Agricultural Fund for Rural Development EC European Commission EU European Union FDI Foreign Direct Investment FTA Free Trade Agreement GDP Gross Domestic Product GNAP Government NationalAction Plan HACCP Hazard Analysis and Critical ControlPoint IF1 International Financial Institution IMF International Monetary Fund INSTAT National Institute of Statistics IPA Instrument for Pre-AccessionAssistance (EU) IPARD Instrument for Pre-Accession Assistance for Rural Development (EU) IPS Integrated Planning System I S 0 International Organization for Standardization MAFCP Ministry of Agriculture, Food and Consumer Protection ME1 Ministry of EuropeanIntegration METE Ministry of Economy, Trade and Energy MEFWA Ministry of Environment, Forestry andWater Administration MOF Ministry ofFinance MOI Ministry of Interior MTBP Medium-TermBudget Program MTEF Medium-Term Expenditure Framework NGO Non-Governmental Organization NMS New Member States (EU) NSDI National Strategy for Development and Integration NSSED National Strategy for Socio-Economic Development O&M Operation and Maintenance PEIR Public Expenditure and Institutional Review PER Public Expenditure Review SAA Stabilisation and Association Agreement (EU) WB World Bank WTO World Trade Organization WUA Water Users Association TABLE OF CONTENTS Abbreviations andAcronyms Acknowledgements ............................................................................................................. ... 111 v 1.Executive Summary andRecommendations......................................................................... ............................................................................... The ChangingRoleofAgriculture inthe Economy.......................................................... Albanian Agriculture in Transition 1 1 The State ofthe RuralSector............................................................................................. 4 Trends inAgriculturalProductionand Sources of Growth ............................................... 9 2. KeyPolicy ChallengesAhead ......................................................................................... 14 OvercomingConstraintsto CompetitivenessAcross Supply Chains ....................... Summary of Recommendations....................................................................................... 17 17 MainFoodChainCharacteristicsandConstraintsto Growth......................................... 18 Milk andDairy ............................................................................................................. 24 Grapesand Wine ......................................................................................................... 25 Olives andOlive Oil .................................................................................................... 27 ................................................................................................................... 28 Meat Processing........................................................................................................... FreshMeat 29 Policy Recommendationsfor Strengtheningof FoodChains 30 3. Food Safety,Veterinary and PhytosanitaryPolicy Summaryof Recommendations.,..................................................................................... .................................................... ......................................... 37 37 The Importanceof BuildingEffective FoodSafety Systems.......................................... StatusOfThe RegulatoryFramework............................................................................. 38 40 Implicationsfor the Agri-foodSector The InstitutionalFramework ........................................................................................... ............................................................................. 43 45 InstitutionalCapacities 48 4. .................................................................................................... Creating an EU-CompliantAgriculturalAssistance Framework Summaryof Recommendations....................................................................................... ............................ 51 51 EUAssistanceFor Albania-Now andinthe Future...................................................... CreatinganEU-TypeRuralDevelopmentProgram........................................................ 52 54 CreatingAbsorptionCapacity Among Beneficiariesfor RuralDevelopmentFunds .....60 58 5. DevelopingAgriculturalPolicyinLinewith EUAgriculturalPolicy............................ Better Managementof PublicExpendituresinAgriculture ...................................... 63 GeneralIssues inPublicExpenditureManagement........................................................ Summaryof Recommendations....................................................................................... 63 AgricultureBudgetPlanning,ExecutionandManagement........................................... 64 -66 An Assessment of Public ExpendituresinAgriculture................................................... . 69 2. Public InvestmentsinAgriculture........................................................................... 1 Non-AgriculturalExpenditures............................................................................... 69 70 3 Direct Cash Support (Subsidies)to Farmers ........................................................... . 75 OverallExpenditureLevelsinAgriculture ..................................................................... 4. Deliveryof Public Services..................................................................................... 76 References........................................................................................................................... 78 82 Annex A: HouseholdBudget Survey dataanalysis............................................................. Annex B: DataonProductionandMAFCPRevenuesandexpenditures............................ 86 92 1 Figures Figure 1 Agriculture is growing less than the rest of the economy. and declining as a . share of GDP ............................................................................................................................. . 3 than inneighboring countries and new EUmember states ....................................................... Figure 2 Agriculture's share of GDP is higher, andper capita income lower. inAlbania 3 Figure 3 The value of agricultural production has increased. due to growth infruit and . livestock production (PIN = 2000) ............................................................................................ 9 Figure 4 Albanian producers will gain significantly ifthey can meet standards for export . to the EU(Domestic vs. EUWholesale Market Prices 2006) 20 Figure 5. Food-borne diseases causedby microbiological contamination remain a major ................................................. public health problem inAlbania (incidence inhumans; PIN= 1990)................................... 39 Figure 6 Lack of cooperation and coordination between control bodies has significantly . enforcement............................................................................................................................. 47 increasedcomplexity. overlapping and omissions ininspection proceduresand law Figure 7. The importance of Pillar 2 policies inthe CAP will increase................................. 61 Figure 8 The bulk of MAFCP expendituresare investments inirrigation and drainage . infrastructure............................................................................................................................ 71 Figure 9 Albania's annual budget for agriculture varies . ....................................................... 80 Table 1 The majority of household farms are very small......................................................... Tables 6 Table 2 Agricultural labor productivity is low comparedwith NMS and neighboring .. countries..................................................................................................................................... 8 Table 3.Despite some yearly fluctuations. yields are rising ................................................... Table 4. Livestock productivity has increased........................................................................ 10 11 Table 5 The agro-processingsector has expanded significantly 12 Table 6 Yield comparisons highlight the potential for tree crops Table 7 Albania is registering a significant increase inbrucellosis infections inruminants ... ............................................ .......................................... 13 ..40 Table 8.Annual EUpre-accessionallocations for rural development range from 5 - 13 per haof agricultural land 54 Table 9 Table 10. Significant funds are neededto operate an EU-compliant rural development .Rural ........................................................................................................ development expenditureswould increase significantly ................................. 54 program Paying Agency .......................................................................................................... 56 Table 11 .Personnel expenses are higher as apercentageof the Ministry of Agriculture budget than for most neighboring countries............................................................................ . 77 figures) ..................................................................................................................................... Table 12 Comparator Country Agriculture Public Expenditure Data (approximate 81 Box 1.Measuring Technical Efficiency.................................................................................... Boxes 7 Box 2 imported raw materials............................................................................................................ .Lack of VAT registration among producers is another factor favoring use of Box 3. Ongoing land reform has improved conditions for land consolidation....................... 33 Box 4.Agricultural Spending and Economic Growth-A Review of the Evidence ..............34 78 .. 11 ACKNOWLEDGEMENTS This study is ajoint output ofthe WorldBankandFAO.Itwas draftedby a team leadby Amelia Branczikand Julian A. Lampietti, comprisingAndrew Dabalen, Juna Miluka, EmmanuelHidier, MarianGarcia, SylvieTillier, Lucian0 Leonetti, PhilipVan der Celen andCarl-Fredrikvon Essen.Local consultantswere DriniImamiof Development Solutions Associates andAnxhelaDervishi.Inthe World Bank's Albania Country Office IbrahimHackaj andDenisa Bilaliprovidedinvaluable supportto the study. The team's counterpartsinthe Albanian government were critical to shaping andproducingthe report,includingH.E.Minister JeminGjana,Ndoc Faslia,NduePreka,Myslym Osmani, Esat Hasani, HajriIsmaili,IrfanTarelli, BrunildaStamo, and Shkelzen Marku, and officials in the Ministry of Agriculture, Foodand Consumer Protectionwho assistedwith data collection andanalysis.Invaluablecomments were receivedfrom peer reviewers JosephGoldbergand DavidLugg; from other colleaguesinthe World Bank, including Alia Moubayed, ErjonLuci, GiuseppeFantozzi,PennyWilliams, Sanjay Kathuria, Leigh Hammill, IreneBomani, andIbrahimHackaj;andfrom Llazar Korra. The team also wishes to thank staff inthe EuropeanCommissionoffice inAlbania andinDG AgricultureinBrusselsfor their help. Lastly, the team is gratefulfor the support and guidance of Marjory-AnneBromhead,Nadir Mohammedand CamilleLampartNuamah. ... 111 EXECUTIVE SUMMARY AND RECOMMENDATIONS Recenttrends inAlbania suggest that it hasthe potentialfor a modernand competitiveagriculturalsector, providedthere is the right policy environmentto engender sufficient private investment.Nevertheless, as other sectors continue to grow, agriculture's relativecontributionto GDP is likelyto fall from its currenthighlevel(21 percent).Consequently,the number ofpeople employedinagriculture (currentlyat 58 percent)will needto decreaseproportionately.The challenge for policymakers, therefore, is to transform agriculturefrom subsistence-orientedproductionintoa modern, commercialand competitive sector, while fosteringalternative incomeopportunitiesfor ruralresidentsleaving the sector. Competitivenessneedsto be improvedthrough increasedproductivityandhigher quality products.At the same time, agriculturepolicy reform shouldbe conductedwithinthe context of current andfuture EUrequirements, includingharmonizingwith EUlegislationand standards.The following recommendationsare intendedto bothidentify activitiesthat will improvethe agriculturalsector andprovideguidance onthe sequencingofthese activities. ImproveMAFCP's capacityto implementpoliciesand maximizethe impactof public expendituresin agriculture.Improvingthe impact ofpublic expenditures i s an importantprecursorto preparingAlbania to absorbfunds from the EU. MAFCPneedsto improvepublic expenditureplanning,management and execution; improvethe effectiveness of specific expenditures;improve overallmanagementof government expenditures,includinggovernment capacity to predict revenues; and improve budgetmanagementwithinthe Ministry.The latter includesstrengthening the link betweenpolicy planningandbudgetingfunctions inMAFCP; strengthening managementof budgetresourceswithinMAFCP across the budget cycle; and improvingaccountingmechanismsandmonitoringand evaluationto ensure the effectivenessof expenditures.Inlight of limitedbudgetresources and a large agendafor the agricultural sector, strategicdecision-makingand appropriate sequencingof interventionsis extremely important,as is the reallocationof inefficient expenditures.(See Chapter 5.) Only whenthe quality of public expendituresinagriculture is improvedshouldthe government consider raisingthe quantity ofpublic resources availableto agriculture. Designinterventionsthat are tailored to the significantgeographicvariations in conditionsand constraintsacross Albania. Policiesneedto be tailoredto deal with different challenges indifferentregions, for examplethe relativelyprosperous coastalplainsversus the poorerareas inthe mountainousNorthandNorthEast. While areas that are moreprosperouswill benefitfrom improvedagricultural policiesand infrastructure,poorer areas will requirea greateremphasis on non- V agricultural policies-such as public services, social assistance and appropriate infrastructure-to promote growth and alleviate rural poverty. (See Chapter 2.) 0 Include in the forthcoming rural development programs measuresto encourage farmers to make the investmentsnecessaryto increaseproduction and improve quality and food safety. Such measures are more efficient and less distortionary than subsidy-oriented support, letting farmers decide on the most appropriate investments. An effective framework for investmentsupport i s a program o f competitive grants, which have beenimplemented successfully in Albania and can be usedas a basis for future programs. These can be designedto encourage cross-compliance with food safety, thus combining an approach o f "carrots" (inthe form o f conditioned grants) with "sticks" (enforcement o f food safety regulations) to gradually promote compliance with EU food safety requirements and upgrade the agri-food industryina way which helps, rather than hurts,producers. A ruraldevelopment program can also form the basis ofa future EUInstrument for Pre-Accession Assistance for Rural Development (IPARD) program, thus simultaneously laying the groundwork for meetingEUaccession requirementsand preparing for programs ofthe future. (See Chapter 2.) 0 Gradually increaseenforcementof food safety standards. This needs to be conducted ina phased approach combining financial assistance and incentives for compliance, ina way that helps, not hurts, the industry, and lays the foundations for adoption o f EU-requiredstandards. This will include developing plans to coordinate the activities o fenforcement agencies to avoid duplication ofinspections and ensure integration o f control plans and laboratory activities. (See Chapter 3.) 0 Gradually adopt strategic elements of the Acquis Communautaire,As part o f its strategic objective o f EUaccession, Albania will have to harmonize its legislation with the EUAcquis Communautaire, much of which is concerned with agriculture. Selected measures will improve Albania's ability to compete inregional and high- value EUmarkets, and may facilitate access to assistance that Albania will become eligible for inthe future. Albania should continue to conduct policy reform inline with EUrequirements ina carefully phased approach, gradually building institutions required for progress on accession requirements but keeping institutions as light as possible inline with capacity. As relates to food safety, Albania should continue phased harmonizationo f national food safety legislation with the EUfood safety Acquis. (See Chapter 4.) 0 Inapproachingthese activities andinvestments,careful consideration needsto be givento investingstrategically in relieving constraints to growth, coordinating with other agencies, and avoiding government intervention in areas where the private sector may have an advantage. Giventhe broad agenda for agricultural policy and the limitedcapacity and resources within government, strategic decision- making i s requiredto ensure that activities and investments inagriculture are prioritized and sequenced effectively. Areas needing investment include rural infrastructure, public services, rehabilitation and management o f irrigation and drainage infrastructure, dam safety, extension services, and the land registry system. vi Cross-sectoral investments, such as ininfrastructure and businessenvironment, will rely on a broad range o f government actors, including the Ministries o fFinance, Public Works, etc. Crucially, given capacity and resource constraints, the government should be selective when choosing areas for investment, and avoid areas where the private sector may have an advantage. vii 1. ALBANIANAGRICULTURE INTRANSITION 1.1 Recent trends in Albania suggest that it has the potentialfor a modern and competitive agricultural sector, providedthere is sufficientprivate investmentand the right policy environment.This chapter looks at the role o f agriculture inthe economy and the current status o f the sector, and outlines the implications o f modernization and transformation o f agriculture for rural areas. It also identifies trends and sources o f growth for agriculture, and concludes by presentingthe key policy challenges for the sector. 1.2 Since it began the transition to a market economy in 1991, Albania's economy has made impressiveprogress, with incomes recovering to pre-transition levels. However, the agriculture sector has fallen behind, with productivity lagging significantly behindthe agricultural sectors o f Albania's neighbors and the rest o f Europe. A substantial portion o f agricultural production takes placejust to provide income support to the rural poor. Productivity has improved inrecent years, possibly as a function o f capital accumulation, and the sector appears to have potential for growth. But important constraints to competitiveness needto be overcome to increase Albania's competitive advantage in agricultural production, against a backdrop o f increasing regional competition and the eventual needto harmonize with EU legislation and standards. Inorder to meet these challenges, the sector must modernize its transformation, which will have important implications for rural areas. THECHANCINGROLEOFAGRICULTUREINTHE ECONOMY 1.3 Agriculture plays an important role in Albania, though currently largely at a subsistence level. Albania's farming sector has beendominated by small private holdings since the collapse o f the communist state in 1991,when peasant farmers disbanded the quasi-state collective farms. Agriculture subsequently became an important source o f income support inrural areas, and i s now undergoing a transition from a largely subsistence sector to a commercial one. Currently, the sector contributes 25 percent o f GDP, which i s highcompared with neighboring countries (see Figure 2), while average gross income per farm i s estimated at about US$1,800.' 1.4 Around 40 percentof Albania's 28,748 square kilometer land area is classified as agricultural land (24 percent arable and 15 percent pasture). The rest is dividedbetweenforest (36 percent) and other uses. Over 75 percent o f Albania is hilly and mountainous, and much agricultural land i s hilly. Albania i s predominantly mountainous inthe North and East, with agricultural land concentrated inthe more densely populated coastal plains o f the West (43 percent o f arable land). A further 34 percent of agricultural land lies inriver valleys; 23 percent i s upland. Albania i s located ' Source:MAFCP, 2005. Page 32. 1 inthe Mediterranean climactic zone andhas short winters andhot, dry summers.Ithas abundant precipitation (1,430 mm annual rainfall) concentratedinautumnand winter, with frequent droughts insummer. It also has extensive underground water resources. 1.5 Around fifty-fivepercentof Albania's 3.1 millionpopulationlives in rural areas,makingagriculturallabor abundant. This, together with an advantageous location for foreign trade, a favorable climate, and relatively inexpensive land, comprise Albania's comparative advantages inagriculture. Fieldcrops, includingmainly cereals (wheat andmaize), vegetables, forage and some industrial crops, covered an estimated area of 0.4 million hectares (ha) in2005. Hilly areas are mostly planted with fruit trees, olives and grapes, while inlandmountainous zones are mainly forest or pasture. 1.6 Agriculturalproductionin Albania has continuedto grow, but its share of GDP has contracteddramaticallyand is likelyto continueto shrink.Albania has seen significant economic growth inrecent years. Since 2000, average annual GDP growth has been5.6 percent, while agricultural GDP growth has averaged4.2 percent.2 After an initial slump inthe early 1990s, Albanian agriculture witnessed a prolonged expansion, sustainedby changes inincentives (from collective farms to private holdings), diversification, especially into livestock andvegetables, and growth inagro-processing, However, the contribution of agriculture has diminishedas structural transformation of the economytook holdandpersistentconstraints inagriculture (small landholdings, limiteduse of modern inputs, poor infrastructure, limitedmarketaccess, andweak processingcapacity) underminedits growthwhile other sectors expanded (Figure 1). The slowdown inagricultural growth, to about 3 percent per annum between2002 and 2005, and the surge inoutput inother sectors have reducedthe share of agriculture inGDP from its high of 35 percent in 1995, to 21 percent by 2006. Construction, services, and other sectors have expandedrapidly inthe past decade and have become more important contributors to GDP-a result of economic and societal changes and a shift from less productive to more productive sectors, firms and a~tivities.~However, at 25 percent of GDP, agriculture's contribution is still very high relative to neighboring countries and the new EUmemberstates (Figure 2). 'Apart from 1997, when the collapse o f pyramid investment schemes caused the economy to contract by 10.9 percent, real GDP grew by more than 7 percent every year from 1993 to 2001, thanks to the government's implementation of a successful macroeconomic stabilization program (bringing budget deficit, money growth, and inflation rate under control), liberalization of prices and external trade, and privatization of agricultural land. World Bank, 2004a. 2 Figure 1. Agriculture is growing less than the rest of the economy, and declining as a share of GDP 15.0 I 1 4 0 10.0 30 5.0 20 0.0 -5.0 -10.0 -15.0 -20.0 Figure 2. Agriculture's share of GDP is higher, and per capita income lower, in Albania than in neighboring countries and new EU member states f 20000- 18000 - 8 4: 16000 - -"3- E 14000 - 12000 - CI 10000- 8 8 8 2 z 8000 - 8 6000- 8 8 ' 0 5 10 15 20 25 Agriculture sector share in GDP (percent) Note: Albania is the fbrthestpoint on the x-axis. Other countries, from left to right along the x-axis, are Slovenia, Czech Republic, Poland, Hungary, Slovakia,Latvia, Estonia, Lithuania, Croatia,Bulgaria, Bosniaand Herzegovina, Macedonia, Romania,and Serbiaand Montenegro. Source: World Bank Database, Eurostat. Agriculture share in GDP figures are for 2004, apart from Albania, which is for 2005. Per capita income figures are for 2005. 1.7 At the same time, there appears to be significant potentialfor growth in the agriculture sector through increased exports. Despitethe highshare o f agriculture in GDP, Albania's agricultural export performance has beenweak inrecent years. Agri- food exports have stagnated at 8 percent o f total exports, compared with 16 percent in Macedonia and 20 percent in Serbia. Agri-food imports constitute 18 percent o f total imports, compared with 14percent inMacedonia and 7 percent in Serbia. Infact, during 2001-2004, the agricultural trade deficit increased by 18 percent. The main agri-food exports are vegetables, crops, medicinal plants, live animals, eggs, and processed products, including tinned fish and vegetables, mineral water and tobacco. The main 3 destinations of agri-food exports are Italy, KOSOVO, Greece, Germany and the United States. 1.8 Data on the agriculturalsector is unreliable,but can be reinforcedby household budget survey data.The following analysis is basedlargely on data from the government statistical office andthe FAO. The reliability of statistical data is an area where improvements are being made to strengthen findings. Government statistical data were supplementedby household budget survey (HBS) data and comparedwith the World Bank 2007 Poverty Assessment4wherever possible. THESTATE OFTHE RURAL SECTOR 1.9 Agricultureis very importantfor the rural economy. Though the share of agriculture inGDP and trade is diminishing, it remainscritically important for rural areas, where 55 percent of the population lives. Fifty-eightpercent of the labor force i s employed inagriculture.' 1.10 Farmingis practicedwidely throughoutAlbania.Albania has around 375,000 household farms, and a total farming population of around 1.8 million-meaning that most rural households are involvedinfarming, ranging from part-time and subsistence agriculture to commercial production. Inaddition to field crops, 91 percent of farms also have livestock and 37 percent have tree-crops. 1.11 Ruralpovertyrates have declinedless than urban poverty rates.Albania's high GDP growth rates have beenaccompaniedby a massive reduction inpoverty. The fraction of the population whose real per capita monthly consumption is below ALL 4,900 (in2002 prices) fell from 25.4 percent in2002 to 18.5 percent in2005. The extremely poor population (those with difficulty meeting basic nutritionalneeds) decreased from about 5 percent to 3.5 ercent, and the poverty gap (depthof poverty) and the severity ofpoverty also worsened.6? However, the decline inruralpoverty was slower than the decline inurban poverty. While the latter went down by 41 percent inthe period 2002-2005, rural poverty declinedby only about 24 percent, to a headcount of 24.2 percent.One consequence of this differential reduction inpoverty is a greater ~ ~ 'Althoughthis World Bank, 2007b. proportiono f labor employed in agriculturemay appear high in comparisonwith the rural population, it should be rememberedthat the labor force participationrate is higher in rural areas than urbanareas (67.1 percent versus 54.1 percent); and unemployment is much higher in urbanareas than in rural areas (13-3 percent versus 2.4 percent). Analysis on povertyand efficiency is from the World Bank, 2007b,Albania: Urban Growth, Rural Stagnationand Migration, A Poverty Assessment. The poverty gap (or depth of poverty) is obtainedby dividing the sum of the consumption gaps ofthe poor (Le. poverty line less consumption) by the overall population,and expressing it as a percentageo fthe poverty line. So a poverty gap o f 5 percent meansthat the total amount the poor are below the poverty line is equal to the populationmultiplied by 5 percentof the poverty line.The main advantageofthe povertygap is that the contributionof a poor individualto overall poverty is larger the poorer that individual is. The second alternative measureto headcount is the severity of poverty, which is sensitive to inequality amongthe poor.Albania's povertygap fell from 5.7 percent in 2002 to 4.0 percent in2005, while severity o fpoverty fell from 2 percentto 1.3 percent in the same period. 4 concentration of the poor inrural areas; whereas the rural poor were 66 percent of the total poor in2002, they constituted 75 percent in2005. The evidence also suggests that poverty i s muchshallower inurbanareas than inrural areas, where the poverty gap, at 5.3 percent, is more than double that of urban areas. This is reflected inthe fact that the average rural resident had about 14percent less per capita consumption comparedto the average urbanresidents7Over time this gap has remainedthe same, suggestingthat the average rural resident gained as muchfrom the recent economic growth as the average urban resident.The fact that rural poverty rates declinedless than urbanpoverty rates implies that rural residents inthe lower endof the rural distribution have gained less from growth comparedto urbanresidents inthe lower end of the urban distribution. On a more positive note, there was less disparity inconsumption growth across the entire distribution inrural population, suggestingthat rural growth, while lower, was more egalitarian.* 1.12 This is becauserural growth has also lagged behind economic growth in the economy as a whole. Changes inpoverty can be characterizedas due to growth, to redistribution, or to residual. The evidence suggests that growth accountedfor all of the reduction inpoverty inAlbania during 2002-2005.9 It also indicates that, between 2002 and 2005, poverty reduction inruralareas was slower than inurban areas inpart because rural growth laggedbehind.As seen above, after growth rates inthe double digits during the 1990~~ agricultural growth has slowed down to about 3 percent per year. The average gross income per farm i s estimated at about US$1,800 (ALL 163,550), compared to an averagenational income per capita of US$2,580 in2005.'' Since the aggregate agricultural growth story includes larger farms that exploit potential economies of scale and lucrative export markets,it i s quite possible that the growth from the majority small farmers i s even lower than the estimated3 percent. Improving agricultural productivity in this class of farmers, or identifyingpro-poor, possibly non-agricultural policies for them, suchas improvingopportunities inthe off-farm sector, is crucial for reducing rural poverty. 1.13 Conditionsand incomesvary significantlyby geographic region. There are large differences inper capita consumption across regions. The mountainous Northand North East are the poorest. Looking at a pooled sample from the Household Budget Survey (HBS), the average resident inthe North andNorth East Mountain areas has 12 percent less real consumption per capita than the average Tirana resident. By contrast, the average rural Coastal residenthas 17percent and 34 percent higher consumption per capita thanthe average Central and Mountain rural residentrespectively." Mountain areas also have the poorest infrastructure and public services (e.g., education, healthcare, 7 This is true after controllingfor regionspecific effects (Annex A, Table Al). It is about 16 percent when regionaleffects are not accounted for. * The meanpercentile growth for the 20" through the 90' percentilesof the rural poor appear to be around 10 percent, while it is more dispersedfor the urban households. 9 Analysis of HBS data. loAtlas method, current US$.Source: MAFCP, 2005. Page 32. GNI per capita from World Bank development data. 'IAnnex A Table A2. 5 transportation and running water), interms of quality and coverage.l2Isolated households (those far away from social services, e.g., the nearest school) have lower per capita consumption, although that disadvantage may be disappearing.By this measure, a 1 percent increaseinthe distance to the nearest school implies a shortfall of 4 percent inper capita consumption. Conditions for farming inthe Mountainareas are considerably different from those inthe coastal plains (see paragraph 1.4); inparticular, the distance to markets and paucity of rural infrastructure constitute a significant constraint to improvements inthe agricultural sector. 1.14 Albanian agriculture is dominated by a large number of very small and fragmented farms. The average size of householdfarms is 1.1ha (Table l), according to official statistics, or 0.8 ha according to HBS data, comparedwith an average of 5 ha for Central and EasternEuropean countries and 27 ha for Western Europe.13Inaddition, these farms are distributed across an average number of 3.9 parcels, with an average parcel size of 0.28 ha. Farm and parcel size are smallest inthe poorer regions of Kukes (average 0.54 ha and 0.17 ha) and Diber (0.55 ha and 0.15 ha), suggesting a positive correlation betweenfarm size and income. The large number of small farms also exacerbates difficulties inoffering effective government support to the sector (suchas support schemes and effective regulation). Table 1. The majority of householdfarms are very small Farm size (ha) Percentageof Household farms 0.1 0.5 29 0.6 1.0 -- 25 1.1 -2.0 36 > 2.0 10 Source:MAFCP, 2005. 1.15 Many smallfarms are not commerciallyoriented, and incomefrom farming i s low. The majority of farms (91 percent) are a mix of crops and livestock, with the rest livestock only. Figures for gross income from crops and livestock suggest that many small farms produce largely for their own consumption. It is estimatedthat only 30 percent of all livestock and crop production i s oriented to the market.l4Nine percent of farms receive less than ALL 10,000 (about US$115) per year from the sale of crops and livestock, averagingjust ALL 2,600 (US$30). A further 32 percent of farms make an average of ALL 55,400 (US$635) per year from the sale of crops and livestock. l5 1.16 Mostfarms, particularlysmaller farms, are notvery efficient. Empirical analysis shows that over 55 percent of all the observed variation inthe output of farmers i s attributed to the differences intechnical efficiency, Le., how close a farmer i s to his or her highestproductionpotential given their endowment of resources (also expressedas I tWorld Bank. 2006d. l3 The CEEC average is from Leibniz Institute of Agricultural Development in Central and EasternEurope (IAMO), 2004. p. 13. The WesternEurope average is from Nagayets, 2005. I4 MAFCP, 2007a. Is MAFCP, 2005. Page 32. These figures should probably be taken as indicative numbers since reliability (how much is declared) is difficult to ascertain. 6 the point at which the producers lie within the production possibility frontier). l6 On average, the technical efficiency of small farmers is only 28 percent, meaning that the average small farmer i s operating at only one-third of their potential, well insidetheir production possibility frontier (Box 1and Annex A, Table A7). Technical efficiency appears to improve, although not greatly, with landsize. The average efficiency for farmers with less than 0.25 ha is 24 percent, while the average efficiency for farmers in the top quartile -those with between 1.16 and 11.5 ha - is only 31percent. Farm production i s often very diverse to spreadrisk, which inhibits the specialization required for greater efficiencies. Box 1. Measuring Technical Efficiency To measuretechnical efficiency,one beginswith an estimateof the productionpossibility frontier-the combinationof inputs (land, labor, capital, etc.) that producesthe highestpossibleoutput. This can be done using the stochastic productionfrontier or data envelop methodologies. The maximumamount of output that can be producedusing the best technology available and the resources-primarily inputs such as land, labor, capital, and so on-defines the "efficient frontier" or "potential output". All farms whose output lies at the "potential output" are said to be operatingat the "efficient frontier". Technical efficiency of a farm is the ratio of its actual (observed) output to the output at "potential output". Therefore, all farms operating on the efficient frontier are classifiedas efficient with an efficiency score equal to 1 (or 100 percent, dependingon the scale used). That is, ifa farm's observed level of value of agriculturaloutput lies on the frontier, this farm will be considered perfectlyefficient. Ifits observedlevel lies below the frontier, the farm will be technically inefficient. Inother words, farms usingmore inputs to produce a given output value than those on the efficient frontier are inefficient and their efficiency score is less than 1 (or 100percent). More detail on how technical efficiency is calculatedcan be found in Annex A. Source: Authors 1.17 Empiricalanalysis suggests that a 10 percent increasein the land available to farmers will increasethe value of agricultural production by 5 percent (Annex A, Table A4). It also suggests that having more landto farm i s more crucial to improving efficiency and income than consolidation of land. This is not to say that consolidation i s not important or that it should not be a priority; rather that the benefits of providing more productive farmers access to more landhave not beenfully exploited. 1.18 While labor is abundant and cheap, agricultural labor productivity is low, and the sector will have to shed further labor as its contribution to GDP continues to decrease. The share of the labor force employed inagriculture is extremely high (58 percent), a functionboth of agriculture's role as an employment and income safety net, and the absence of opportunities inother sectors of the economy. With around 756,000 people employed inagriculture, annual agricultural GDP per worker is US$2,550. This is low compared with EUnew member states (NMS)and neighboring countries (Table 2). Moreover, as agriculture's share of GDP continues to shrink (paragraph 1,6), it will have to shed further labor inorder to improve labor productivity and income levels. Off-farm opportunities are neededto absorb this excess labor inrural areas. l6Analysis of HBS data from World Bank, 2007b. See Annex A Table A4. 7 Table 2. Agricultural labor productivity is low compared with NMSand neighboring countries. Agriculture GDP per Agriculture Worker (US$) Slovenia 79,230 Croatia 20,149 Bosnia and Herzegovina 13,630 Bulgaria 11,711 Hungary 9,153 Czech Republic 8,958 Lithuania 8,327 Macedonia 7,575 Romania 7,324 Estonia 7,08 1 Slovakia 5,737 Serbiaand Montenegro 4,900 Latvia 4,688 Poland 3,811 Albania 2,550 Sources: GDP data from World Bank Development Indicators 2005 (apart from Hungary, which is for 2004); agr. employment data from F A 0 Compendium of Food and Agriculture Indicators, 2006. 1.19 There is evidence that many rural inhabitantsare already leavingthe sector. Although Albania's population as a whole is rather young (average age 31.7 years), the farming population is aging. Almost halfof farm operators are over 54, with 24 percent aged 55-64 and 23 percent 65 years or older. Many rural inhabitants are migrating to urban areas, particularly from the poorer North, inresponseto low incomes from farming, limitedoff-farm opportunities and poor rural infrastructure andpublic services.l7 1.20 Off-farm employmentand remittancesare alreadyan importantsource of incomefor agriculturalhouseholds and havecontributedto changingproduction choices for these households. Ofanaverage total of 465 person-days spent working by each agricultural household per year, 24 percent are spent on off-farm activities. Of the remainder, 36 percent is spent on crops, 32 percenton livestock, and 8 percenton fruit trees. Around one-third of farm householdsreceive income from off-farm employment, with 24 percent of these earning over ALL 200,000 (US$2,293) from these activities. This suggests that for suchfarms the transition away from agriculture may be underway. Migration and remittances are also an increasingly important factor inrural incomes. Around one third of farming householdsreceive income from remittances, with 60 percent of these receiving over ALL 200,000 from this source.'* A total of 75,000 permanentemigrants and 166,000 periodic emigrants are from farming households. Ina recent study, McCarthy et a1(2006) found that householdswith migrants abroad have more livestock holdings and allocate more land to the complementary activities o f forage and pasture. They do this firstly because migrant membersreducehousehold labor (it tends to be younger people who leave), so householdsare likely to move away from 17The rural population decreased from 57.3 percent in 2001 to 55 percent in 2004. MAFCP, 2005. P. 24. Fifty-two percentof householdsearning from off-farm employment, and 29 percent of those receiving remittances, get ALL 50,001- 200,000 from these sources. 8 labor-intensive activities. Secondly, migrant members send remittances that enable households to choose more risky, but more profitable and less labor-intensive activities. The study finds that suchhouseholdshadhigher agricultural andtotal income. TRENDSAGRICULTURALPRODUCTIONAND SOURCESOFGROWTH IN 1.21 Agricultural growth in recentyears has been driven by fruit and livestock. Since 2000, the gross value of primary production has increasedby 12 percent inreal terms for all main categories of agricultural output (Figure 3), to ALL 198.9 billi~n.'~ This increase was driven by fruit, which increased 34 percent; and livestock,which increased 17percent. Fieldcrops increased only 3 percent. Fruit went from 9 to 11 percent of total primary production and livestock from 44 to 45 percent. Field crops decreased from 47 to 44 percent. These trends correspondwith Albania's resource endowments(paragraph 1.4), which would suggest a comparative advantage inthese sub- sectors. Figure 3. The value of agricultural production has increased, due to growth in fruit and livestock production (PIN = 2000) 140 ----- 130 0 0 / 120 / 0 8 110 0 P4 .....-...._..--..-.-- EI1 100 90 _.____ Livestock 80 --- Field Crop Fruit 70 - Total 60 2000 2001 2002 2003 2004 2005 1.22 Production of crops has increasedin spite of a smaller area planted, indicatingrising productivity (yields). During 2000-2005, the total area planted in field crops decreased from 419,300 to 400,500 ha, continuing a downward trendover the last ten years. The biggest decrease was incereals (178,200 to 147,700 ha), while forage increased from 165,000 to 191,000 ha; most others remained stable. During this time, production of vegetables increasedfrom 620,000 to 685,000 tons; cereals decreasedfrom 566,000 to 511,000 tons; and forage (important for increasing livestock production) increased from 4.7 to 5.2 million tons. Other products remainedstable, apart from decreases intobacco and sunflower. These figures indicate an increase inproductivity for cereals, vegetables, potatoes and all other field crops apart from forage (Table 3), with 19Statistics and trends in gross value o f agricultural productionare summarized in Annex B Table B3. 9 some yearly fluctuations.20In2005, the cultivated area was planted with 46 percent forage, 37 percent cereals, 11percent vegetables andpotatoes, and 6 percent other. Table 3. Despite some yearly fluctuations, yields are rising (quintaldha;PIN= 2000) 2000 2001 2002 2003 2004 2005 Field crops CereaIs 100 95 103 103 109 109 Vegetable 100 103 105 111 112 112 Potatoes 100 104 109 105 107 119 Tobacco 100 90 106 79 101 117 Forage 100 101 96 95 101 88 Fruit Apples 100 139 134 145 156 Grapes 100 102 93 107 89 Peaches 100 195 115 129 135 Plums 100 179 160 169 198 Source:MAFCP,2005. Fruitdataare from FAO. 1.23 Vegetable and fruit productiondisplays the same trends. Whereas the area of vegetables grown infields has stagnated inrecent years, the area under greenhouses increasedby over 40 percent during 2000-2005 (from 462 to 650 ha), and the volume of production increasedby over 52 percent (from 38,600 to 54,700 tons). Yields went from 835 to 902 quintalsiha. Greenhousesoffer a partial solution to the fragmentation of Albania's farms by allowing farmers to expand and grow crops year round, while offering good export potential, especially for off-season vegetablesS2' 1.24 Tree farming has become one of the most dynamic sectors of Albanian agriculture.Immediately after the collective farm systemcollapsed, around 60 percent of orchards andvineyards were abandonedor uprooted. Apples and other pome fruit startedto be replanted inthe 1990s, followed by citrus and vineyards during 2000-2005, and, to a lesser extent, olive trees. In2005, fruit production accountedfor about 6 percent of the total value of agricultural production, and it is growing. Participation infruit tree production increased significantly from 54 percent o fhouseholds in2002 to 83 percent in 2005. Tree fruit sales also increasedfrom 14percent to 18 percent inthe same period.22 Yields also rose (Table 3). 1.25 Productivityalso appearsto haveincreasedin the livestocksector. Livestock-5 1percent cattle, 31percent sheep and goats, 11percent pigs and 7 percent poultry-is judged to be an area of potential growth. Production increased for all livestock products during 2000-2005 (Table 4), includingmilk (by 14 percent), eggs (39 percent), wool, honey (70 percent), and live weight for animals, resulting ina doubling of 20MAFCP, 2005. p.59. FA0 stat data, which measuresyields in hg/ha, shows the same trends. 2'Albanian farmers are able to producesome vegetables(e.g., tomatoes) ingreenhouses duringthe off- season at costs low enoughtojustify their export to neighboringcountries.This advantage lies inthe abundance of sunlight inAlbaniaduringthe fall monthsrelative to neighboringcountries,whichreduces the cost of heatinggreenhouses. 22WorldBank, 2007b. 10 production of poultry meat and an increaseinsmallruminant meat production of 17 percent.23Given that numbers of livestock did not increase at an equivalent rate, this increase inproduction appears to be the result of rising productivity. Table 4. Livestock productivity has increased. 2000 2005 Change between 2000 and 2005 (`000 heads) (`000 heads) ( Y O ) Cattle 728 655 (10) Sheep & Goats 3,045 2,70 1 (11) Pigs 103 147 42 Poultry 5,291 6,432 22 Beehives 76 157 207 Cow milk (`000 Mt) 807 930 15 Sheep milk (`000 Mt) 70 75 7 Total milk (`000 Mt) 948 1,076 14 Source: MAFCP, 2005. p. 81. Note that the difference between 2005 and 2000 reflects relatively stable increases, thus these figures are representativeof trends. 1.26 Agro-processinghas expandedsignificantly.The agro-processingsector has seen fast growth, with production of selected food products in2005 at 278 percent of their 2000 levels, andbeveragesat 205 percent. Meanannual growth has beenover 15 percent(significantly greater than agriculture as a whole), and agro-processingcurrently accounts for 19percentof agricultural The total value of production increased by 58 percent, while the number of enterprises went from 1,844 to 2,060 (Table 5).25The biggest increaseswere inenterprises producing tinnedfruits andvegetables, refined oils, dairy products, bread, sweets, biscuits, and wine. Investments inagro-processinghave increased by 225 percent since 2000, and agri-businessis seen as one of the four sectors with major trade potential andbenefits for the economy.26 1.27 However, much of the raw materialfor agro-processingis imported.This includesvegetable oil for bottling, grapes for wine production, meat for processing, and vegetables for tinning. Currently, only a small volume of production that i s sold (1.8 percentof crops and 1.9 percent of tree fruit) i s sold to agro-processors, many of whom preferto use inexpensive, higher quality imported raw materials with reliable supply chains and a sufficient volume of products. 1.28 Although agro-industrialexports havebeen driving growth in agricultural exports,most of these enterprises are very small and cannotproducefor export. While data suggest that relatively little production i s exported,27the value of agro- industry exports has increased 68 percent from ALL 2.0 billion in2000 to ALL 3.4 23MAFCP, 2005. Page 25. 24MAFCP, 2005. 25Of these enterprises45 percentproduce bread and sweets; 19 percentare in dairy; 13 percent in milling; 6 percent in vegetable oil, while others produce beer, meat and other alcoholic beverages. Enterprises are concentratedin Tirana (42.5))Fier (294) and Korce (216), with the fewest inthe poorer regions of Lezhe (82)) Diber (67) and Kukes (26). Source: MAFCP, 2005. 26World Bank, 2004a.This is basedon the strength of the industry prior to 1990 and recentgrowth inthe sector. "MAFCP,2005.Pp98, 108,114. 11 billion in2005, makingthem the principal driver of increasesinagricultural exports during this period.28However, these exports are concentratedina very few firms. Ninety-six (96) percent of agro-processingenterprises employ only 10 or fewer workers and only a few have adoptedHazard Analysis and Critical Control Point (HACCP) and International Organization for Standardization (ISO) standards. Improvedtechnology and achievement of quality standards are neededto further improve growth inthis sub-sector. 1.29 Thus,the agro-processing sector needs significant investmentsto achieveits potential for rapid growth, and has the potential to grow faster. These investment needs may put considerable strain on the sector, but the expansion describedabove suggests strong potential for continued growth. The agro-processingsector is examined in greater detail inChapter 2. Table 5. The agro-processingsector has expanded significantly. Change between 2000 2001 2002 2003 2004 2005 2000and2005(%) Number of Enterprises 1,844 1,950 1,972 1,937 2,021 2,060 12 Number o f Employees 9,076 8,655 8,783 9,371 9,933 9,865 9 . Value of Production (Mil.ALL, 2000 prices) 27,834 29,994 33,913 37,358 41,549 43,905 58 Total Investment (Mil.ALL) 898 1,021 1,012 2,093 2,298 2,917 225 ForeignCredit (Mil. ALL) 50 20 7 8 788 237 374 Bank Loan (Mil. ALL) 17 29 102 102 208 1,444 8,394 Source: MAFCP.2005. 1.30 This evidence suggests that future growth in agriculture will probably come from further intensification of production through commercialization of farms, and a focus on high-value products. It is difficult to determine whether increasedyields are a result of improvements ininputsand technology or a combination of factors, but increasesinproductivity suggest that modernization of the sector is occurring. Comparisons with neighboring and EU-15 countries suggest significant potential for further improvements inyields with greater intensification (Table 6). 1.31 These data also suggest that Albania should focus more on its apparent comparative advantage in fruit and vegetables, sub-sectors where it performs well comparedwith neighboring countries (incontrast to cereals, where it performs poorly). Major opportunities for growth inthe sector are widely judged to be inhigh value crops suchas fruit andvegetables; livestock products (especially milk and lamb); agro- processing; and certain niche products that exploit Albania's relatively significant agricultural labor force (herbs and medicinalplants, olive oil, honey, organic food production) .29 MAFCP, 2005. p. 107. Apart from adecline in 2002 this representsasteady increase.Note that agri-food exports increasedduringthis periodfrom ALL 4,027 m to ALL 5,746 m, a 43 percent increase. 29Based on trends, potentialfor growth, income-generatingability and market conditions, the SSAF identifiesthe following strategic sectors: fruit-growing and viticulture; horticulture; livestock; industrial processingo f fruits and vegetables; and industrialprocessing of milk and meat. 12 Table 6. Yield comparisons highlight the potential for tree crops. Albania's yields as shares of EU-15 Rank in SEE Region Crop yields (YO) (l=top, ll=bottom) Tomatoes 48 2 Plums 85 3 Peaches 70 1 Grapes 214 1 Apples 25 8 Potatoes 42 5 Sunflower seeds 81 6 Wheat 52 8 Barley 55 8 Maize 46 7 Source: FA0 Stat. Regionalcomparator countries are Bosniaand Herzegovina, Bulgaria, Croatia, Czech Republic,Hungary,FYR Macedonia, Romania, Serbia and Montenegro, and Slovakia. 1.32 These are also the sub-sectorswith the most potentialfor income generation and poverty reduction.HBS data show that livestock and fruit production are also important areas for poverty reduction. The rise inthe participation o f fruit tree and livestock production and sales indicates that such activities have provided profitable opportunities for agricultural households inrural Albania. Analysis shows that both agricultural income and total income for agricultural households is positively and significantly associated with the area o f land cultivated with fruit trees and ownership o f live~tock.~'Importantly for Albanian producers, animal husbandry can be carried out on a small scale and adapted to the production structures o f Albania's small private farms, while also serving as a guarantee for rural incomes. Livestock production, especially small ruminants, i s particularly important as a source o f livelihood inmountain areas. The combination o f remittances and emigration inmountain areas make investmentsin livestock more attractive for Albanian farmers to improve agricultural and total income. Infact, livestock productionandby-products accounted for almost 80 percent ofthe total value o f agricultural output o f household^.^^ There i s also potential for commercial expansion: several nearby countries are large importers o f lamb, which could potentially be suppliedby Albania ifit can improve its quality and transport infrastructure. 1.33 There are also potentiallinksto be exploited betweenagriculture,agri- processing, tourism and the environment.Tourism is a relatively fast-growing sector inAlbania, suggestingthat agro-tourismand associated sectors such as traditional food products are a potential growth area, with strong linkages to the environment. 1.34 There are already signs of increasingcommercializationof some farms. There are indications that some farms are becoming increasingly commercially oriented. The increasing shift towards vegetable and fruit production, which i s more likely to be sold on the market than cereals, can also be interpretedas a move towards more commercially oriented production. The number o f larger livestock farms also appears to be increasing, 30World Bank, 2007b. 3'World Bank, 2007b. See Annex A, Table A3. 13 seen inan increase in the number of farms with 5-10 and 11-50 head of cattle, and a similar increase for small ruminants. 1.35 At the same time, wide variation in reportedfarm incomesuggests distinct stratificationinto income groups and betweenviable operationsthat can specialize, scale up and commercialize,and small-scalefarms that will continue to produce largelyfor domestic consumption.The bottom 9 percent of farms earn an average agricultural income of ALL 2,600; 32 percent o f farms average ALL 55,400; 49 percent ALL 212,800; andthe top 10percentaverageALL 621,900. Giventhat the poverty line i s ALL 4,891 per capita monthly consumption (in2002 prices), and that 24.2 percent of the ruralpopulation lived inpoverty in2005, one can assume that many small farms use farming to supplement other sources of income, and are therefore not primarily engaged inagriculture 1.36 Increasingcapital, Le., greater useof inputsand technology,may be the main driver of growth. Evidence that the use of inputs is rising and investments inagro- processingare increasing (paragraph 1.26 and 2.13) suggests that recent growth can be attributed to an alleviation of these constraints. However, the fact that growth is still minimal inspite of these improvements suggests that other constraints such as poor rural infrastructure are a bottleneck to growth. 1.37 Notably,the landconstraintremains a key factor behindinefficientfarming and low productivityand incomes. Although technical efficiency does not appear to vary greatly by farm size (discussed inparagraph 1.16)), given the very small average farm size, it can be argued that land fragmentation imposes severe hurdles to improving efficiency, such as large transaction costs, inefficientallocation of inputs, and difficulties inadoptingtechnologies with scale economies, suchas tractors andharvesting equipment.Moreover, very small farms cannotprovide sufficient income to support a family, as evinced by the average agricultural income data inparagraph 1.12. 1.38 Finally,improvingquality also representsan important potentialsource of growth.Highagricultural imports andlow exports also suggest that Albanian farmers cannot meet the quality standards of their competitors. Improving the quality of production, particularly ingrading, packaging, food safety and marketing, also represents an important potential source of sector growth. This will enable farmers to participate in modern supply chains, which value standardization, compliance with food safety and quality standards, and regularity of supply, for example, agro-processors, supermarkets and export markets(see Chapter 2). KEYPOLICYCHALLENGES AHEAD 1.39 Agriculture needs to continueitstransformationinto a modernsector. Albania's agriculture has potential for continued growth. The modernization of Albania's rural and agricultural sector will needto see many subsistence-oriented farms leave the agricultural sector altogether for more profitable opportunities inthe off-farm sector. This will free up land for viable farming operations to continue to scale up and commercialize, increasing the overall productivity of assets inthe sector. This trend is consistent with 14 trends inmany EUnewmember states (NMS), where uncompetitive agricultural households are transitioning into off-farm opportunities. It is also an important precondition for a competitive agricultural sector. EU-type rural development policies promote this transition to a more modern and competitive sector by targeting different assistance instrumentsat farms basedon whether they are subsistence or semi- subsistence producers. With its aspirations to EUaccessionand the corresponding need to align agricultural policies with the EU, Albania will follow this trend, and needs to formulate policies accordingly. However, it is also dependent on the availability of off- farm income-generating opportunities so that smallholders are willing to give up the guaranteedincome provided by subsistence farming. While some successful farms may absorb extra labor, many inthe rural labor force will needto find other opportunities. 1.40 A number of constraintsprevent agriculturefrom becomingmore competitive,includinginfrastructure,business environmentand supply chain issues. Albanian products are generally uncompetitive due to highproduction costs and poor product quality, and farm-gate prices are often higher than inEUcountries. Many local products are competitive only because Albania's weak and highly fragmented retail system, which i s poorly integrated with the wholesale system, gives local products an artificial advantage. Constraints facing Albania's agricultural producers, examined in more detail inChapter 2, can be broadly characterizedas falling into three categories: (a) private sector-oriented supply chain problems (for example, small size o f farms, small scale of production, and low quantity and quality o f inputs due to high input prices and low awareness among farmers); (b) the business environment; and (c) deteriorated rural infrastructure and public services. Overcoming these constraints will require significant efforts on the part of the private and public sectors inthe coming years. 1.41 Regionaland EUmarkets are becomingincreasinglycompetitive, creating morechallenges ahead for Albanian agriculture.The agri-food trade deficit suggests Albanian agriculture is uncompetitive inlocal and regional markets (though this may also be a reflection of Albania being subjectto dumping). The situation is likely to become more difficult as consumer preferences drive demand for improved food safety and quality, changes indistribution networks put greater emphasis on integrated supply chains (Chapter 2), and neighboring countries work to increasetheir competitiveness. Without concertedattempts to adjust, Albanian producersand agro-processors will become increasingly marginalized from domestic and external agri-food supply chains. 1.42 Reformof agriculturalpoliciesshould be conducted within the context of current and future EUrequirements.A strategic objective ofthe Ministry of Agriculture (MAFCP) is to harmonize Albania's agricultural policies with those of the EU-a processthat will eventually require sweepinglegislative changes and increased investments innew institutions. Achieving progress incertain areas, for example, food safety capacity, will help Albania to improve its competitiveness and access to high-value EUmarkets.Eventually such efforts may also facilitate progress on EUpre-accession requirements(see Chapter 4). 1.43 Goingforward, the governmentneedsto avoid interventionsin areas where the privatesector is moreeffective, and insteadfocus on providingpublic goods and 15 creating an enabling environment for the private sector. Increasing agricultural competitivenesswhile simultaneously respondingto this evolving environment creates significant policy challenges for the Albanian government. Starting in 1993, Albania proceededwith a broad dismantling of price andtrade controls, rapid distribution of agricultural land and other assets of the state farms and collectives, andprivatization of most of the state marketing and agro-processingenterprises. Since then, the agricultural policy environment has beenrelatively free of distortions (no price controls, limited subsidies, liberal trade policy with generally low tariffs on agricultural inputs and products).32Growth inthese conditions suggests that the Albanian agricultural sector can be competitive, especially with better infrastructure. Going forward the government should continue to avoid interventions inareas where the private sector is more effective, particularly given the resource constraints posedby a decline inthe donor financing envelope available.33Instead, it should focus on providing a policy environment that fosters private investment, and strengthens institutions a~cordingly.~~ includes This improvingthe businessenvironment and enforcement of the rule of law to encourage private investment; restructuring andbuilding institutions that provide extension services andthat promote andprotect land rights; working towards harmonization with EU legislation; improving food safety standards; and developing a comprehensive approach to rural development. 1.44 The rest of this report analyzes the challengesfacing the agricultural sector and recommendspoliciesfor addressingthem. These challenges are analyzed in greater detail, andmore specific policy recommendationsare given inthe following chapters, which focus on strengthening supply chains, improving food safety, and ensuring that reforms are carried out incompliance with EU legislation. The final chapter looks at how well public expenditures inagriculture are managed inorder to achieve these policy objectives. 32Albania became a member of the World Trade Organization (WTO) in September 2000, which carries an obligation to retain an open trade policy and establish bindingtariff levels. Given the extent to which trade and price policies had already been liberalized, membership in the WTO has mainly consolidated previous '' trade policy reforms rather than promoted further reform. 33The government warns that current donor projects in agriculture are set to close by the end of 2009, otentially leaving the sector without donor support in2010. World Bank. 2006c. 16 2. OVERCOMINGCONSTRAINTS TO COMPETITIVENESSACROSS SUPPLY CHAINS 2.1 To overcome constraintsin agriculture, governmentpoliciesneed to encourage and facilitate privatesector investmentsin key areas and createan enablingenvironmentfor growth.This chapter provides more informationon the constraints facing Albanian producers, and recommendspolicies for overcoming these constraints. It starts by summarizing the major constraints facing the agricultural sector, both at the level of producers and at the structural level. It goes on to look inmore detail at key emerging supply chains (dairy, grape and wine, olives and olive oil, fresh and processedmeat). The chapter then identifies and recommends appropriate public sector actions to assist indeveloping and consolidating supply chains, both at the primary producer level and at the level of agro-processors. SUMMARY OF RECOMMENDATIONS 2.2 Designinterventionsthat are tailored to the significantvariations in conditionsand constraintsalonggeographiclinesin Albania. The areas surrounding the Tirana-Durres corridor are relatively prosperousand well connectedto markets, and will respondwell to agricultural policies and increasedinvestment inthe sector, for example, inirrigation. However, the poorer areas, largely inthe mountainous North and North East, continue to face binding constraints inthe form of underdeveloped infrastructure, inferior public services and higher poverty. Therefore, policies needto be tailored to deal with different challenges. Inpoorer areas, a greater emphasis must be put on pro-poor, non-agricultural policies-improving public services, providing social assistance and some appropriate infrastructure investments-to promote growth and alleviate rural poverty. 2.3 Design and implementa rural development programthat will help farmers make the necessary investmentsto improvetheir productiontechniques and increaseyields and quality. Suchan investment program is less distortionary and more efficient than subsidy-oriented support, letting farmers decide on the most appropriate investments. An effective framework for investment support i s a program of competitive grants, which can be designedto encourage cross-compliance with food safety. 2.4 Gradually increaseenforcementof food safety standards.This needs to be conducted ina phased approach combining financial assistance and incentives for compliance, ina way that helps, not hurts, the industry,and lays the foundations for adoption o f EU-required standards. 17 2.5 Adopt strategic elements of theAcquis Communuutuire.As part of its strategic objective of EUaccession, Albania will have to harmonize its legislation with the EU Acquis Communautaire, a significant part of which i s concerned with agriculture. This canbe usedto help encourage the formation of producers' associations and create a more favorable tax regime for farmers. 2.6 Investin rural infrastructure. Underdeveloped infrastructure-roads, water and electricity-inhibits the development of integrated rural supply chains. Investments in infrastructure are critically important and are discussed inChapter 5. This recommendation will require cross-sectoralcooperation with the appropriate Ministries (Ministry of Finance and Ministryof Public Works). 2.7 Continueto rehabilitateirrigationinfrastructure.Investments are neededfor further rehabilitation, to improve managementofirrigationanddam safety. Improvements also needto be made inthe way money is spent inirrigation (Chapter 5). 2.8 Encouragethe land rentalmarket.Greaterconsolidation of the highly fragmented agricultural sector is sorely needed, to increaseefficiency andagricultural incomes. Encouraging the land rental market is likely to be the easiest way to facilitate this, for exampleby increasingthe security of titles, andmaking andinvestments inthe land registry system (suchas those being undertakenas part of the LandAdministration andManagementProject). 2.9 Improveagriculturalservices, includingextension and food safety services. There is a needto build strong institutions for agricultural growth that can respondto the needs of farmers who are engaging innewactivities suchas taking up livestock and fruit production, implementing new techniques andtechnologies, and seeking better access to financing. Institutions aimed at improving food safety andtechnology transfers are essential. MAINFOOD CHAINCHARACTERISTICSAND CONSTRAINTSTO GROWTH 2.10 Albania's agri-foodchains are developing,butvertical integrationand consolidationis stillextremelylimited.After the near-total collapse of Albania's agri- food complex inthe 1990s, recovery has been slow, with limitedprivate investment. However, inthe past three years development has acceleratedand broadenedacross an increasingnumber of supply chains. Nevertheless, major differences remainbetweenthe levels of development o f different supply chains, and betweendifferent segments o f the same supply chains. As a whole, the processing sector could be growing faster. With the exception of freshvegetableproduction, the process of recovery and development has beenledby the food processing industry-agro-processors. Consolidation beganin sectors with access to cheap, highquality imports of raw materials, which freed the industriesinquestion from dependency on irregular supplies of localraw materials that fall short o frequirements inquality and volume.35Inthe fruit and vegetable chain, the 35With the exception of fish processing. In additionto the examples o fwine grapes and meat described in the text, around90 percento f raw materials for the vegetable processingindustryare importedfrom Greece, Italy and Macedonia. 18 market leaders are the wholesale distributioncompaniesnear the mainproductionand consumptionareas. The process ofbusinessconsolidationis most evident inthe processedmeatindustry, infreshvegetables, and recentlyinthe wine industry-though these industriesare frequently still unableto competeat the internationallevelsince their productioncosts are higherthancompetitors,' andthey are unableto fulfill quality requirements.The fish industryhas followed a different developmentpath, with a clear market leader emergingvery early and smaller actors starting muchlater; it is addressed ina separate fishery sector strategy.36Laggingbehindare milk anddairy, fresh meat production, fruit andvegetable processing, andfreshfruit production. 2.11 A combinationof low quality production,a weak retail networkand few agro-processors is limitingthe growthof value-added in the agriculturalsector. Productionat the farm levelis extremely fragmented and effortsto organize for the purpose ofmarketingor procuringinputs are limited.Very few downstreamplayers (at the agro-processingand retail levels)have emergedinsupply chains, inpart due to the smalldomestic market and lowpurchasingpower of Albanian consumers. Inview ofthe weakness of downstreamand intermediaryplayers insupply chains, a large proportionof local agriculturalproductionends up beingsoldon informalmarkets, with little processing, productdifferentiationand/orvalue added. 2.12 IfAlbanian farmers can produceto the standardsrequiredfor export, they stand to improvetheir profitabilitysignificantly.Figure4 indicatesthe potential rewardsfor the Albanian agriculturesector of improvingproduct quality and supply chain management inan EU-compliantmanner.Formost fruit andvegetable products, EUwholesale marketprices, as reflectedinthe averagepricesat the Fasanowholesale market inItaly, are significantlyhigherthan domestic wholesale marketpricesin Albania. Providedthat the additionalcosts of enhancingproductquality levels, achieving regularoutput flows, and developingsupply chains remainsmaller thanthese price differentials,the Albanian agriculturesector couldbenefitsubstantially from export opportunities inthe EUmarket. 36Ministry of Environment,Forestryand Water Administration, 2006. 19 Figure 4. Albanian producers will gain significantly if they can meet standards for export to the EU(Domestic vs. EUWholesale Market Prices 2006) - 250 - an0 (Italy) Wholesale w =! .-6 8 150 3 \o 100 50 0 Cucumbers Green Tomatoes Watermelons Peaches Grapes (*) Peppers Note: (*) 2005 Average Wholesale Market Prices Source: MAFCP, 2006. 2.13 Many problemsfacing supply chains require significant privateinvestments. A recurrenttheme inthe supply chains analyzedbelow is the weakness ofprimary productioninterms ofquality of output andpost-harvestingdistribution,exacerbatedby poor rural infrastructure. As a result ofthis weakness, the most successfulprocessing sectors have largely beenthose that use importedrawmaterials. Inorder to be ableto providesufficient volume andquality ofproductsfor the agro-processingsector, farmers needto overcomethe followingweaknessesinprimaryproduction. 0 Farmersstilldo not usesufficientinputs. Concertedefforts have beenmadeto improvefarmers' access to quality inputs, andthe situation has seen some impr~vernent.~~An earlier lack of competitionininput marketshas beenresolved by a hugeincrease inthe numberandrangeof input suppliers (smallmachinery dealers, veterinary pharmacies, livestock feed suppliers, seedand saplingproducers, andtraders infertilizer andplantprotectionmaterials).The quality of inputs has also improved(for example, seeds andsaplings); however,labelingi s poor and sometimes inaccurate, andcouldbe improvedthroughbetterenf~rcement.~~ In addition,the, use of inputs is still low-only 55 percentof farms use pesticides,for e~ample~~-andevidencesuggests the costs of some inputs havebeenincreasing recent~y.~' 37For examplethe AgriculturalServicesProjectsupportedby the World Bank. World Bank, 2001. 38Improvementsinavailability, qualityand quantity of seeds are recorded inthe mid-termreview ofthe Agricultural Services Project.Morefarmers have been usingcertifiedseeds since 2001, andthe seed trading businesshas expanded.New varieties are beinggrown. 39The highest number is inBerat (83 percent)and lowest in Lezhe(42 percent).The qualityof pesticides remainsa problem.Across the country 92 percentof farms use fertilizer-almost 100 percentinTirana, Berat,Vlore and Elbasan,and around80 percent(the lowest) inKukesand Gjirokaster. MAFCP, 2005. 20 Farmerscontinueto use outdatedtechnology and haveinsufficientpost- harveststorage/packing/gradingfacilities.Although 73 percent offarms now use tractors to plough fields, 63 percent also plough by hand and 24 percentuse animals.41Small farms are the least mechanized-only 57 percent of farms under 1 ha use tractors, increasing to 90 percent of farms of 1.1to 2 ha. Some of the reasons for the low use of tractors include the high service fees charged by equipment owners andthe small size of farms. Although marketinfrastructure has improved, yielding a tangible difference for nearby producers, more investments are neededin post-harvest infrastructure and services. Foodsafety and quality needs to improve.As shown by its large trade deficit, Albania has beenunable to fully benefit from WTO membershipandpreferential treatment inEUmarkets. Inaddition to its insufficient volume of production, one of the mainreasons for this outcome is Albania's inability to conduct proper and recognized testing and certification of products that conform to technical specifications and regulations (more details inChapter 3). Unreliable food safety and quality also underminecompetitiveness indomestic markets-a weakness that will be magnified as average incomes rise and consumer preferences continue to evolve. There have beensome improvements infood safety, but significant challenges remain, particularly for the meat and dairy sectors. 2.14 Many constraintsare based on structuralproblemsthat will requirecareful policy responsesto overcome externalitiesand createan enablingenvironmentfor privatesector-led growth. Inefficienciesderivingfrom smalllandsize, exacerbatedby weak landsales and rentalmarkets,constituteone of the biggest drags on agriculturalgrowth and rural incomes.As noted inparagraph 1.14, farms are typically small (average 0.8 - 1.1 ha) and fragmented, undermining efficiency and agricultural productivity and incomes.Albanian land markets,both sale and rental, are currentlyvery thin: less than 2 percent of householdshave sold land, and only 3.6 percent rent out their land. However, the fact that about 6 percentof farmers rent-inshows that some are already makingarrangementsto increasetheir access to land. Financingfor the necessary investmentsis scarce. Just a little over athird of all farm households report having access to credit. Increasing bank credit figures in the farming and agro-processingsector in2006 suggest that credit is more widespread, particularly for livestock and fruit prod~ction.~~However, for most producers credit constraints reduce efficiency. The ability to obtain credit diminishesthe smaller the landholding; only 28 percent of householdsinthe lowest There does not appearto be a correlationbetween fertilizer price and usage, suggesting other factors affect its use. 40 Lemel, Harold, 2005. 4'MAFCP, 2005. page 72. The same farm may employ more than one method of ploughing. 42In2005, 50 percentof funds invested in agro-processing were bank credits, supplementedby own funds (42 percent) and foreign credit (8 percent).MAFCP, 2005. 2006 statistics show a dramatic increase of 853 percent in bank loansto the private farming sector, from ALL 48,278 million to ALL 411,932 million. MAFCP, 2007a. 21 yartile of land size have access to credit comparedto 42 percent inthe top quartile. Suchlow levels of credit availability precludehouseholdsfrom undertaking intensive margin activities or activities that have high risk and high return.The source of credit also matters. While access to credit from private banks and government is associatedwith increasing efficiency, access to credit within the community-i.e., borrowing from local lenders-reduces efficiency. This may be because it is offered on the basis of local patronage.44The most efficient and effective way to improve rural credit is to address structural problems that deter bank activity inthe agricultural sector, for example, the very difficult procedures for foreclosure on mortgaged pr~perty.~'Banks can also be provided with training on how to work with farmers, assess risk inagriculture and identify alternative forms of collateral, and work with matching grant programs. Rural credit is examined infurther detail ina forthcoming World Bank report on access to finance inAlbania.46 0 Irrigation and drainage will eventually need further rehabilitation and reform. Only 27 percent of atotal of 52 percentof Albania's arable land that could potentially be irrigated has been. Only 40 percent of all plots have access to irrigationand many of the systems are not operating at full potential. The drainage system only covers two thirds ofthe potential area, and less than a sixth of Albania's 639 pumping stations are working. Only around half o f the irrigation systems are managedby Water Users Associations andFederations (WUAs and FWUAs), which themselves are inneedof consolidation and ~trengthening.~' Ongoing investments are being made inrehabilitation of irrigation infrastructure (paragraph 5.23), constituting a large percentageof public expenditures in agriculture. But the quality of these expendituresneeds to improve to ensure that the money is spent effectively on rehabilitation, maintenance, and management.For example, even where farmers do have access to irrigation, it is not reliable and has a low impact on productivity. Dam safety needs to be improved. Water collection capacity i s insufficientand water quality i s diminishing incoastal areas, and is currently not monitored. Inaddition, management of irrigation needs to improve further, bothinterms of humanand institutional capacities and inthe use of te~hnology.~~Empirical analysis suggests that the use of irrigation increases 43Analysis of HBSdata. 44Albania currentlyhas two financial institutionsthat aim to increasethe availability of rural credit-the MountainArea FinancingFundand the Union of Savings and Credit Associations. 45World Bank. 2006b. p.24. There is also an ongoing ESW beingconducted on the availability of credit in Albania. 46World Bank, 2007a. 47Intheory, 95 percent of the irrigation system is under the managementof WUAs (for tertiary systems) and FWUAs(secondaryand primary). Inreality only a third of WUAs are operational and only 12 out o f 22 FWUAs.A mid-termreview o fthe World Bank-financedWater Resources Management Project in September 2007 will shed further light on these numbers. 48These needs are outlined inthe SSAF, MAFCP, 2007a. The World Bank-supported Water Resources ManagementProject(WRMP) focused on (i) completingdevelopment of WUAs and FWUAs and further strengtheningthem; (ii)restructuringwater enterprises; (iii)establishing participatorybudgetingprocedures for irrigationand drainage investment; and (iv) transformingMAFCP's role regardingthe irrigation and drainage sector. 22 efficiency (defined inparagraph 1.16 as how close a farmer is to their highest production potential given their endowment of resource^).^^ Taken together, this suggests that there is further potential for improving agricultural output using more irrigationthan has beenexploited to date. Extensionservices need further development.MAFCP employs only 245 agricultural specialistsinits extension service, andthere are also private service providers. Empirical analysis of HBS data shows that farmers who received extension services, specifically advice on soil quality and soil improvement techniques from an agricultural extension officer, were 72 percentmore efficient than farmers who did not.50.This suggests that an efficient and pro-active extension service can add a lot of value. Yet few households use or are served by extension services on seeds, crops, and pests, and fewer still by input programs (fertilizers) and artificial insemination (livestock programs). Extension services reach 34 percentof the overall rural population, mostly inthe form ofveterinary and livestock advice. Coastal rural areas benefit the most from extension services, as do householdsinhigher income quintiles (28 percent of households inthe lowest income quintile receive extension services, compared with 41percent of households inthe highest income q~intile).~~ There is littlehorizontalintegration,Le., support betweenproducers.Farmers' associations, which have only formed inthe last few years, represent an important means of improvingproductivity and competitiveness and overcoming some of the constraints discussedhereaS2For example, they can be an instrument for concerted action against pests and for bulk purchaseof inputs, and can promote knowledge of and access to improved production techniques. However, they are still limited in Albania and face legal constraints. The business environmentdiscouragesmuch-neededinvestment.By most measures of corruptionYs3law and order, and bureaucratic quality, Albania lags behindother countries, creating an uninviting businessenvironment for the private sector. This is reflected inlow levels of foreign investments (3.6 percent of GDP). Poor rural infrastructureand other public services holdbackagricultural productivity.Fragmentation ofagricultural production (the very large number of small farms), together with poor transport links and difficulties inproduct collection and marketing, increasethe costs of agricultural produce. However, increasing 49Annex A Table A5. Irrigation also increases the value o fagriculturalproduction,thoughthe extent depends on the amount of precipitationinthe year being measured, which varies enormously. See World Bank, 2007b 50Annex A Table A5. See World Bank, 2007b. "WorldBank,2007b. 52The IFDC program, which started inthe early to mid-l990s, has established morethan a dozen viable nationalassociationsincludingdairy and livestockassociationsand a nationalFarmersAssociation. 53Researchby Transparency Internationalindicatesthat Albania was rankedjoint 126* out o f 159 countries surveyed in 2005, down from l08* out of 149 countries in 2004. The new prime minister in September 2005 made the fight against corruptiontop priority for his government. Albania's rankingin 2006 is still 11I". 23 investments inrural infrastructure such as roads has createdtangible improvements for producersinnearby areas. MilkandDairy 2.15 Albania's dairy industry,though longestablished,is highly fragmented,with no actors leadingconsolidationof the supply chain. Around 90 percent of Albania's farms hold cattle and smallruminants, with the average farm holding two cattle and eight small ruminants. There are also around 1,000 enterprises specialized inbreeding cattle for milk production. At the processinglevel, 375 dairy plantsemploy 1,200 people, and process approximately 187,000 Mt of milk annually to produce pasteurizedmilk, yogurt and cheese (2003 figures).54There are also an estimated 800 unregistered (and unmonitored) workshops that process a few hundredliters of milk daily to produce white cheese. These figures suggest a very fragmented industry,with an average of three employees and processingcapacity of 1,000-2,000 liters of milk per day. Unlike other food chains, no actors (producers, processorsor distributors) have emerged as potential leaders to develop and modernize the food chain. 2.16 Quality and safety of milk is a serious concern and needs to improve. As seen inChapter 1, increasing yields are contributing to the risingproduction of cow's milk. However, ensuring sufficient, regular flows of safe, quality milk to processingplants is a real problem. At the farm level, there i s limitedprogress incontrolling animal diseases and insufficient hygiene measures adopted during milking. This i s exacerbatedby the lack of a proper cold chain. Part of the problem lies with weak food safety capacity at the state level to help control diseases, e.g., an incomplete animal disease monitoring system and incomplete animal identification (see Chapter 3). Part of the problem also lies with the private sector andlack of functioning market incentives. Dairies tendnot to offer better prices for higher quality milk, which removes incentives for farmers to improve quality. Margins for farmers are low, with the price for raw milk ranging from 25 to 30 ALL per liter. This makesit difficult for a dairy farm with fewer than 15 cows to be profitable, especially iffarmers cannot produce their own animal feed. 2.17 Quality and safety of processing is also highly inconsistent.Almost 90 percent of milk is not processedinregistered dairy plants, and is insteadsold un-pasteurized or processedby the producers themselves. Alimentary fraud is widespread, such as adding starchto milk to produce cheese more cheaply. 2.18 There has been relativelylittle innovationor investmentin branding,and consequently pricesare low. Two generic types of cheese traditionally popular in Albania are produced: a white cheese similar to feta andthe hard "kashkaval" cheese, bothmade with cow or sheep milk.55Although there is some recognition of differential quality-white cheese from Sarandaand hard cheese from Gjirokaster are considered the '`Statisticsrecordabout 12,000 Mt.of cheese production per year, comparedwith cheese importso f about 1,200 Mt.MAFCP, 2005. 55On average4 Itof milk are requiredto produce 1kg of white cheese, and 6 It are neededfor 1 kg o f hard cheese. Sheep's milk is more expensive, and the cheese can cost twice as much(up to 730ALL/kgat retail) as that made with cow's milk (as low as 300 ALL/kg). Market survey. 24 best-in general, demand for a generic product makes it difficult for processorsto market their products. Inthe absence of product differentiation competition is basedon price, and the resulting low margins for producers and processorsdiscourage further development of the industry.56 2.19 There are importantinitiativesunderwayto improvequality and marketing. There are signs that the dairy industry is modernizing and consolidating, including several initiatives to improve processingfacilitie~.'~It is hoped that the ability to produce a higher quality product will encourageprocessorsto offer producers a premiumfor better quality raw milk. After several failed attempts inthe late 1 9 9 0 ~ ~ some processors are producing milk inplastic bottles, although the quality is low. Some dairies are trying to widentheir range ofproducts, for example by producing mozzarella-style cheese, but thus far, the price-quality ratio still favors imported products. Grapes and Wine 2.20 Grape productionis increasing.Approximately 300,000 farms are involvedin grape production, with the average size of vineyards ranging from 0.1-0.3 ha.Production, though still low, is growing rapidly-between 2000 and 2005 the cultivated area increasedby almost 30 percent to 13,300 ha, and production increasedby 45 percent, due to better yields. Significant imports from Greece, Macedonia and Italy, and the sale of wine grapes as table grapes, suggest that domestic production is not yet able to satisfy demand for table grapes. 2.21 The quality of grape productionis low and needs to improve.Management of vineyards is generally poor, due to inappropriate agricultural practices, lack o f attention to pest/diseasecontrol, low quality of saplings and insufficient use of fertilizers and other inputs. Productivity i s generally valued more than quality. Most growers produce both differences betweenthe two.S table grapes for freshconsumPtion and wine grapes, eventhough there are important 2.22 Problemswith post-harvestdistributionreducecompetitiveness. Lack of investment incold storage and other post-harvest infrastructure and services seriously constrains the expansion of production, particularly inareas that are highly suitable for grape production (e.g., Berat and Permet) but outside the Tirana-Durres area where demand is concentrated. (Inaddition to demandfor table grapes, 40 percent of Albanian wine i s produced inDurre~).~~ 56The pricefor raw milk rangesfrom 25 to 35 ALL/lt, occasionally reaching40 ALL/lt. 57Such as that run by the USAID-funded LandO'Lakes good management practicesprogram, which trains farmers on product development, milk collection, business management,and hygiene and sanitation. Some important investments are beingmade in cheese factories inthe South, though the profitability of such initiativesis still uncertain. 58Wine grapes tend to have more seeds and thicker skins. s9 Halfof the population o f the whole country lives inthe area o f Tirana-Durres, which also accounts for about 60 percent of the total purchasingpower of the country. 25 2.23 Grape production is profitable, but not competitive. The average wholesale price of table grapes i s relatively high: ALL 60-70 for localproduction, comparedwith ALL 85-100 for imported production. With production costs at ALL 29/kg, this gives a mark-up of around 140percent.60Production inthe Tirana-Durres area, close to the centers of demand, i s very profitable. However, the very small size of farms, the high cost of inputs,the relatively high losses due to inappropriate agricultural practices, and the poor quality of saplings all contribute to increasedproduction costs and lower competitiveness. For farms separated from the main centers of demandby poor infrastructure, the return is lower. However, improvements ininfrastructure and cold storage and distribution will also increasethe competitiveness of imports over domestic production. 2.24 Farmers producing wine grapes are not able to market their product effectively. The low quality and subsequently the price paid for grapes by wineries creates incentives for farmers to try to sell wine grapes for fresh consumption or to process the grapes themselves, traditionally to produce grape brandy (Raki). Decreasing demand for Raki has forced farmers to find new ways to market their production. Some have opted to process grapes into wine, eventhough it is more expensive and difficult, and therefore not viable. Potential solutions suchas establishing co-operative wineries, or further specializing ingrape production (as opposedto processing), have not yet been embracedby farmers. 2.25 Wine production has recoveredwell in recentyears. Wineries were well developedprior to the 1990s, when there were 22 large processingplants producing 200,000 hlof wine, alcoholic beverages andvinegar. Wine production was one of the first industriesto recover and attract investment. In 1999, it was weak and fragmented, consisting of about 100 small wineries, only 20 percent of which were regularly registered; by 2003 consolidation hadledto around 40 or 50 operating wineries, but this numberhas increasedinthe last two years with new investments. Consolidation ofthe wine and spirits industry is gaining momentum with more competitors, improving quality, and increasing domestic demand.Durres is the leading wine area, with seven wineries producing almost 40 percent oftotal national output. Other important areas include Tirana, Berat and Permet. 2.26 The wine industry is dependent on imported grapes. Local grapeproduction is unableto respondto the needs of the industry. One reasonfor the wine industry's resilience inthe 1990swas its ability to import cheap, bulk Italianwine for fbrther processingor bottling. After 1996, this was replaced by increasing imports of Macedoniangrapes, which have a good price/quality ratio. It is estimated that 50 percent of formally traded Albanian wine is produced with imported grapes, and 30 percent with Macedonian grapes. While Albanian wine grapes are cheaper (37 ALL/kg, compared with 56 ALL/kg CIF factory for good quality Macedonian grapes), imported grapes are favored for several reasons. Importinggrapes i s easier interms of logistics andthe 6oWholesale price is 60-70 ALL/kg (e0.5-0.6) for local grapes and 85 to 100 ALL/kg (e 0.7 to 0.8) for imported grapes. Production cost is 29 ALL/kg. This means that a vineyard cultivated with 40% table grapes and 60% wine grapes might recoup all production costs (included the opportunity cost of family labor) with table grapes alone; income obtained from wine grapes or wine represents profit. 26 requirementof a single contract. VAT is lower, since it is paidonly on the addedvalue, with the payment for raw materials deducted. The lower quality of Albanian grapes also makes it more expensiveto producewine. 2.27 Investmentsare needed in improvedtechnology. Although increasing investments are being directedto the sector, includingfor renovating equipment, most winemaking equipment is obsolete. There is also a lack of adequate and safe storage capacity and a shortage of winemaking skills, although producers are increasingly procuring the services of oenologists. 2.28 Marketingis improving.Distribution of localwine is improving, with 24 Albanian wine brands regularly being sold throughout most of the country.61Local varieties (suchas red and white shesh andkalmet) are less popular than imported varieties, due to consumer preferences andthe lower quality of local varieties. 2.29 Wine productionis profitable.A comparison of reference prices shows that wine can be produced less expensively elsewhere.62However, inspite of strong competition from Italy and other neighboring countries, many Albanian wine producers are profitable, especially those located inthe Tirana-Durres corridor who are able to sell to restaurantsand bars without invoices and tax-frequently making mark-upsof 100 percent over production costs. Olives and Olive Oil 2.30 The poor quality of olive productionis the mainweakness in this food chain. Duringthe privatization of farmland in 1991, 19,000 ha of olive groves were distributed to 110,000 households, leading to highly fragmented olive production. Olives typically form a low share of farm income, meaning that investmentsof labor and capital are low, and insufficient attention i s paid to quality and yields. Olive trees are poorly cared for, with insufficient use of fertilizer and pesticides, and harvesting and processing o f olives i s not conductedwell. Efforts to develop original and innovative approaches to integrated pest control have proved unsustainable. 2.3 1 The olive oil industry is constrainedby its dependency on local raw materials.The olive oil industry is made upofaround 140processors, 90 ofwhich are associated. The industry is inthe processof strengtheningand diversifying, but has been constrainedby its dependenceon local raw materials, for technical and financial reasons,63While it i s good for domestic olive oil producersthat raw materials are sourced 6'December2005 market survey. 62 The reference price is relatively high and ranging around 250 to 300 ALL for bottled wine and 200 for wine in bulk. As a term of reference, it is possibleto consider that in Italy it is possibleto buy at retail level several IGT (Geographic indication) wines for 1 Eurohottle (125 ALL) and some cheap DOC (wines with denomination of origin) for 1.7Eurohottle (212 ALL). 63 To get good quality olive oil, olivesmust be processedwithin 24 hours of harvesting. The logistics involvedpreclude importedolives from beingviable for olive oil productionin Albania: importswould have to be calibrated so that the exact amount of olivesthat can be processedin one day are imported on a daily basisand are homogenous in quality, and that the processis completed in 24 hours. On the financial 27 locally, the productivity and quality of output needs to improve ifthe olive oil industry i s to be successful. Ifit succeeds, olive oil will be the first agro-industry to develop and consolidate without relying on imported raw materials. 2.32 High production costs and poor quality mean low competitivenessof olive oil. The quality of Albanian olive oils is improving, the range o f products i s growing and competition betweendomestic producers is increasing. However, there are still important problems of inconsistent quality from the same producer withinthe same year. The difficulty of obtaining good quality olives for the production of extra-virgin olive oil- which requires a well trained workforce and adequate logistics-has pushedthe cost of sucholives to uncompetitive levels. There is poor understandingamong farmers ofthe different qualities of olives andolive oil andtheir different prices. As with other food chains, the scarcity andhigh cost of good quality raw materials, and the small size of many processors (i.e., the lack of consolidation) contribute to very high final production costs, and difficulties competing with imported olive oil. 2.33 Marketing has made considerable progress, but needs to improve further to capitalize on evolving consumer preferences.Most consumers still consider olive oil a homogenousproduct, and margins are primarily generatedthrough distributing medium- quality product. Alimentary frauds are widespreadand easy,64and distribution-level wholesalers and supermarkets still play a marginal role. However, demand for olive oil is increasing, and market segmentationis taking place. Partly due to rising incomes, urban consumers are increasingly aware of the difference between olive oil and other vegetable oils, and different types o f olive oil. The olive oil supply chain is undergoing a transformation, driven inpart by the increasing role inretail distributionof supermarkets, which demand a wider range of products. An increasing number o f producers are offering extra-virgin olive oil, and there has beenan increasing emphasis on marketing, packaging and better branding. Some enterprises are starting to organize and widentheir sales forces and/or wholesale networks; 15 producers are now large enough to afford a regional or national distribution policy.65 FreshMeat 2.34 The quality and safety of fresh meat production is uncertain. Inaddition to the small livestock holdings discussed above (2.6), Albania has 725 enterprises specialized in breeding cattle for meat production. Inrural areas, small ruminants account for the majority of meat consumed. This often involves home consumption of a domestically rearedand slaughtered animal, and though slaughtering takes place outside any system of controls, the risk of contamination is limited, since there is minimal transport involved. Urbanmeat demand, mostly for beef andpoultry meat, requires far more extensive production logistics, as live animals are usually transported to slaughterhousesinor close ~~ side, the yield of olives into oil is low, so the transport costs would render it unprofitable. While it is viable to import half-processedtable olives, this is not practiced since it is more profitableto engage inthe entire process using unprocessedolives. 64A basic calculationof productioncosts suggests that what is widely and informally sold as olive oil in recycled plastic bottles couldbe, at best, another edible oil mixedwith low-gradeolive oil. 65December2006 market survey. 28 to urban areas (a responseto consumerpreferences for freshly slaughtered meat). Inthe absence of a proper epidemiological monitoring system, there i s a high risk that infected animals will be sold for slaughter. Subsequent steps inthe chain are poorly controlled and the risk of contamination is great, particularly given the prominence of live animal marketsand transportation. Only three slaughterhousesinAlbania are consideredsuitable for meat production, but utilizationis extremely low, implying that extensive production takes place inuncertifiedpremises. There are also few controls on the sale of meat: around half of the meat shops inTirana do not have a regular license, eventhough they are regularly controlled by the veterinary service. The negative implications for public health as well as competitivenessare discussedingreater detail inChapter 3. 2.35 Improvementsin this food chain need to be driven by enforcementof laws and consumer awareness. Shortcomings inquality and safety standardsacross the fresh meat supply chain can be ascribedto a number of factors examined more closely inthe following chapter. These include lack of market incentives driving higher quality, and lack of enforcement of effective food safety rules andregulations by the veterinary service. Though consumer preferences are moving towards higher quality with rising incomes, price is still an important factor. Weak enforcement of existing regulations allows less scrupulous producersto undercut competitors that invest infood safety, removing the incentive to invest insafety. Transforming the sector will require major investments interms of capital, humanresources and logistics. The most effective means to achieve this is likely to be a "carrot and stick" approachthat creates incentives for producers. Such a multi-faceted approach would include informingproducers of the commercial benefitsof adopting standards suchas HACCP; facilitating access to the capital needed for appropriate investments (for example through a rural development program) and requiring cross-compliance with food safety standards to access this capital; and gradually enforcing standards. A key role would needto be played by veterinary services inthe main cities, which are responsible for controlling slaughtering within urban areas and meat distribution, and which needto be strengthened. Chapter 3 elaborates on this strategy ingreater detail. At the same, time public awareness of the importance of food safety standards can also be increased, to create consumer demand for quality and safety. 2.36 Marginsare low but could be improvedif animalswere slaughteredat a morematureage. Consumer preference is for young, low-weightand supposedly more tender animals. The result is that animals, especially bovines, are slaughteredtoo early, and this reduces the potential returnfrom fattening and finishing animals. Meat Processing 2.37 The meat processingindustryis one of Albania's moredeveloped supply chains. It was amongthe first food chains to consolidate, inpart because it was able to rely on imported raw materials. It comprises a few large wholesalers that operate large cold storage facilities and import inexpensive frozen meat, and a small number of processors.These actors all made substantial investments intheir operations, which increasedthe barriers to entry into the industry relative to other food chains. The origin of 29 imported meat varies, since it is often sourced from excess supply, or from products that are re-exported.66 2.38 Safety is good but relies on an effectivesystem of controls of importedmeat. There is trust inthe industry among consumers, and trust inimporters on the part of the processors. Since this trust is basedon effective controls on the quality and origin of imported meat, the role of customs and food inspectors inthe functioning of this food chain is essential. 2.39 The sustained success of meat processorsis dependenton their capacityto develop a brandingpolicy and compete againstnew entrants,principally supermarkets.Most meat processing enterprises have developedtheir own distribution system, some through a mix ofproprietary shops and agreements with wholesalers, others through experimenting with a system of limitedfranchising. They have beenrelatively effective at branding and developing consumer trust, and their shops are usually better thanordinary food shops andbutchers.However, after several years of dominating the domestic market, meat-processingenterprises now face a challenge from new players suchas supermarketchains with extended, integrated supply chains abroad. Further improvements will be necessary ifthey wish to remain competitive. POLICY RECOMMENDATIONSSTRENGTHENING FOOD FOR CHAINS 2.40 Some problems-and thereforesolutions-are relevantto all food chains. These includehighagricultural input prices; lack of economies of scale due to small farm size; slow adoption of food safety standards and lack of enforcement; an inadequate legal framework that fails to adequately provide for associations betweenfarmers or define the status of farmers andthat needs to be revised for approximation to the EUAcquis; and a VAT regime that puts farmers at a disadvantage. Policy recommendationsto address these problems include the following. a) Designappropriateinterventionstailored to the significantvariationsin conditionsand constraintsalonggeographiclinesin Albania. Dueto the very different conditions found indifferent geographical areas, interms of constraints and opportunities, agricultural and rural development policies would be muchmore effective ifthe government targeted measures by geographic region. This approachto policy making follows the approachadoptedby the EU inits support scheme for farming inless-favored areas (and indeedimportant lessons can be learned from the EUapproach). The areas surrounding the Tirana-Durres corridor are relatively prosperous and well connectedto markets, and will respondwell to increased investment inagriculture, for example inirrigation. They are also the scene of competition for land betweenagricultural use and urban and tourist developments. The poorer areas, largely inthe mountainous NorthandNorthEast, continue to face binding constraints inthe form of underdeveloped infrastructure (e.g., roads), inferior public services, and higher poverty. There are pockets inthe mountainregions where 66Imports includecheap beefmeat from Brazil (e.g. %3/kg);poultry meat from the United States; live animals from Macedonia; and additional sourcesdepending on market prices. 30 commercial agriculture is viable and can thrive, and agro-tourism is often suggested as an option. Therefore, policies needto be tailored to deal with different challenges inthe higher-potential plainareas, comparedwith the mountain areas. First, the country must be divided by geographic aredproblem zone, and these areas mapped for constraints and appropriate policy priorities. Inpoorer areas, a greater emphasis must beput on non-agricultural, pro-poor policies, suchas improving infrastructure and public services, and providing social assistance, to promote growth and alleviate rural poverty. Giventhat many problems and policies are crosscutting and go beyond agriculture to rural infrastructure, public services etc., an appropriate agency would be required to oversee development inthese areas. This has beenimplicitly recognized through the development of a separate agency for mountain development, the MountainArea Development Agency (MADA). With an appropriate mandateto address not only agriculture but also other development issues (infrastructure, public services, etc.), and with an appropriate designation for the less-favored areas that it would focus on (possibly adapted from EUcriteria), MADA could potentially fillthis role. For the more prosperous coastal areas, competition for landbetweenagriculture, urban development andtourism calls for a well-coordinated policy betweenMAFCP and the Ministry of Environment, Forestry and Water Administration (MEFWA) and MinistryofEconomy, Trade andEnergy (METE), inaddition to other ministriesas appropriate. b) Designand implement a rural development programthat will help farmers make the necessary investmentsto improvetheir productiontechniquesand increaseyields and quality. Sucha program has beenpioneered inAlbania through the Competitive Grants Program (CGP) of the World Bank-supported Agricultural Services Project.67This mirrors the rural development programs administered in EU member states and accessioncountries that are increasingly favored over subsidies since they are non-distortionary and enable farmers to decide on the needed investments infood chains (see Chapter 4). The grants can be directed at investments for improvingproductivity and food safety and quality, by making compliance with food safety requirements6*one of the selection criteria. The design of such a program, includingthe selection criteria for potential beneficiaries, needs to be considered extremely carefully. For example, by targeting areas of production that are now consolidating, such a program would be more likely to support sub-sectorsthat are growing, while less well-performing areas could be targeted with a different kindof support measure. Inorder to function well, any grant program needs to be transparent, with very clear rules and criteria. The selection of grant recipients has to be conductedusing a multi-level systemto avoid undue political pressureon specific The CGP is part of Component4 of the Agricultural Services Project, and its objectives are: (i) to acceleratethe transfer of technology and improvedbusinesspractices to rural communities; (ii)to build capacity of rural service providersto support farmers/producers and other rural entrepreneurs; (iii) to assist associations and other community groups to take advantage of economic opportunities;and (iv) to help '' MAFCP establish more public-privatelinkages for reachingfarmers and agri-businesses.During the ASP around 140 grants have been provided,with most being carried out very satisfactorily.To varyingdegrees, many have helped develop market linkages, includingimprovedfood quality; improvedprocessing and ackaging; storage; and addressingniche markets. "Cross-compliance," to go hand in handwith an extensive informationcampaign and training program in food safety systems. 31 decisi~n-makers.~~Capacity developed during implementation o f the CGP can be utilized as a basis for the rural development program. Gradually increaseenforcementof food safety standards.The introduction o f minimumstandards is particularly urgent inthe dairy and meat sectors, where the risks for the public health are currently high, and where lack o f enforcement removes incentives for improved standards, underminingcompetitiveness indomestic and external markets. The introduction o f standards needs to be realistic so that they can be enforced andto avoid forcing operators out o fthe sector or creating insurmountable barriers to entry. As discussed inparagraph 3.21, an enforcement approach needs to be combined with incentives for compliance, such as grants conditioned on cross-compliance with food safety standards, accompanied by public awareness campaigns among producers and consumers. After a defined period, this would be followed by the strict enforcement o f minimum standards, which would be raised over time as appropriate. This issue and proposed solutions are examined in more detail inChapter 3. A gradual introduction o f standards i s also a highly strategic move, since it will get Albania on track for the gradual approximation to the Acquis. Though this is a gradual process, Albania needs to start now to take advantage o f the opportunity afforded by its relatively longtimeframe before accession. The rapid development o f the agro-processing industry also provides an important window o f opportunity to encourage adoption o f appropriate standards by new and evolving enterprises. Gradually adopt strategic elementsof theAcquis Communautaire.As part o f its strategic objective o f EU accession, Albania will have to harmonize its legislation with the EUAcquis Communautaire, a significant part o fwhich i s concerned with agriculture. Legislation can be significantly improved to ameliorate some o f the issues facing farmers. Definingthe legal status o f farmers will help them take advantage o f VAT registration (Box 2),) and i s also neededfor the implementation o f a rural development program and to form a Farm Registry.Albanian legislation currently limits the potential for producers' organizations, holding back the establishment o f associations or co-operatives, for example, for thejoint procurement o f inputs, which could help farmers overcome some o f the problems outlined abovea7' The needs and provisions of groups for joint procurement o f inputsrequire specific regulation to give them the legal status o f co~perative.~~ The introduction o f 69Additional factors need to be taken into account. For example, proposalsshould be generated by the applicants to ensure relevanceto the specific problem. In addition, while a grant program can be gearedto addressspecific issues(such as introduction of food safety systems), it should probably not be too narrow and should allow a wide range of ideasto be tried out. 70Only non-profit associationsand mutual cooperatives are recognizedas possible mechanismsfor organizing individuals into users' associations, producers' organizations, input supplyjoint procurement consortia, co-operatives and inter-professional agreements. Several efforts havebeen made to develop a solid legal framework for the development of co-operatives, including support from GTZ for the law on associationsof mutual co-operation, and from IrishCooperation for credit unions. Inparallel, specific applications ofthe law on non-profit associationshavebeen developed, such as the Irrigation law (regulating the establishmentof Water Users' Associations (WUAs) for the management of irrigation systems) and Community Forestry, also based on the law on non-profit associations. 71An example is Italy, through the law of 1948 on agrarianconsortia. This law was changed in 1999 to give these organizationsthe legal status of co-operative. 32 Producers' Organizations (POs) into Albanian law i s also a necessary step towards the harmonizationo fAlbanian law to the A c q ~ i sAnother important tool to protect . ~ ~ and promote quality food chains i s the regulation o f inter-professional associations such as the consortia established inEUcountries to manage the use, application and development o f denominations o f origin. Albania can also adopt more specific jointly maintainrural infrastructure^.^^ Enforcement i s a necessary corollary o f provisions for other types o f users' associations, for example, those established to legislative improvements, as are stimulating more partnerships between farmers and promoting awareness o f the benefits o f associations and how they can be established. At the same time, Albania could also usefully reform its taxation regime to favor businessgrowth. The taxes faced by an ordinary business are much greater than those imposed on "small" businesses. This discourages the consolidation o f enterprises and also encourages tax evasion, since it fails to take into considerationparameters other than turnover, such as the amount o f capital assets and the number of employees. The government also has a role to play infostering agro-tourism and linkages between agriculture, tourism and the environment (paragraph 1.33), for example, by adopting more environmental rules and regulations. Box 2. Lack of VAT registration among producers is another factor favoring use of imported raw materials. Currently, most farmers are not registered as farmers and are not VAT-registered.This meansthat they cannot provideVAT invoices to agro-processors,who are in turn unableto reclaim VAT on their raw materials. When using locally sourced raw materials, VAT needs to be paid on the entire value of the processedproduct; when using importedraw materials, VAT only needs to be paid on the difference betweenthe sale price and the price paid for the raw materials. This adds to the factors favoring imported raw materials.The registrationand extension o fthe VAT systemto farmers, with a reductionin VAT as appropriate, would help solve this problem.Until suchtime as farms are registered-which may be many years-this will continue to work against farmers, unless interim solutions can be identified.One solution that should be considered is to allow for agro-processorsto generateinvoices themselves for purchases from unregisteredfarmers. Source: Authors. e) Invest in rural infrastructure. Underdevelopedrural infrastructure-roads, water, and electricity-is a consistent factor inhibiting development o f integrated supply chains. Investmentsininfrastructure are critically important and are discussed in Chapter 5. This recommendation will require cross-sectoral cooperation with appropriate Ministries (Ministry o f Finance, Public Works, etc.). f) Invest in irrigation and drainage infrastructure, rehabilitation and management. Investmentsto date have beeneffective inimproving irrigation infrastructure and Water User Associations, but improved quality o f these expenditures and continued investmentsfor further rehabilitation and better management are necessary to increase productivity. Discussion o f alternative approaches and models for irrigation 72As establishedby the EC for the regulationo f the common market of agriculturalproducts, e.g., fruit and vegetables (ex Reg. CE 2200/96 and subsequent modifications)and oleic productions (ex Reg.CE 136166 and 865/04 and relevant amendmentsand modifications). 73At present, the only type of users' association governed by a specific law is WUAs, established to managesecondary and tertiary irrigation networks and water resources. 33 investmentsand different approachesfor dealing with water scarcity is imp~rtant.'~ Dam safety is also an increasingly urgent issue that needs to be addressed. This issue i s examined in greater detail in Chapter 5. g) Improvethe land rentalmarket.Landconsolidation is sorely neededto improve agricultural efficiency and incomes, but bothsales and rental markets are weak. Improving sales markets may be more difficult, since weak rural credit markets precludethe availability of financing for landpurchase, and supply of land for sale is low (perhaps because of its role as a social safety net). This suggests that efforts should focus on improving the rental market.Improving the environment for land rental markets to expand is also im ortant because households that rent inland outperform others inseveral areas! Part of addressingthe land issue is improving secure property rights, an issue that has beenaddressedunder the World Bank- supportedAgricultural Services Project (Box 3). Propertitling of all land would help facilitate the rental market, with evidence suggesting that significantly more households that rent out landhave their title deed, comparedto those that do not rent (Annex A, Table A6). Institutions that provide and protect rights to land also help farmers improve efficiency. Farmers who have land title deeds from the 1991land reforms are on average more efficient, as are those who have inheritedland, which i s a good indicator of secure property rights within the family (Annex A, Table A5). More than 90 percent of farm households claim to own their land; however, the share of households with proper rights to their land varies substantially, and declines with declining land size. There is also evidence that informal land exchanges and pooling are taking place, which could be encouragedthrough local land exchanges. An appropriate landtax, consistently enforced and collected, would also help encourage owners to ensure that land is inproductive use, rather than lying fallow. !ox 3. Ongoingland reform has improvedconditionsfor landconsolidation. 1. Key elements ofthe government's land reformprogram in recentyears have included: (i) the development of a comprehensive legaland regulatoryframework for land administration and land market development; (ii) the establishment o f an ImmovableProperty RegistrationSystem (IPRS) for real property titling and registration;and (iii) a comprehensive,donor-supported programto providefirst time registrationto new landowners. This has included activities in the World Bank-supportedAgricultural ServicesProject, which includes physicaland institutionaldevelopmentof the IPRS.There is evidencesuggesting that land consolidation may be occurring inrural areas. Average farm size has increased from an average of 1.04 ha in2000 to 1.1ha in 2005, and average parcel size from 0.2 to 0.28 (thoughthe reliability of these statistics is uncertain). The key elements of a modern Europeanland and property system are now inplace. However,there remainproblems, includinga mismatch betweenthe revised structures 74 Discussionson this issue, and on improvingthe functioningof Water Users Associations, are anticipated during the mid-termreview of the World Bank-financedWater Resources Management Project in late 2007. 75 The average efficiency ofthose who rent in land is 35 percent,higher than the 12 percent for those who rent out or 28 percent for those who do not participateinthe rental market (autarky).Total profits for those who rent in are twice as high as the average for all farmers. Those who rent in also use more inputs, such as machinery, etc. Analysis of HBS data, Annex A, FigureA 1. 34 and laws on paper, and functions and practices on the ground. Key challengestherefore include resolvingremainingpolicy issues, finishing institutionalsystems, and creatingroutineprocedures and standards at a detailed level. Specifically, and relatingin particularto rural land, this includes: (i) completingthe property registrationsystem and strengtheningthe IPRS; (ii)continuingtheprocessoftransferringforestandpasturetractstocommunalcontroland transformingpracticalagreements that villagers work out amongthemselves into routine legal forms; (iii)improvinglandagencyservicestoruralinhabitants,andensuringthattheyarecontext-and service-oriented; for example, they are able to accommodate flexible cooperative agreements among farm families, and offer cheap and fast registrationof leases and use agreements; and (iv) assisting land administrationand protectionagencies with managementof public land. Inadditionto these issues, the weakness ofthe agricultural sector and the ruraleconomy acts as a dampener on land transactions. A weak ruraleconomy deters smallholders from selling landthat could otherwise be farmed by more efficient producers since it providesa crucial income buffer in times of unemployment, thus restrictingthe supply of agricultural land. Meanwhile,the weaknesses inthe agriculturalsector and the difficulty o f profitableproductionsuppress demand for agricultural land. Sources: SSO and World Bank. 2006b. h) Improve extension services. There is a needto buildstrong institutions for agricultural growth. It will be important for these institutions to respond to the needs o f farmers who are taking up new activities, especially those identified as potential growth areas, such as livestock and fruit production and organic production. Such institutions could also provide support to farmers for marketing, a key area of weakness. For Albania to exploit its comparative advantage inthese areas, complementary institutions infood safety and technology transfer are essential. Extension services have received donor support inrecent years and have some capacity, but the effectiveness o f the public system remains inquestion. There i s clearly scope for the govenunent to introduce a system to contract private providers and other sources such as universities, institutes, etc., for the delivery o f specific information (e.g., infood safety) rather than use the public extension services inall cases. 35 3. FOOD SAFETY, VETERINARY AND PHYTOSANITARY POLICY 3.1 A strategic approach is neededto improvefood safety standardsand enable producersto take advantageof trade opportunitiesand protectpublichealth.This chapter provides an overview of Albania's food safety, veterinary and phytosanitary policy and identifiessome key institutional and policy changes requiredto improve food safety, veterinary and phytosanitary standards; and enableproducers to take advantage of trade opportunities and to protect public health.Despitesignificant progress, key constraints persist inthe national food safety control system inAlbania regarding legislation, institutional capacity, infrastructure, control and enforcement, and private investment. These shortcomings restrict export opportunities, reduce competitiveness in domestic markets, and endanger public health. Inorder to overcome these shortcomings, a strategy needs to be devised that helps farmers to meet standards through (a) the strategic adoption of appropriate EUAcquis Communautaire measures, and (b) a combination of investment assistance and effective incentives for domestic agri-food producers and exporters. SUMMARY OF RECOMMENDATIONS 3.2 Continueharmonizationof nationalfood safety legislationwith the EUfood safetyAcquis. The approval of the draft food law basedon EURegulations 178/2002, 854/2004 and 888/2004 with appropriate exemptions and derogations to allow a phased introduction of regulation will be an important step towards alignment with the EUfood safety legislation. 3.3 Developa phased nationalfood safety program,includingfinancing, to promote compliancewith EUrequirementsand upgradeAlbania's agri-food industry.An approachthat encouragesrather than hurtsproducersneeds an appropriate combination of "carrots" (conditioned grants) and "sticks" (enforcement of regulations) inacarefully phasedprogram. As discussedinother chapters, Albania should follow similar initiatives as NMS through the formulation of rural development programs to channel funding to producers for investments inupgrading food safety standards. Eligibility for rural development grants can then be conditioned on appropriate standards of cross-compliance. Though effective and consistent enforcement of food safety legislation is essential, a phasedapproachis likely to be most effective instrengthening food safety without hurtingthe industry.A first enforcement priority should be the enforcement of the Law on Veterinary Service and Inspectorate(Nr. 9308, date 04.11.2004) to improve food safety andpublic health outcomes and to provide incentives for private investments infood safety control systems and infrastructure. 37 3.4 Developplansto coordinatethe activities of enforcementagencies to avoid duplicationof inspections and ensure integrationof controlplans and laboratory activities.The establishment ofthe Albania National FoodAuthority (NFA) proposed underthe draft food law will constitute a major institutional reform towards an integrated approach to food safety control. THEIMPORTANCEOFBUILDING EFFECTIVE FOOD SAFETY SYSTEMS 3.5 Increasinginternationalfood safety and hygienerequirementscouldact as a trade barrier for domestic producersand exportersin Albania. As inother parts of the Balkans sub-region, Albania struggles to meetand demonstrate compliance with international food safety regulations and requirementsunder the WTO SPS Agreement. Although WTO membership has opened up new opportunities to promote economic development and rural growth through increased trade inagricultural and food products, inherent weaknesses inthe national food control system seriously limit this potential, as discussed inChapter 2. They also underminecompetitiveness indomestic markets where consumers are placing increasing emphasis on food safety and quality. Approximation o f national legislation and adoption o f food safety control and inspection procedures that are compliant with the EUAcquis Communautaire will ensure that Albania meets its obligations under the SAA and will allow the country to benefit from trade preferences and improve its competitiveness indomestic and export markets. 3.6 Taking advantageof increasingtrade opportunitieswill requireAlbanian's agri-food producersto improvethe quality and safety of their productsto comply with stringent EUrequirements.As regional and EUmarkets become increasingly exposed to higher quality and safer, moderately priced agricultural and food products, Albanian producers and exporters will encounter increasing difficulties inplacing their products. The sector will face similar competitive pressures inthe domestic market as safer, higher quality imports at lower prices become available, reducing the cost o f the food basket and pushingthe local industryto become more competitive. Significant private investment i s neededto improve food safety and quality, particularly innew equipmentand infrastructure andmodem quality control systems. 3.7 Effectivenationalfood controlsystems are also essentialto protectthe health and safety of consumers. Food-borne diseases caused by microbiological contamination remain a major public healthproblem inAlbania. The country i s registering an increase inbrucellosis, particularly inpeople, transmittedeither through contact with animal tissue or through the ingestion o f contaminated milk and derivates (Figure 5). The main problem i s brucellosis inruminants, caused by B. melitensis, which i s widespread in several districts o f the country. The infection reached its highest levels between 1960 and 1965, and subsequently decreased with the implementation o f different control measures. In 1989, the country was proclaimed as free o fcattle brucellosis, with lowprevalence (0.002 percent) insmall ruminants. Duringthis period, brucellonization was successfully implemented and helpedto eliminate positive heads. Moreover, application o f the B-19 strain vaccine and its combination with the tracing yielded evident results. After political and economic changes inthe 1990s, the infection expanded inanimals throughout the country and reached its climax in2000 (Table 7). The uncontrolled movement o f 38 animals, the non-application o f sanitary and quarantine rules as well as the low level o f cultural and technical education o f fanners, together with a limitedbudget for implementingan eradication strategy (total screening, total elimination o fpositive heads), ledto anexpansion of brucellosis across the country. A new strategy for the control o f brucellosis inAlbania usingB. melitensis rev 1 strain vaccine was introduced in2003, and i s startingto have positive results.76This infection currently affects the entire territory o f the country, reaching a prevalence o f 10 percent inseveral districts such as Saranda and Gjirokaster. The number o f persons affected by brucellosis i s increasing, particularly inrural areas. Figure 5. Food-bornediseases caused by microbiologicalcontamination remain a major public health problem in Albania (incidencein humans; PIN = 1990) f Gastrointestinal infection -..-. Toxic infections -Shigelloses E II -.-.- Salmonella 100- ----Typhoidfever 50 - .......Hevatitis 0 3000 2500 0 2000 I @I1 1500 1000 500 0 Source: Sector of Hygieneand Epidemiology,Ministry of Health, IPH 76This new control strategy involvesthe vaccinationof lambs and young goats (3-6 months) in infective zones, extensive screening of pregnant ewes using skin and serological testing, the vaccinationo fpregnant ewes 15 days after parturitions (over 85% o fthe flock), eliminationo fpositiveheads within 15 days of their identification,and identificationof vaccinated animals. 39 Table 7. Albania is registeringa significantincreasein brucellosis infections in ruminants Year of Total No. of Affected No. of Checked Affected Yo of study ruminants districts hotbeds heads heads infection 1996 3,232,000 26 34 490,227 1,700 0.34 1997 3;006,000 10 31 657,000 1,800 0.27 1998 2,923,000 21 114 838,000 4,800 0.57 1999 3,000,000 19 233 840,000 5,629 0.67 2000 3,000,000 20 276 1,482,208 10,278 0.69 200 1 2,987,000 18 215 1,064,233 5,828 0.54 2002 2,980,000 22 228 902,782 8,012 0.88 2003 2,800,000 24 196 1,296,000 9,350 0.75 2004 2,740,000 23 190 841,368 6,369 0.78 Source: MAFCP 3.8 StrengtheningAlbania's food safety system will depend on effectiveand consistent enforcementto ensure compliance.Enforcement mechanismsand, in particular, the collection of fines and implementation of administrative procedures is a key weakness. The persistence of an import ban for certain Albanian products inEU countries is due more to the inconsistent enforcement of rules and proceduresthan to insufficient technical means or training. At home, the high and increasing number of brucellosis incidents inhumans indicates a serious lack of meat and diary controls. Animals are butchered inprivate homes usually without veterinary controls. Currently there are only three slaughterhousesinAlbania that are considered suitable for meat production, two of which are private, and the lack of effective and consistent enforcement of existing food safety legislation by the veterinary service is perpetuating illegal practices. Private investment inmodern, well equippedslaughterhouseswould be encouragedby strengthening municipalveterinary services and ensuring that control procedures are effectively enforced, includingthe gradual enforcement (e.g., as part of a 3-year program) o f regulations for currently unlicensed butcher shops. 3.9 Recent studies by the Instituteof Public Healthshowedthat 55 out of 61 retail market sites hadpermits from the local authorities, but only 14met basic hygiene and sanitary conditions. Insome districts, like Durres, Gjirokaster and Saranda, permits for food products for public consumption are issued without adequatetests. Fraud inthe production andtrading of food products, especially with regard to alcoholic beverages, soft drinks, milk and dairy products, and oils i s also a matter o f concern, given the potentially costly consequencesfor public health. Fraud is particularly prevalent in imported products, especially regarding expired products. STATUS OF THEREGULATORY FRAMEWORK 3.10 Albania needs to make significant efforts to align its food safety legislative framework with EU requirements.The existing Albanian Law on Food (Nr. 7491, date 31.05.1995) does not fully reflect the principles of the EU General Food Law (Reg. (EC) 178/2002) or requirementslaid down inthe Acquis. For example, the 1995 Law on Food does not assignthe primary responsibility for food safety to the operators inthe food chain nor ask for the mandatory implementation of HACCP-based food safety systems. Albanian food safety legislation requires that producers/importers declare the quality and safety of food products from production to final marketedproduct, with safety to be 40 certified by a laboratory. Illegally sold food, especially milk and meat products, i s a major income-earner for many families, inparticular inthe countryside. There is no legal provision or any other instrument available to stop illegal sales. 3.11 A new draft FoodLaw that incorporatesthe basic principlesof the EU GeneralFoodLaw has been prepared.The law was drafted by a multi-ministerial working group headedby the Deputy Minister for Agriculture and is currently with the Council of Ministersfor consideration. The draft law is based on EURegulations 178/2002, 854/2004 and 888/2004 and closely follows the model of the new Croatian Food Law. The draft law provides the basis for the hygiene and safety of food and animal feed, proposesthe establishment of the Albanian NationalFood Authority (NFA), and sets up a system o f official control of food and animal feed to ensure compliance with legislation. It applies to all stages of production, processing and distribution of food and feed, includingimported food. 3.12 The approvalof the draft food law should includeappropriateexemptions and derogationsto allow a phased introduction.Secondary legislation will thenhave to be drafted and implemented. 3.13 In the veterinary sector, Albania has already taken steps to transpose some partsof the EUfood safetyAc4uis. The mainlegislative provisions are the Law on Veterinary Service and Inspectorate(Nr. 9308, date 04.11.2004), the Law for the National Sanitary Inspectorate(Nr. 7643, date 02.12.1992), the Food Law for products of animal origin (Nr. 7491,date 31.05.1995), the Law on Animal Identificationand Livestock Farms Identificationand Registration (Nr. 8702, date 01.12.2000, basedon EEC 92/102/EEC), andthe Law on Consumer Protection (Nr.9135, date 11.09.2003). Secondary legislation has also beenpassed, although sometimes only partially in compliance with EUlegislation. The new EUfood hygiene-related Acquis andbasic principlesofthe EUlegislation on animal welfare are yet to betransposedinthe national legislation. Technical assistance to support the drafting of by-laws, regulations and protocols inaccordancewith OIE standards and guidelines is being provided through a new World Bank project on Avian Influenza.77This will include developing guidelines, especially inchapters and articles of the new law on disease control, surveillance and eradication. 3.14 Significant effortsare requiredto strengthencontrolstructuresin linewith EUrequirements.Basic elements ofthe official control systemneededinthe domestic market are inplace but needto be strengthened.First priority shouldbe the enforcement ofthe Law on Veterinary Service and Inspectorate(Nr. 9308, date 04.11.2004). This will require close cooperation betweenthe municipal veterinary services with the road police and the border guardsq7*Enforcement of the law will promote food safety andbetter 77World Bank. 2006e. 78The Law on Veterinary Service and Inspectorateforesees that the State Police is obligedto offer assistance to the Veterinary Service and Inspectorate in need of support, whenever requestedfor the enforcement ofthe law (Article 12, Item 1). Whenever the State or the Municipal Policy encounter animal owner or keeper that do not have veterinary certificatefor animals and products of animal origin duringthe transport, they must black them immediatelyand inform the nearest veterinaryinspectorate(Article 12, 41 public health by requiring the slaughtering of animals, production of products of animal origin and of unprocessedmaterials for human consumption to be carried out only in approved slaughter places and holding^.'^ However, inconsistent enforcement of existing food safety legislation i s allowing the continuation of illegal practices, and discouraging private investments inthe development of a sustainable network of modern, better- equipped slaughterhouses.Infected animals have to be slaughtered but strict controls are missing, e. there i s little informationon how inedible carcasses are currently eliminated!' While the enforcementof the laws on animal healthwould require additional financial resourcesto strengthen relevant municipal veterinary services, it would also generate revenuesfrom the issuance of veterinary certificates." Moreover, it would increasethe competitiveness of those producers who are actually complying with the laws by allowingthemthe means to demonstratethe superior quality oftheir products while putting further pressure on those not complying. 3.15 A comprehensivesystem of animalidentificationand registrationis essential in controllinganimaldiseases. Initiatives promoted and financed by several international projects inthe field of animal identification (necessary for the control of quarantine diseases) have proved unsustainable. A PHARE program provided assistance for the establishmentof a system for the registration of cattle; however, the lack of public funding and unwillingness of the veterinary service inMAFCP to sustain the project meant that only 20 percent of cattle has beenidentified and registered.A system for controlling diseases and monitoringthe movement of small ruminants is being set up underthe EUCARDS project, 'Monitoring the Healthof Small Ruminants.' Once operational, the system needs to be assessed. Government funding will be requiredto complete the work initiated under different programs inorder to establish a comprehensiveidentification andregistration system for animals destined for the food chain. 3.16 There has been limitedprogress in the area of phytosanitarycontrol.Some secondary legislation has beenpreparedbut will only be adoptedafter the amendment o f the Law on Plant Protection Services (No. 7662, dated 19.01.1993). Certification schemes have beenset up for the plantingmaterial of certain fruit plants, but Albania needs to ensure the efficient control and monitoring of domestic plant production in general, particularly for products with EU-specific requirements.Albania became a member o fthe International Union for the Protection of New Varieties of Plants (UPOV) inOctober 2005. Item2). Border police prohibits illegal transition or transport of consignments outside o f official border crossing points (Article 15). 79Article 51. Blood, inedible and infected parts o f animals or carcasses should be pre-tested in special plan before f,oing to the incinerator(Article X) The UNDP 'Strengthening the Marketing o f Small Ruminants' Project (2005) estimates a 6.7 million ALL revenuefor the state veterinary service. 42 IMPLICATIONS FOR THE AGRI-FOODSECTOR 3.17 Bringingagri-food establishmentsup to EUstandardswill be a major challengefor Albania, particularly for meat and dairy. Agribusinesses inAlbania either have closed down, or are obsolete and unable to compete with European industry due to shortagesinandhighprices of raw materials andthe generally low quality of locally processedproducts. Partly due to the small scale of their operations, many food producersindividually lack the means to access market outlets for their produce. Their problems are exacerbatedby lack ofknowledge about food quality and safety standards and requirements, inability to apply good hygiene, manufacturing practices, and quality assurance schemes (HACCP), a scarcity of marketing information, inadequacies in packaging and labeling, and continuing mistrust of the potential benefit of more formalized collaboration inbusinesses. These difficulties, which are particularly pronounced inthe meat and dairy sectors, are all describedingreater detail inChapter 2. 3.18 ImplementingEUruleswill requiresubstantialprivateinvestmentin upgradingfacilities, combinedwith a policyof negotiatingspecialprovisionsfor low capacityfirms to allow them to continue producingfor the domestic marketwithout fully complyingwith EUrequirements.Despite a significant increase (225 percent between2000 and 2005) ininvestments inagro-processinginrecent years (Chapter l), further private investment will berequiredto comply withthe detailedrequirements of EUlegislation governing the infrastructure andorganization ofthe production chain. This i s particularly the case for the meat and dairy industries. Experience from NMS shows that only large agri-food companies could afford to make the necessary upgrades even with EUassistance programs providing financial support.s2Around one thousand food processingplants inthe NMS were granted a maximum three-year transition period starting May 1,2004; however, they accounted for only 8 percent of the total 12,000 food processingestablishments inthese countries. A relatively large number of companies whose production accountedfor only a fraction of the overall output, had to be closed down because they were very small or because the processingfacilities were too outdated to makethem viable businesspropositions. High-risk sectors such as meat production/ processinginNMS face substantial problems regarding compliance with EU requirements. 3.19 The Polishexperienceoffers some lessons for Albania. Only 19percent ofthe Polish meat firms fully comply with the EUhygiene and veterinary standards (Directives 64/433/EEC and 77/99/EEC) and are thus licensed to export to the EUmarkets3.Being high capacity enterprises, their output makes up for 65 percent of the total meat production inPoland. However, about 70 percent ofthe Polish meat firms do not meet the EUstandards. With their low production capacity, they fall under the EU's special provision for small-scale enterprises. Complying with the simplifiedEU standards, 47 percent of the Polish meat firms are authorized to sell on the Polish national market only. '' s2 For example the EU's SAPARD program (Special Accession Programfor Agriculture and Rural Development)assists the agri-foodsector inthe new member states in adjustingto the EUpolicies.It articularlyfocuses on improvingthe productiordprocessingof agri-food products. Rau, M.-L.and F.van Tongeren, 2006. 43 The remaining 24 percent experiencedthe largest shortcomings inmeeting the EU standards. Inorder to account for their difficult situation, a special law that allows these very low capacity enterprises (<4tondweek) to maintain their production was enacted just before accession. According to this law, their noncompliant products are to be sold on the very local market only (i.e., directly to end consumers). Albania would do very well to follow a similar approachby negotiating specialprovisions for low capacity firms to allow them to continue producing for the domestic market, even without fully complying with EUrequirements. 3.20 A nationalprogramshould be developed to help food processing establishmentsupgradetheir facilitiesto meet EUrequirements.Eachestablishment intending to comply with EU legislation should be subject to an upgrading plan, with small businesses given priority support inline with policies to maintain and regenerate rural communities. Progressinthese areas will contribute towards improving final product quality and safety and increasing competitiveness. 3.21 The use of investmentgrantsthat lower the fixed costs of compliance,such as those includedin the EURuralDevelopmentPrograms(RDP), can be a very effectivefor promotingcompliancewith EUrequirementsand for upgrading Albania's agri-food industry.Albania needs to take advantageof the time before accessionto start improving food safety standards. The most effective meansto do this is through financial assistance that putsprivate producers inthe driver's seat and creates incentives for compliance-rather than subsidies or public provisionof facilities, which may not address market needs. InNMS,most of the funding for upgrading private commercial facilities has beenchanneled through the SAPARD scheme, which was set up specifically to helpbusinesses inaccessioncountries comply with EUregulations (Measure 1.1). This could be achievedthrough the use of competitive grants aimed at encouragingprivate firms to invest inincreasingproductivity, improving food quality and safety standards, upgrading (adapting, rebuilding or creating) processingplants and strengtheningtheir marketing of agri-food products. This program is describedinmore detail inparagraph2.40 b) and inChapter 4 of this study. 3.22 A full regulatoryimpactassessment on the mandatoryuse of HACCP-based systems by food business operatorsshould be carriedout. The newdraft food law will require food manufacturers to implement HACCP-based systems over time. By-laws implementing the draft food law will outline the expectedtime-frame for HACCP implementation. However, a full assessment of the impact interms of the costs, benefits and risks of this fundamental shift inthe regulatory approach on the private sector has not beenundertaken. There is a lack of awareness and understanding of the HACCP principlesinthe country, bothamong enforcers and inthe private sector, with only a limitednumberof food companies with HACCP-based systems inplace. There are about 10 production facilities (out of about 200) that have already implementedHACCP systems, and only a small number of food firms are inthe process of HACCP implementation. These food companies are the most advanced food companies inthe country with part of their production destined for export markets where HACCP is an entry requirement.Most Albanian food companies, due to the small scale of their 44 operations andtheir focus on the domestic market will not be able to afford the costs of the consultancy servicesrequiredduring the HACCP implementation process. 3.23 Finally,the shortageof localexpertiseavailableto assist the food industryin implementingEUfood safety requirementsneedsto be addressed. The certification for I S 0 and HACCP is currently performed by accredited foreign companies. A Dutch- fundedproject supportedthe creation ofthe first localcertification company, ALCEBO (Albanian Certification Body); however, it has not beenaccredited yet due to the lack of external funding. An extension of the grant is currently being negotiated to allow the company to achieve certification. An additional limitation is the lack of international recognition of the Directorate for Accreditation under the Ministry of Economy, which currently can only offer accreditation for national purposes, as it is not a member of the European Accreditation body. THEINSTITUTIONAL FRAMEWORK 3.24 Lack of cooperationand coordinationbetweencontrolbodies has significantly increasedcomplexity,and has created overlappingand omissions in inspectionproceduresand law enforcement.Under the 1995 Law on Food, responsibilities for food quality and safety control are divided betweenthe General Directorate of Food Safety and Consumer Protection (within the Ministry o f Agriculture, Food and Consumer Protection - MAFCP) and the Departmentof Primary Health Care (within the Ministry of Health- MoH) (Figure 6). The responsibilities for each of these bodies are definedinseparate laws.Each law is supportedby implementing regulations that are issuedby the respectiveministry or state agency. The Law on Food established the NationalBoard for Food Control as the coordinating andadvisory body for law enforcement. The Board is headed by MAFCP andhas eleven members, including representatives from the MoH; however, cooperation betweenboard membersappears to bevery limited, and is affecting inspection functions and responsibilities. 3.25 Albania should push aheadwith rationalizingits institutionalframework towards an integratedapproach to food control,with overallcoordinationat the nationallevel, andwith a relativelysmall agency initially.The draft FoodLaw establishesthe Albanian National Food Authority (NFA), which will unify the different inspection services. It will be positioned as a supervisory body withinthe Albanian government. Its creation will enable a general overview of the entire production chain to be maintained. The combination of supervision, risk assessment and risk communication will enable the NFA to respondto safety risks inbotha proactive andreactive manner.84 TheNFA will ensure that the necessarylegislation is drafted andimplemented.Its scope, tasks and responsibilities are foreseento be similar to those of the European Food Safety Authority (EFSA). Its management structures are also establishedbased on the EU model, includingan executive director, a management board, an advisory board and a scientific committee. However, diverging views emerged during the drafting of the new food law regarding the precise organizational structure of the new NFA, particularly in 84There is scope for the CARDS 2005 project, scheduledto start inJune 2007, to assist with some of these hnctions. 45 relation to its position within the Albanian government. The difference o f opinions concerns whether the new NFA should operate as an agency under a ministry (MAFCP or MoH) or directly under the Prime Minister.This issue needs to be resolved ina timely manner. 3.26 A CARDS project, `Establishment of aNational FoodAuthority' (e 3 million), was approved inDecember 2004 to provide technical assistance for the creation o f a food authority according to European standards and for training o f staff. This 3-year project will assist the government increatingthe NFA envisaged underthe draft food law once its precise organizational structure, inparticular its position within the Albanian government, i s agreed by all relevant stakeholders. The CARDS project will be supported by a parallel project fundedby the Italian Cooperation, `Strengthening FoodControl Institutions inAlbania' (e 2 million), aimed at modernizing and upgrading the scientific and managerialcapacity o f food laboratories and inspection services inAlbania. 3.27 Additional public investmentwill be requiredto make the NFA operational with adequate funding arrangements, but the first priority must be to resolve the issue o f the institutional framework. Given the capacity constraints inAlbania, initially it i s preferable to maintain a light food safety system and associated agency; scaling up can happen as and when EUaccession requirementsrequire it. 3.28 To facilitate institutional restructuring, Albania needs to develop a National Strategy for Food Safety Controlwith defined objectives, an action plan for its implementation, and milestones. These objectives would include: complete harmonization with EUlegislation; coordination o f the activities o f central state authorities and competent authorities performing official control; optimization o f the laboratory network; establishment o f scientific committees; intensivecommunication with consumers; development o f an RAFFS system; and cooperationwith EFSA.85 3.29 Albania has to assess proceduresfor inspectioncontrol, monitoring and surveillancein linewith EUinspectionpractices, particularly regarding transparency, use of risk analysis, HACCP and traceability. Enforcement agencies should develop annual control plans, with guidelines and general rules for inspections at the central and regional levels. Compliance with theseplans should be ensured and attentionpaid to adequate provision o f the requested information (e.g., elements required for the monitoring plans o f veterinary residues, medicines, use o f hormones, details o f methods o f analysis, etc.). This enforcement ``stick'' should be strengthened gradually as parto f a phased approach to encourage compliance without hurtingthe industry.86 One current issue inthis regard is the transfer o f the Plant Protection Institute o f Durres from MAFCP to the University o f Agriculture (under the Ministry o f Education), which raises concerns about the Institute's ability to effectively coordinate with the relevant MAFCP directorate and respond ina crisis situation. "CARDS2005(beginninginJune2007)willassistwith these issues. 86CARDS 2005 (beginning inJune 2007) will assist with these issues. 46 0 0 E n INSTITUTIONAL CAPACITIES 3.30 Establishinga national food safety system consistent with the Acquis will require an increase in the level of public expenditures on food safety, veterinary and phytosanitary activities. Establishing a national food safety system consistent with the Acquis i s a priority and adequate financial resources should be allocated to support the creation o f institutions and systems and to upgrade skills. Government expenditureson agriculture have decreased inrecent years, with the bulk o f MAFCP expenditures (48 percent o fthe budget in 2005) going to investmentsinirrigation and drainage infrastructure. However, the `Agricultural and food safety inspections and services and consumer protection' program (the third largest inMAFCP with 15 percent o f the MAFCP budget), i s expected to see significant increases inthe coming years to strengthen inspection services. Giventhe limitedabsorptioncapacity of relevant institutions, additional fundingshould be selectively applied and well prioritized. 3.3 1 The overall capacity of the country's laboratories is deficient and should be further developed in order to provide food testing and analysis that meet international standards and requirements. Although there are 36 laboratories throughout the country, the majority have inadequate or outdated equipment and infrastructure, a shortage o f competent analytical and management staff, no official working methods or procedures or business plans, andpoorly developed systems for recordingtest results, reporting, and information management. Insome cases, laboratories have obtained sophisticated equipment under international projects, but analysts and technicians lack the necessary skills to operate and maintain them. Inaddition to the lack o f qualified and motivated staff, problems include shortages inthe power supply and lack o f operating costs. Many laboratories face difficulties inobtaining essential supplies ofmaterials, reagents and services (disposable materials, reagents, gases, calibration and maintenance services), and lack access to technical support for calibration and reference testing. A further problem i s the loss o f qualified staff, including individuals trained by donor projects, either through dismissal or transitioning to other jobs. Inadditionto basic weaknesseswithin individual laboratories, there are also problems o f unclear and overlapping roles and responsibilities, and a general lack o f cooperation and information exchange among laboratories. Hence, the likelihood o f most laboratories obtaining accreditation appears remote. A new project funded by the Italian Cooperation, `Strengthening Food Control Institutions inAlbania' (e 2 million) will assist the government inmodernizing and upgrading the scientific and managerialcapacity o ffood laboratories in Albania to meet international standards and accreditation requirements.The project will establish a central food reference laboratory that will be internationally accredited according to ISO/IEC 17025. A key point to remember i s that laboratories do not have to be public or even financed by the public sector. 3.32 However, additional public investment will be needed to strengthen the inspectionservices at all levels of government, in preparation for the move from test- based to risk-based inspection services. The number o f staff and resources at the regional and local level is very limited, consideringthe broad field o f responsibilities covered. The total number o f inspection personnel i s 708-108 food inspectors, 400 veterinarians and 200 inspectors ofpublic health indifferent districts. The shift from a regulation-focused approach towards an enforced self-regulatory approach will require significant changes incurrent 48 inspectionprocedures,which under the draft food law shouldrely primarily on hazard-based inspectionsofthe process/premises(applyingHACCPprinciples) rather than samplingand laboratorytesting ofproducts.NewhygieneandHACCPBooksof Ruleswill be required, followedby upgradingof inspectionskills.As the implementationofHACCPsystems becomesmandatory,the role ofthe inspectionserviceswill becomeincreasinglyimportant, not only inassuringimplementationbut inthe provisionof implementationguidelinesandthe control of certification. A comprehensivetrainingprogramfor inspectionpersonnelto operate ina HACCP-basedfood system is required.Considerationalso needsto be givento the appropriate structureof inspectionservices. 3.33 The main policy challengefor MAFCP will be to define realistic food safety policiesaimedat improvingfood safety standards inthe agri-food sector to reduce healthrisks for domestic consumers and facilitate access to internationalmarketsfor Albanian agriculturaland food products.However,effectiveregulations depend on effective and consistent enforcement to ensure compliance.Hence, a major arearequiring progressand interventionis the enforcement of existingfood safety legislation, which would requireadditionalhumancapacityto strengthenrelevantmunicipalveterinary services. 49 4. CREATINGAN EU-COMPLIANTAGRICULTURAL ASSISTANCEFRAMEWORK 4.1 Albania must lay the groundworkfor meetingEUinstitutionaland regulatory requirementsin order to makethe most of assistance now and in the future. As highlightedinChapter 2, Albania is advisedto structure its assistanceto the agriculturesector inthe form of a competitivegrantsprogram,withinthe framework ofa well-designedrural developmentstrategy.This rural developmentprogramwill bethe precursorof an EUpre- accessionassistanceprogramifandwhenAlbaniabecomesanEUcandidatecountry.After briefly assessingassistance funds, bothcurrently andpotentiallyavailableto Albania from the EU, this chapter looksat the lessons learnedfrom NMS inaccessingandimplementingEU rural developmentprograms, andprovidesguidanceonthe timing anddirection of institutionalmechanismsandagriculturalsupport measuresto minimizethe disruptioncaused by alignmentwith EUpre-accessionrequirements.The agriculturalAcquis is the most difficult andexpensivepartof harmonizationwith EUlegislation.As such, it is extremely importantto make an early start andtake a strategic approachto its adoptioninline with country needsandcapacities.This chapter identifiesareas inwhichAlbania can profitably beginto makeprogresson highlydemandingEUinstitutionalrequirementsinorder to absorb andmakeoptimaluse of funds. The analysiswill includeestimates ofthe institutional, budgetaryandpolicyimplicationsof accessingEUfunding. While the timeline for making these institutionalandfinancial investmentsis relativelylong, it is importantthat ongoing reformsandinvestmentsbe alignedwith future EUrequirements. SUMMARY OF RECOMMENDATIONS 4.2 Createa rural developmentprogramthat will form the basis of a future IPARD program. As one ofthe most effectiveways of addressingthe constraintsoutlinedinChapter 2, this approachwill simultaneouslylay the groundwork for meetingEUaccession requirementsandpreparefor programsofthe future. Suchan approachwouldhelpstrengthen existingcapacity for channelingassistanceto the sector throughEU-typemechanismslike the competitivegrantsprogram, andlay the groundwork for accessingfuture EUassistance. 4.3 Align certain policiesand institutionalstructureswith EU requirementsin a carefully phased approach. InapproachingEU alignment, Albania shouldcarefully prioritizethose measuresthat will improveAlbania's abilityto competeinregionalandEU markets andfacilitate access to assistancethat Albaniawill becomeeligible for inthe future. These measuresincludeimprovingthe impactofpublic expenditures inagricultureto prepare for makingeffective use of potentiallysignificant EU assistance funds. Finally, Albania shouldwork to keepnew andreformedinstitutions as light as possible, inline with government capacities. 51 4.4 Continueto tackle structuralconstraintson rural finance to build producers' capacityto access creditfor co-financingneeds for grantsprograms.This will foster a more successful rural development program and will greatly facilitate an IPARD program in the future. Ruralfinance should be fosteredthrough targeting structural constraints and training banks, rather than through subsidizing credit. Ifrural credit remains a weak alternative, financing should be considered for ensuring that co-financing is available for IPARD grants. EUASSISTANCE FORALBANIA-NOW AND INTHE FUTURE 4.5 As a potentialcandidatecountry for EUmembership,Albania is eligiblefor certainfunding under the Instrumentfor Pre-AccessionAssistance (IPA) over the period2007-2013.87The IPA supersedes the EU's previous pre-accessioninstruments (including PHARE, ISPA, SAPARD, Turkey Instrumentand CARDS), and comprises five components whose overarching aim is to help actual andpotential candidate countries to meet EUstandardsandpolicies prior to accession. As apotential candidate country, Albania has access to two out of the five IPA components: Transition Assistance and InstitutionBuilding, and Regional and Cross Border Cooperation. For 2007, the EUhas allocated Albania atotal of61 million under these two components. The total allocation will increaseannually to reach93.2 million in2010.89These funds are managed centrally by the European Commission (EC) through its Delegation inTirana. Although the main objective of IPA's Transition Assistance and InstitutionBuilding component is to helppotential candidate countries develop the administrative, programming and managementcapacity requiredto access andmanage funding under the other three components, it also allows for investments inrural development, infrastructure, regional development, and labor and social measures. The EU's allocation for this component will increasefrom 54.3 million in2007 to 82.7 million in201oa90 4.6 Ifand when Albaniaacquirescandidatestatus, itwill becomeeligible for further IPA funding, includingEUrural development assistance. IfAlbania acquires candidate status, total IPA funding, covering all five IPA components, would increaseprogressively in the following years." Although the exact amount of IPA funding that would be available to 87Albania signed a Stabilization and Association Agreement (SAA) with the EU in June 2006, providinga framework of mutual commitments on a wide range of political, trade and economic issues. 88Under CARDS 2005-2006, EU support for Albanian agriculture was mainly targeted at strengtheningthe food safety and quality control systemto improve the quality and export potential of agricultural products. CARDS provided (a) institutional support to MAFCP to design and formulate appropriatefood safety policy in coordination with other ministriedintra-governmentalagencies; (b) assistance to ensure continuity in approximation ofthe EUAcquis inthe veterinary and phytosanitary fields and in food safety and control; (c) assistanceto build an EU-type Food Authority structureto function as a separate agency on food safety issues; and (d) support for structuresenforcing veterinary, phytosanitary and food safety legislation, including modernization of laboratoriesand training and qualification o f inspectorsand food analysts. 89IPA Multi-Annual Indicative Financial Framework for 2008-2010. See http://ec.europa.eu/enlargement/Ddf/countries/ipamiff 081106 en.pdf 90Ibid. 91Inthe Explanatory Memorandum attachedto its proposal for a regulation establishingthe IPA (COM/2004/0627 final), the EC indicated that, "the intention is that future candidatecountries should be treated broadly the same as past candidatecountries. As the countries ofthe Western Balkans becomecandidate countries, it is proposedthat they will receive per capita per year about the level of assistanceestablished inthe 52 Albania ifand when it acquires candidate country status remains unknown, the 2010 sum in itself, 93.2 million, represents 1.3 percent of Albania's 2005 GDP and 7.4 percent of the 2006 total government budget, andwould facilitate a substantial increase inpublic expenditures.This allocation compares favorably with the 2007 IPA allocations received by Croatia (0.48 percentof 2005 GDP) and Turkey (0.18 percent of 2005 GDP), and i s similar to Macedonia's allocation (1.3 percent of 2005 GDP).92Importantly for the agriculture sector, Albania will be able to receive funds underthe rural development component of IPA, the Instrumentfor Pre-Accession Assistance for Rural Development (IPARD). IPARD aims: to (a) contribute to a sustainable adaptation of the agriculture sector and implementation of the Acquis Cornrnunautaire, and (b) develop rural areas.93 4.7 Albania could receiveIPARD funding of between5.6 and andH4.6 million per year, which would significantly increaseagricultural public expendituresin Albania. This projection is based on the SAPARD experience ofthe NMSandthe IPARD allocations earmarked for current candidate countries such as Croatia and Macedonia for the period 2007- 2010 (Table 8). A simple sensitivity analysis basedon the informationprovided inTable 88 indicates that IPARD funding is likely to be inthe range of5,605,000 to 14,573,000 per year (Table 9),94This would be equivalent to 0.08-0.21 percent of Albania's 2005 GDP, or a 14-38 percent increase inagricultural expenditures (based on 2006 MAFCP budget in Chapter 5). These funds include resources that could go directly to producers for investments inproduction, helping overcomethe constraints identifiedinChapter2. However, it should be noted that these figures are a rough estimate of the average annual allocation, and it is likely that the bulk of the allocation would be absorbed towards the end o f the IPARD program, once the government has set upthe required institutional implementing structures. financial perspective 2000-2006 (under heading7) for the 10 candidatecountries in Centraland Eastern Europe." This meansthat each ofthe future candidateswould receivearound27 per capita when they acquire candidate status. As mentioned in paragraph4.5, underthe EC's Multi-Annual IndicativeFinancialFramework for IPA, Albania will receive93.2million (30 per capita) worth of IPA funding in 2010. 92The exact allocationwill based on a number of criteria, includingneedsassessments, absorption capacity, respectof conditionalities, and managementcapacity. 93The two other IPA componentsopen only to candidatecountriesconcernregional development and human resourcedevelopment. For more details see EuropeanCommission, 2006a. 94This projectionis conducted by the authors o fthis report and based on the informationin Table 8. The exact IPARD allocationwill be based on a number of objectivecriteria includingfarm population, agricultural area, GDP per capita in purchasingpower, and the specific territorial situation. 53 Table 8. Annual EU pre-accessionallocations for rural development range from 5 - 13 per ha of agricultural land Agricultural Land 2000-2004 Average Annual SAPARD Assistance per ha ('000 ha) SAPARD Allocation ('000 ) of Agricultural Land (e) Czech Republic 4,279 22,445 5 Hungary 5,854 38,713 7 Poland 18,413 171,603 9 Slovakia 2,44 1 18,606 8 Slovenia 518 6,447 12 Estonia 986 12,347 13 Latvia 2,485 22,226 9 Lithuania 3,489 30,345 9 Bulgaria 5,582 53,026 9 Romania 14,857 153,243 10 Agricultural Land 2007-2010 Average Annual IPARD Assistance per ha ('000 ha) IPARD Allocation ('000 ) of Agricultural Land (e) Croatia 3,137 25,725 8 Macedonia 1,242 7,875 6 Average 5,274 46,883 9 Note: With Turkey included, the rangeof SAPARDDPARDassistance per ha of agriculturalland would be 2- 13, and average 8. Average agriculturalland and the annual SAPARD/IPARD allocationwould amount to 7,882,000 ha and 48,864,000 respectively. Inaddition, it should be notedthat the EU does not provide area- based support, Le., it does not allocate SAPARD or IPARD fbnds on a per hectare basis.Moreover,IPARD fbnds are not directed at crop production,but rather at investments in livestockand on-farmactivities, and in the processingindustry and rural areas. The analysis conducted by the authors inthis table measures the allocation per hectareas a proxy measurementofthe allocationcomparedto the size ofthe agriculturalsector, in order to producean estimate of the possible range for Albania. Source: Calculations by the authors, based on EuropeanCommission, 2004, FAOSTAT, and European Commission, 2006. Table 9. Rural development expenditures would increase significantly. Projected IPARD Share of 2005 Increase in 2006 Allocation ( per year) GDP(Yo) Agriculture Budget (YO) Low Case: 5ha 5,605,000 0.08 14 Middle Case: 9/ha 10,089,000 0.14 26 High Case: 13/ha 14,573,000 0.21 38 Source: Authors' calculations. CREATING AN EU-TYPERURAL DEVELOPMENT PROGRAM 4.8 Accessing EUpre-accession assistance, includingIPARD funds, will be significantlymore demandingthan for previouspre-accession instruments.Albania can already access funds under two IPA components, but as a candidate country, it would needto fulfill stringent EUrequirements to access funds available underthe three IPA components that are only available to candidate countries, including IPARD. IPA aims to prepare candidate countries for implementation o f the EU's structural and common agricultural policies and regulations after accession, and funds available underthese components must be managed by the candidate country under a decentralized management system. The candidate countries thus needto meet the same requirements interms o f legal and operational 54 institutionsas member includingsoundfinancial management structures and practices andautonomousprogrammingandmanagementcapacitieswithinMAFCP.96A RuralDevelopment Strategy andPlan, as well as an IPARDPayingAgenc needto be accreditedby the ECbeforethe IPARDprogramcan becomeoperational?'Building institutionsto be accreditedalso takes time. A reviewofthe experienceofNMS indicatesthat the time neededto receivethe first accreditationwas between 18 and 30 months.98IPARD stronglyresemblesits predecessor,SAPARD; hence, the experience ofNMS inestablishing SAPARD structures andinstitutionsis examinedhere.99Albania also needsto use this time to identifypotentialsources of funding and improve its capacity to spendpublic funds effectively. 4.9 Preparationshavebegun for an EU-type rural developmentprogram.MAFCP is currently inthe processof developingan Agriculture andRuralDevelopment Strategy, which will formthe basisfor the development of aNationalRuralDevelopmentPlan. MAFCPaims to makethis planconsistent with EUprogrammingprinciplesandbase it as muchas possible on specific measuresprovidedfor under IPARD."' MAFCPprovisionallyplannedto establisha PayingAgency under its EuropeanPartnershipAction Plan 2004-2008. Preparationshavebegunfor the PayingAgency, but the proposalandcost estimationneedto 95 Althoughthe EuropeanCommission's objective is to have the candidatecountrymanagethe pre-accession funds under the ExtendedDecentralized ImplementationSystem(EDIS), candidate countries short of satisfying all EDIS requirements could disbursethe funds under a partially Decentralized ImplementationSystem (DIS). Under DIS, the nationalauthorities as contractingauthorities are responsible for all implementationand paying functions, but the EuropeanCommission Delegationinthe country maintains a systematic ex-ante control requirementover eachtendering and contracting. 96 Certain requiredadministrativestructures are commonto the three IPA components.They include (a) the establishment of a ResponsibleAuthority reportingto the EC, includinga NationalCoordinator(NAC) and a NationalAuthorizing Officer (NAO); (b) a National Fund (NF), common for all IPA components, which requests, receivesand distributes funds to different ImplementingAgencies (IAs) (see below) and which needs to be accredited by the EU; and (c) IAs for each IPA component. 97After successfulaccreditation ofthe National Fund and the IPARD PayingAgency, the EC executes a 'Conferral of Management,' allowing decentralized management ofthe program by the candidate country. 98This is time taken to receivethe EU's 'Conferral of Management' for SAPARD funds after the legislation for the establishment of the SAPARD agency has been enacted and the Agency's managementappointed. See EuropeanCommission, 2005a. 99Under the EuropeanAgricultural Fund for RuralDevelopment(EAFRD), the EU's only instrument to finance its rural development policy for the period2007-2013, ruraldevelopment assistance is providedfor promoting(i) humanresources(vocationaltraining and informationactions, young farmers, early retirement, use of farm advisory services, setting up farm management,reliefand forestry advisory services); (ii)physicalcapital (farm/forestry investments,processing/marketing/co-operationfor innovation, agricuIturaVforestry infrastructure, restoringagricultural productionpotential); (iii) quality of agriculturalproduction and products (meeting standards,temporary support, food quality incentivescheme, food quality promotion); (iv) transitional measures(semi-subsistencefarmers, setting up producer groups); (v) sustainable use of agricultural land (mountainLFA, other areas with handicaps, Natura2000 agricultural area, agri-environmentlanimalwelfare, support for non-productiveinvestments); (vi) sustainableuse o f forestry land (afforestation,agro-forestry, Natura2000 forest areas, forest environment, restoringforestry productionpotential, support for non-productive investments); (vii) quality of life (basic servicesfor the ruraleconomyand population, renovationand development of villages, protectionand conservation of the rural heritage); (viii) economic diversification (diversificationto non-agriculturalactivities, support for micro-enterprises,encouragement of tourism activities); and (ix) training skills acquisitionand animation(training and information,skills acquisition, animationand implementation). loo See MAFCP, 2004. p24; and MAFCP, 2007b. 55 be developed. The establishmentof aPaying Agency provides ausefulinstitutional mechanismfor the managementof Albania's own rural development program (Chapter 5). 4.10 Albania will eventuallyneed to create fiscalspace for these institutions.While there is little informationavailable from NMS on the incremental costs o f SAPARD institutions and structures, the total operating costs of the IPARD Paying Agency are estimatedto be around 5-1 5 percent of the 2006 MAFCP budget. The expenditures would primarily be for staffing and administration of informationtechnology (IT) and control systems. Clearly, these costs would vary according to the number o f measures accredited and the numberof applications for funding received. At aminimum,2.1-5.8 million per year, or 5 to 15 percent of the 2006 MAFCP budget, would have to be set aside (Table 10). These estimates are basedon the SAPARD experience o fNMS,which spent 3-5 percent o f the total SAPARD allocation on administration of the SAPARD Paying Agency. This budget also had to co-finance 25 percent of SAPARD projects, thus representing 33 percent of the SAPARD allocation. These needs will not be immediate but canbeginto be incorporated into the MTEF (Chapter 5), and the government can ensure national budget appropriations for these investmentsand beginto identify potential sources of funding. It should be noted that the administrative costs would be significant and well inadvance of accreditation, since the structures and staffing must be inplace before the EUconfers management. Table 10. Significant funds are needed to operate an EU-compliant rural developmentprogram Paying Agency EstimatedIPARD Co-financing Allocation Administration costs @ 33% Total IPARD Share of 2006 Ag. (see Table 9) Costs @ 4% (e) (e) Operating Costs (e) Budget (Oh) Low Case: 5,605,000 224,200 1,849,650 2,073,850 5 MiddleCase: 10,089,000 403,560 3,329,370 3,732,930 10 High Case: 14,573,000 582,920 4,809,090 5,806,780 15 Source:Authors' calculations 4.11 The eventualcosts will depend on the measures that are selected for financing under the rural development program.The SAPARD experienceofNMS suggests that costs andperformance of the rural development program, administering either national or IPARD rural development funds, is heavily influencedby the following factors. a) The country's experience in managing and monitoring stateprograms. Additional measures to improve MAFCP's administrative capacity are recommended for efficient administration of rural development funds. b) The number of measures administered. The more measuresthat are administered and/or accredited, the higher the administration costs. c) The nature ofmeasures. Public infrastructure pro'ects with larger budgetstend to decrease the relative size of administration costs.'" However, it is likely that future candidate countries will be discouragedfrom selecting such projects for IPARD funds. lo' For example.the mid-termevaluationof Romania'sSAPARDprogram indicatedthat administrationcosts were 0.72 percento fcommitted SAPARD funds. This is muchsmaller than in other countries due to the high 56 The complexity of application procedures. Keepingapplicationproceduresas simple andtransparentas possiblereducesthe amount of assistancepotentialbeneficiaries need, as well as the numberof incompleteapplications.CertainNMSmade SAPARD applicationrequirementsmore bureaucraticthanrequiredby the EU.This probably improvedthe monitoringandauditingofthe use of funds, but also createdan excessive burdenfor potentialbeneficiariesandofficials. Theprocessing time of applications. Establishingefficient processinganddecision- makingmechanismsminimizesadministrationcosts. Eligibility criteria. The eligibility criteria for farms that canapply for rural development funds, andthe numberof farms that meetthis criteria, also determinesexpensesfor the program.Albania will haveto determinean appropriatefarm size threshold.Io2 This is in addition to significant costs further down the road. These figures are minimumestimatesas they do nit take into accountthe initial expensesneededto establish the PayingAgency andget it accredited, or the costs ofcreatingdemandfor rural developmentandIPARDfunds (addressedbelow). They also do not includecosts incurredat a later stage of settingup the agriculturalinstitutionsand structuresrequiredfor accession (Figure4). These include: an IntegratedAdministrativeandControlSystem (IACS)with a LandParcel IdentificationSystem (LPIS); an Animal IdentificationandRegistrationSystem (AIRS) anda FarmRegistry (FR); anAgricultural InformationSystem(AIS) that includesa FarmAccountingData Network(FADN),Io3Agricultural Statistics (AS) anda Market InformationSystem(MIS);anda FoodSafety Agency to ensure compliance with EUfood safety requirements.Albania will also needto pay attention to environment-focusedaspects suchas organic certification, nitrates andmanuremanagement,pesticidedisposaletc. 4.13 Getting an early start on reforming and strengthening agricultural institutions, structures and policiesin linewith EUrequirements will foster an efficient and effective rural development program, facilitate the transition process for agriculture, and eventually advanceAlbania's EUaccession agenda. One of the key lessons from the implementationof SAPARDbyNMS is that countriesshould start early to set upthe institutionsand structures requiredto manageEUpre-accessionassistancefor rural development.Albania i s still severalyears away from candidate status, andneeds to think share of large infrastructureprojects Romaniaselected for financing. Romaniawas not particularlyeffectivein committingits SAPARD funding, perhaps because ofthe low level of administrativesupport. I02For example, under the transition measure for semi-subsistenceagricultural holdingsof the European Agricultural Fundfor Rural Development (EAFRD), it is the NMS' individual responsibilityto define such holdings, including minimum and maximumsize, revenueand size o fmarketable production.When defining minimum and maximumsizes for semi-subsistence farms, severalNMSthat selectedthis measure appliedthe classificationscheme usedby the EuropeanCommission(EC), which is based on the concept of Standard Gross Margins(SGMs). SGM of a crop or livestockitem is the value of output from one ha or one animal less the cost of variable inputs. For each EU regionthe EC accords an SGM to more than 90 separate crop and livestock items.The methodologyto determine the economic size of a farm (expressed in EuropeanSize Units (ESUs)) is designed to identify activities present on the farm, determine the scale of each activity, calculatethe SGMs, and dividethe farm's total gross marginby the value of one ESU-currently establishedat 1,200. NMS such as Polandand Hungarygenerally establisheda minimum size threshold of 2 ESUs for semi-subsistencefarms in their 2004-2006 RuralDevelopment Plans.Slovakia, Estoniaand Lithuanialaid down specific thresholds for the differentagriculturalactivitiesthat would qualify for EAFRD support. IO3For collectionof accountancydata on the incomesand businessoperations of agricultural holdings. 57 carefully before making significant investments inexpensive and heavy bureaucratic structures that do not needto be infull operation until muchcloser to a future membership date, and investing inthe human capacity requiredfor building institutions and approximating agricultural policies to the Acquis. But it can look to future requirements as it formulates its agricultural policies andexpenditure management frameworks and identifies areas for potential donor financing. Moreover, an approachof gradual phasing is recommendedto provide opportunities to introduce andtest systems to avoid the loss of EUfunds. Accordingly, MAFCP has already taken several important steps inaligning its institutions, structures andpolicies with EUrequirements(paragraph 4.9 and Chapter 5). Moreover, Albania already has institutions with ex erience inadministering a competitive grants program with similarities to IPARD's.'' Harnessingcapacity from this program and building on it will facilitate the creation of the IPARD Paying Agency when this becomes a necessity. CREATING ABSORPTIONCAPACITY AMONGBENEFICIARIES FOR RURALDEVELOPMENT FUNDS 4.14 An importantdeterminantof the success of rural developmentprogramsis ensuringthat potentialbeneficiarieshavesufficientabsorption capacity and that access is equitable. The experience of NMS highlights lack of absorption capacity as one o f the main reasons for the relative underperformance of the SAPARD program.lo5 Building this capacity requires investmentsinthree key areas: (a) public informationcampaigns, (b) application support for potential beneficiaries, and (c) rural credit markets. The costs of these investments is hard to determine and can vary widely. 4.15 Futureactivitiesto ensure the success of the rural developmentprogramwill includeinvestmentsin public informationcampaignsto createsufficientdemandfor rural developmentfunds, and ensuringthat application proceduresare well designed. Public informationcampaigns will have to be targetedat potential beneficiaries (farmers, rural entrepreneurs, and rural municipalities) to (a) inform them of the benefits and availability of funding; (b) explain selection criteria and application requirements, potential sources of financing and availability of advisory services (inthe form of public and/or private advisory (extension) services);lo6 and (c) inform them about how these funds can be usedto help fulfill EUmarket access requirementsinfood safety, sanitary, phytosanitary and veterinary IO4The World Bank-financed Agricultural ServicesProject(ASP) aims to create an environment conducive to rural income growth by addressingthe key constraints faced by Albania's emergingsmallholderfarmers in agricultural production,trade, and the functioningof land markets. It pursuesthese objectives by: (a) improving access of smallholder farmers to quality seeds through an improvedseed regulatory framework, an enhanced role of the private seed sector, and the strengtheningof public seed-relatedtraining and research; (b) supportingthe establishment o f a functioningland marketthrough improved land registrationand pilot initiativesfor land consolidation; (c) improvingparticipationof smallholderfarmers in market activities through the development of selected market infrastructureand active demonstration and facilitation of market linkages; and (d) improving the access of smallholder farmers to adaptedtechnologiesand increasingopportunitiesfor diversified roduction,processingand marketingthroughcommunity basedtechnology pilots. 'Os EuropeanInstituteFoundation, 2005. 106 In Romania, insufficientpublic awareness of eligibilitycriteria and difficult applicationrequirements were among the key reasons for asub-optimaldemand for SAPARD funds. EuropeanInstituteFoundation, 2005. 58 standards, environmental protection and animal ~e1fare.I'~MAFCP will also need to design rural development program/IPARD application procedures effectively, keep them simple and transparent, and enable farmers to access application support. Incertain NMS, SAPARD application procedures and requirementswere so complicated that farmers and rural entrepreneurshad great difficulties preparingproposals for assistance, especially small farmers with limited experience inpreparing businessplans. InHungary, over half o f the proposals were rejected inthe first round because they did not meet procedural standards. In Croatia, only ten percent o f applications could be accepted due to overly complicated procedures, which then had to be modified before the second call for applications. Various measures have beenusedto address this problem, including training courses for specialized consultants to helpbeneficiariesprepare proposals and businessplans; assigning "village managers" to disseminate information and advise farmers on how to apply for SAPARD funds; and simplification o f applicationprocedures. 4.16 Potentialbeneficiarieswill need access to creditin order to meet pre- and co- financingrequirements.lo* Many poorer farmers inthe NMS could not access commercial bank loans and thus had great difficulty fulfilling pre- and co-financing requirements for SAPARD.lo9As with Albania, lack of access to credit was often the result of an inability to use land as collateral and the banks' perception o f the risk involved. As a result, mostly wealthy agricultural enterprises were able to meet pre- and co-financing requirementsand access SAPARD assistance. Inview o f this imbalance, governments inRomania and Poland devoted significant resources to establish credit programs for SAPARD co-financing, e.g., interest rate subsidy schemes, inorder to increase absorption levels. However, impact analyses reveal that these programs mainly financed larger agricultural enterprises rather than small and medium ones. These larger enterprises would have beencapable o f accessing SAPARD support evenwithout the credit programs. As seen inChapter 2, the availability o f rural credit inAlbania i s limited, especially for poorer farmers. The additional future need for rural credit weighs infavor o f tackling the structural issues constraining rural credit markets, such as land titling to improve the security o f collateral, development o f land markets to improve the value o f collateral, training banks to work with farmers and assess risk in agriculture and educating banks on forms of collateral such as grant schemes. 4.17 Albania can alreadyintegratesome of the lessonsand measures describedabove into ongoing policiesto ease itsEUaccession path inthe future. This includes (a) tackling structural issues associated with access to rural credit, which will help producers identify lo'Inthe Czech Republic,informationon SAPARD program requirements was promoted by the SAPARD PayingAgency using mass and other media, and seminarsorganized in cooperation with the Agrarian Chamber. InLatvia, potentialbeneficiariesreceived informationthrough the media and workshops organizedby the Agricultural Advisory and Extension Service.EuropeanInstituteFoundation, 2005. 'OsTo successfullyapply for SAPARD funds, potentialbeneficiaries hadto prove their ability to raisetwo types of financing: (1) Pre-financing: SAPARD did not involveany advance payments, only reimbursingexpenditures already made. Financingthe investment required pre-financingby the beneficiaries who would then be reimbursed by the SAPARD PayingAgency. (2) Co-financing: The Communitycontributioncould amount to up to 75% of the total eligible public expenditure, leaving25% to be co-financed by the candidate country.For revenuegeneratinginvestments, public aid couldonly amountto up to 50% of the total eligible cost, of which the Community contributioncould amountto up to 75%, leaving25% to be co-financed by the candidate country, and at least 50% by the privatebeneficiary.Source: EuropeanCommission, 1999. IO9Csaki, C., and Kray, H.,2005. 59 sources o f pre- and co-financing for IPARD, and (b) continuing to channel government assistance to farmers through competitive grant procedures to raise awareness and capacity among farmers for absorbing these sources o f assistance. DEVELOPING AGRICULTURALPOLICYINLINEWITH EUAGRICULTURALPOLICY 4.18 Albania should align itspoliciesand institutionsas appropriatewith the CAP in its future rather than its current form. Ifand whenAlbania becomes an EUmember,the government will need to have its agricultural support policies aligned with the CAP. The CAP i s currently inthe process o f transforming from predominantly production-linked support (so- called Pillar l)towards direct payments that are de-coupled from production levels and replaced by a single farm payment that i s conditional on respect for food safety, animal welfare and environmental standards ("cross-compliance") (Pillar 2-type support). This allows farmers to be more responsive to market signals than to government market interventions. Inaddition, the EUis now attaching greater importance to rural development support measures. This shift i s most clearly demonstrated by the substantial increases inthe budget for the EAFRDenvisaged for the period 2007-2013. This i s expected to rise annually to reach 10.5 billion, or almost 26 percent o f the total CAP budget, in2013 (see Fi ure 7) (previously the second pillar accounted for only 10-1 1percent o f the CAP budget).`loThese increased rural development expenditures will be financed mainly through reductions inthe direct payments for bigger farms. Inits future form, the CAP may thus provide a model for effective and non-trade distorting agricultural support; as such, it constitutes a critical reference point for Albania inrelation to its own agricultural policy reform process. 4.19 At the same time, Albania should ensure that its agriculturalpoliciesand reforms remainappropriate for itsown challenges and it own current situation. Albania faces very different challenges inthe agricultural sector than EUcountries, such as the needto increase productivity among producers, improve quality, and strengthenmarketing. Therefore, its agricultural policies need be appropriate for the challenges currently facing the agricultural sector, rather than an overly hasty adoption o f CAP principles that are aimed at addressing different problems facing EUfarmers. Inaddition, Albania's agricultural support programs are already relatively non-distortionary, providing it with a good starting point for aiming toward the future CAP. It will be many years before Albania has to align its support to the CAP for EUaccession purposes, and the government should take a carefully considered approach to aligning policies to ensure that they are suitable for the Albanian context. `loExpendituresunder the first pillar o fthe CAP are expectedto be broughtback to 40.6 billion in2013. 60 2000 2005 2013 Sources: European Commission, 2003; European Commission, 2005c; European Parliament, Council, European Commission, 2006. 4.20 The costs of developingthe agriculturalinstitutionsand structuresrequiredto access CAP funds are significant.As mentionedearlier, candidate countries needto have put inplace an IACS, AIS, andFood Safety Agency before they canreceive CAP benefits. Implementationo f an IACS and especially an FADNhas proven to be one o f the most complex and technically demanding aspects o fjoining the EU.Sufficient appropriate technical expertise also needs to be sourced. 4.21 The issues outlined inthis chapter and invarious EUProgress Reportsare extensive,but integratingEUrequirementsinto ongoing reformsin a thoughtfulmanner will help Albania in promotinga viable and productiveagriculturesector. Albania i s still far from fulfilling these requirements,but MAFCP has taken some steps inaligning its institutions and structures with EU demands, especially with respect to its information base. Small pilot projects are inplace to set up a livestock and farm registry; software to digitalize the data is expected to be ready bythe endof2007. MAFCP will start a landregistry project in2007 andhas developed animproved questionnaire for annual surveys.'" Giventhe limited resources o f MAFCP, such a pilot project approach i s appropriate. Moreover, Albania should adopt a carefully phased and timed strategy for progressive compliance with EU requirements, focusing first on activities that will strengthenthe agriculture sector and lay the groundwork for meeting pre-accession requirements.They include statistics, land registration, a food safety systemthat facilitates exports, and preparation for IPARD. When there is a clear timetable for accession, Albania can beginto focus on the development o f an IACS and formulate a fully-EU compliant Rural Development model. While Albania i s taking important steps towards fulfillingmany EUrequirements, further efforts are needed to embedthese projects ina broader strategy for the agriculture sector to ensure their continuity. Sustained effort i s neededto continue reforming and strengthening domestic agricultural institutions, illEuropean Commission, 2006c. p38 61 structures and policies. Importantly, MAFCP could support these initiatives with assistance available under the Transition Assistance and InstitutionBuildingcomponent o f IPA. Albania could also learn from the experience o f NMS and make full use o f current and future assistance provided under the IPA as well as under the EU's Technical Assistance and Information Exchange Instrument (TAIEX),and identify needs for donor financing. Ifused wisely, Albania may avoid many o f the problems encountered by previous accession countries, and facilitate the transition process inits agriculture sector. 62 5. BETTERMANAGEMENT OF PUBLICEXPENDITURESIN AGRICULTURE 5.1 This chapter providesa sector-widepictureof the magnitudeand structure of publicspending for agricultureover the period2002-2006, and assessesits effectiveness in tacklingthe constraintsand challenges analyzedin previouschapters.The chapter first looksat the overall government management o f expenditures,compositionand trends, and distributionbetweendifferent levelsof government.It then looks at public budgetplanning, management, and executionfor agriculture, includinglinkagesbetweenagriculturalpolicy and strategyandpublic expenditures.This is followedby an assessment of the effectiveness and compositionof public expendituresinagricultureby category,and an analysisofthe level of expenditures.Itprovidesrecommendationson howto improvethe effectiveness and efficiency o fpublic spendinginachievingthe government's policy goals.It i s intendedthat this analysiswill inform future decisions over priority public expendituresfor agriculture, includingshifts inexpenditureallocationsand other measures necessary to make the most effective and efficient use of government budgetaryresources. SUMMARYOFRECOMMENDATIONS 5.2 Take measuresto improvethe impactof ongoingpublicexpendituresin agricultureon addressingthe constraintsoutlined in previouschapters.First and foremost, this includesimprovingpublic expenditureplanning, management and execution, and improvingthe effectivenessof specific expenditures.This shouldtake placewithin a broader effort to improveoverallmanagement of governmentexpenditures, including government capacity to predictrevenues. Only when public resources are beingspent effectively shouldthe government consider increasingthe quantity of public resources available for the agriculturesector. 5.3 Improvebudget managementwithin MAFCP.This includesimprovingthe link betweenpolicy planningandbudgetingfunctions inMAFCP; improvingmanagement of budgetresources within MAFCPacross the budgetcycle; improvingaccountingmechanisms and monitoringand evaluationto ensure the effectiveness of expendituresand make the case for increased budgetallocationsfor agriculture; improvingsustainabilityof irrigation and drainageinfrastructureinvestments,includinginfrastructurereforms; improvingprioritization of investments; and reallocatinginefficientexpenditures. 5.4 Be selective and strategicwhen choosingand sequencingother areas for investment,and avoid areaswhere the private sector may havean advantage.Increase overall governmentspendingon infrastructure, infrastructuremaintenanceand public services, and focus on public goods or investmentswith strongpublic good characteristics such as infrastructureor knowledgecreation. 63 GENERAL ISSUES INPUBLIC EXPENDITURE MANAGEMENT'l2 5.5 Public expenditures need to be linkedmoreeffectivelyto policyobjectives.A proliferation o f strategy documents and policy initiatives inrecent years has put a heavy reporting burdenon line ministries.'l3These strategies have remained fragmented and mostly disconnected from the budgetprocess, without clear cost implications o f proposed measures or activities. Policy prioritization i s limitedand the government has not beenable to develop a true policy orientation inthe public budget. InApril 2005, the government decided to implementan Integrated Planning System(IPS) to serve as a unifying framework for the various existing strategies and introduce greater coherence to government policy and strategy formulation.' l4 This should helpstrengthenstrategic planning and public expenditure management through improved prioritization o f budget allocations, with a gradual move towards linking resources to outcomes and performance-based budgeting.Meanwhile, the newNational Strategy for Development and Integration (NSDI) will provide a single comprehensive government program, including initiatives such as European integration. The initial focus o f the IPS during 2006 and early 2007 was to establish central structure^"^ and prepare a set o f sector and crosscutting strategies on which the NSDIwill be based. 5.6 The government has made progresson improvingmedium-termbudget planning, but moreimprovementsare needed.In2000, the Government introduced a Medium-TermBudgetProgram (MTBP)' l6 to move away from traditional incremental budgetingpractices and adopt a more policy-led approach to the allocationo fpublic resources, to be linkedto the national priorities defined inthe NSDI. Since 2003, new economic and program budget classifications have facilitated a more strategic approach to resource allocation within spending agencies; in2005, all ten major sector ministries presenteda budget classification by programs basedon sector strategies.' l7Inspite of this `I2This sectiondraws heavilyon World Bank, 2006f. II3The NationalStrategy for Socio-EconomicDevelopment(NSSED), adopted in2001, is a mainstrategy document ofthe governmentof Albania, and is based onthree pillars: (i)improvinggovernance; (ii) promoting privatesector development; and (iii)fostering humanresource development.Other strategy documents elaboratedsince2000 includethe EU IntegrationStrategy; a three-year GovernmentNationalAction Plan (GNAP); and a number of sector and crosscuttingstrategies. The new governmentcommitted itself inNovember 2005 to introducingthe IPS. `I5A new Departmentof Strategyand DonorCoordination(DSDC), located within the Councilof Ministers, is responsiblefor coordinating the implementationof the IPS across the government and for the preparationand monitoringo fthe NSDI.Two inter-ministerialcommittees oversee the IPS: (i) a Strategic PlanningCommittee that decides on high-levelpolicy priorities, and (ii)a Government ModernizationCommitteethat approves details ofthe IPS and monitors its implementation. II6The term used for Albania's medium-term expenditure framework. `I7Fiveministriesalso initiatedthe implementation of new budget preparationproceduresthat had beentested in previousyears, including"Program Policy Review" and "Program Expenditureand InvestmentPlanning". The "Program PolicyReview" requires participatingministriesto providestructured and systematic policy statements for each o f their programs(includingprogram policy goals, objectives and standards). The "Program Expenditureand Investment Planning" requires ministriesto prepareexpenditure plansto the levelof Article for athree-year period.The conceptsunderlyingthese procedures were tested during MTBP preparation in2003 in the Ministriesof Health, Education and Agriculture. Detailedprocedureswere preparedbased on the lessons from this exercise and were piloted inthe same ministries,plusthe Ministry of Labor and SocialAffairs in2004. Those four ministries, plusTerritorial Adjustment and Tourism, have implemented the proceduresas part of MTBP preparationin2005. Dueto changes in government following the 2005 elections, the 2006-08 MTBP was not submitted for approval by the Councilof Ministers.The new government was restructuredand reduced in 64 significant progress, effective medium-term budget planning has beenconstrainedby several factors, includingdifficulties instrengthening capacities inthe GeneralBudget Directorate of the Ministry of Finance (MOF) andother relevant budget andplanning departmentsinline ministries;the lack of systematic costing and integration into the MTBP processof the Government's various policy and strategic initiatives (e.g., NSSED, GNAP, EUIntegration Strategy); insufficient progress inintegrating the planning of recurrent and capital expenditures and lack of consideration of recurrent costs arising from investment projects in the budget planning process; andover-optimistic revenueforecasts, resulting insignificant in- year budget cut-backs. Effortsto establish a more predictable and policy-ledbudget process through the MTBP and program budgeting have beenundercut, and spending patterns have beenslow to adjust to new policy andprogram priorities. The IPS is a responseto this, and starting in2005 a more prudent approachto revenue forecasting has also beenfollowed, narrowing the gap between forecast and actual revenues. 5.7 Budgetexecution remainsweak. Onthe budget execution side, progresshas been made inmodernizing the Treasury system. However, the coverageand quality of budget reporting remains weak, particularly the reporting of expenditures on externally financed projects (the majority of grant-financed investment projects are still not recorded inthe government accounts). Inaddition to in-year budget cuts and resulting reallocations, other weaknesses inprocurement processes l8and cash management-for example absence of commitment control, and overly-conservative setting of cash release allocations by the MOF during the first part of the fiscal year-seriously underminethe utility ofthe budget as a predictabletool for policy implementation. They also underminethe overall efficiency of public spending, especially for investment and quality public services. Inaddition, while audit andparliamentary oversight arrangementsare sound indesign, their effectivenessis severely limitedby capacity constraints. 5.8 Poor capacityand confusion of roles at the localgovernmentlevelcreatefurther problems.Local governments are severely constrainedby weak capacity andresources.'l9 Excessivefragmentation leaves smaller communities short of financial resources andthe administrative andtechnical capacities necessary to implementpolicies and operatepublic services efficiently'*'-a difficulty exacerbatedby internal migration. Weaknesses are particularly acute inthe area of budgeting. Accounting procedures are not uniform, planned and executedbudgetsusually diverge, auditing (ifany) is not regular, and monitoring and evaluation are practically non-existent. Twelve regional governments are expectedto play a mainly coordinating role (Annex ByTable B4), but inpractice their functions remain unclear-they cannot count on fiscal autonomy and the central and first-level local size (14 ministriesinstead o f 16), with a corresponding new sector structure (23 line and 10 cross-cutting sectors). ' I 8Joint assessment underthe recent PublicExpenditure and InstitutionalReview(PEIR) and the Country FiduciaryAssessment Update (CFAU) conducted by the World Bank indicates a lack o f competitionin domestic contract award and management, includingregular resortto direct procurement, with a loose control environment resultingin corruption,undulyhigh unit costs, and the misuseo f public funds. l 9 See Annex B Table B4 for details on the structure and budgetprocess for local government. I2O Despite its small size and a total populationof only about 3 million, Albania is formally divided into 374 first-level local self-government units(65 municipalitiesmostlyurban, and 309 communes). Over half o fthe communes have less than 5,000 inhabitants. 65 governments are reluctant to delegate functions to them. The definition o f competencies and distribution o f responsibilities betweencentral and local governments need further clarification to avoid inefficiencies and duplication or under-provision o f services. A specific issue i s the central government's responsibility for capital investment, while local governments are responsible for operation and maintenance (O&M). Another constraint on decentralization is the still-limitedfiscal autonomy o f local government units, inspite o f the fiscal reform approved inDecember 2002.'21Complementary funding o f local budgets i s providedby transfers and grants from central government, which are often basedon unclear or regressive criteria and subject to political and bureaucratic influences. 5.9 Overallbudgetmanagement needsto improve.General government spending at about 29-30 percent o f GDP puts Albania ina group o f European countries with relatively small governments. The budget deficit has declined from about 13.1 percent o f GDP in 1997 to around 3.4 percent in2005, a result of efforts by successive governments to improve revenue collection, accelerate privatization and end subsidies and soft loans to state-owned companies. 122 However, the nominal budget deficit does not include state enterprise deficits or quasi-fiscal deficits, including an accumulation of arrears from water companies towards other budgetary and non-budgetary institutions. Albania's pattern o f deferredmaintenance in several infrastructure sectors, including roads (see below) i s creating future liabilities interms o f reconstructionand rehabilitation costs, while the pension system i s unsustainable and runs a significant risk o f bankruptcy inthe mediumterm without major reform. Highinterest payments continue to crowd out primary spending. There i s increasing rigidity inthe structure o f spending, with non-discretionary spending (including debt service, wages and salaries and transfers to social security) rising from 57 percent o f the budget in2000 to 63 percent in2005. This constrains the government's ability to allocate expenditures according to development and sectoral priorities. AGRICULTUREBUDGETPLANNING,EXECUTION AND MANAGEMENT123 5.10 The governmentis preparinga new strategyfor the agricultureand food sector, and for rural development.The IPS includes elaborationo fa Sector Strategy o fAgriculture and Food (SSAF), and a crosscutting Inter-Sectoral Rural Development Strategy o f Albania (ISRDSA)).'24As discussed inChapter 4, this is an important step to beginintegrating EU The fiscal reformpackage o f December2002 reorganizedthe assignmentof revenuesources by redefining some previouslynationaltaxes as local taxes, creatingnew localtaxes and fees, reclassifyingand rationalizing the previouslyexisting fees, and eliminatingthe existing local turnover tax. `22With the exception of a few companiessuch as the Albanian Power Corporation (KESH). `23The Ministry o f Agriculture, Foodand Consumer Protection (MAFCP) is the key spendingentity inthe agriculture sector.The analysis inthe following sections is based on MAFCP's expenditures, as reportedby its Budget and Financedepartment.Some differenceswith general data on functionaldistributionof Albania's budget(Annex B Table B6) are due to the inclusionof MAFCP's general administrative costs under the category "general public services" inthe overall functionalclassification. `24The new draft SSAF (MAFCP, 2007a) emphasizesthe following strategic priorities:(i) increasingfinancial support for farms, agriculturaland agro-processingbusinesses; (ii) improvingthe management, irrigation, and drainage of agricultural land; (iii) improvingthe marketingof agricultural and agro-processingproducts;(iv) increasingthe leveland quality oftechnologies, information,and knowledge of farmers and agro-processors; and (v) increasingthe quality and food safety o f agricultural and agro-processingproducts.Underpinningthese prioritiesare the following strategic goals: (i) sustained management of land, as a basic component o f sound agriculturaldevelopment; (ii) higher employment, incomes, and standardof living for farming households; (iii) 66 requirementsinto ongoing reform ofpublic institutions. The governmentrecognizes that strategies for rural areas have to go beyond improving agricultural productivity; they should also ensure increasedaccess to better quality rural services (education, health, social protection), potable water supply and sanitation, and rural transport infrastructure. Rural development strategies must also seek diversification of the rural economy and increase employment inand revenuesfrom non-agricultural activities. MAFCP has beendesignatedas the leadministry for preparationofthe ISRDSA.I2' Inpreparing its sector strategy, MAFCP should be very strategic inidentifyingpolicy priorities, ratherthantaking on an overly ambitious agenda. 5.11 There is a crucialdisconnect betweenpolicyplanningand budgetingfunctions in MAFCP, which hurtsthe overallbudgetingprocess. MAFCP has beenone ofthe leading ministriesinimplementationofthe MTBP,but a disconnect betweenpolicy planning and budgeting functions remains(paragraph 5.3). Sector working groups and committees set up for strategic planning andpolicy formulation126are loosely structured, rarely convene (e.g., to meet deadlinesimposedby the NSSEDannualreporting timetable), and insome cases have met only once or twice (e.g., the inter-ministerial committee on rural development). Budget and finance staff responsible for preparing MTBP and budget submissions are not entirely familiar with key sector reform initiatives andtheir implications for budget planning, so the traditional practice of incremental budgeting (Le,, based on expenditures inprevious years) continues. Weaknesses inbudget planning and execution can be seen inthe fairly large discrepanciesbetweenthe initial plannedamounts (allocations at beginning of the budget year), final planned amounts (allocations after budget rebalances during the year), and actual expenditures. This reflects general constraints inAlbania's budget system and internal weaknesses specific to MAFCP. Improvements inbudget planning and managementare important not only to improvingthe effectiveness of public spendingbut also inthe context of EUrequirements(Chapter 4). 5.12 Difficulty in predictingrevenues creates uncertainty in the discretionarybudget, exacerbatingpoor planning.Between2002 and 2005, overall domestic revenue collections ~~ ~~ ~ ~ increasedagriculturaland agro-processingefficiencythrough productivityenhancement and a higher product quality ;(iv) guaranteedhigher food safety standardsfor all the population; and (v) improvementsin agricultural marketing. MAFCP is responsible for all matters relatedto agricultureand food production. This includes overseeing management of agricultural(cultivated)land, irrigation and drainage. The management of other natural resources,includingforests, pastures and fisheries, falls underthe Ministry o fEnvironment, Forestryand Water Administration(MEFWA). MAFCP's central administrationis currentlyorganized into four general directorates:Agricultural Policies, Resource Managementand Services, Food Safety and Consumer Protection, and Support Services. Followingthe appointment of a new government in September 2005, Albania's ministerial structure was reorganized and down-sized.The total number of central staffwas 125 employees in March2006, down from about 170 in 2005. A number of field institutions-including 12 regional directorates and several specialized agencies or institutes-also report to MAFCP.Detailed data on MAFCP's organizational structure, public expendituresand other relevant indicators are providedinAnnex B. Other ministriesexpectedto participateinthe rural developmentstrategy includethe Ministry of Economy, Ministry of Environment, Ministry of EuropeanIntegration, Ministry of Finance, Ministry o f Interior,Ministry of Public Works, and Ministry ofTourism. `26For example, the working group for the agriculturesector expenditure strategy established in2000 under the MTBP process; the ad hoc technical sector working group TSWG to contribute to draftingand follow-up of the NSSED; and the inter-ministerialcommittee for the rural developmentstrategy establishedin 2003. 67 inAlbania averaged4.4 percentless thanbudgetedlevels, meaningthat discretionary spending budgetshadto be cut significantly. In2003, MAFCP's final allocation under the central government budget was reducedby 5.7 percent from its initial allocation, at the expense of allocations for O&M and investment projects. In2006, higher than expected revenues inthe first halfo f the year allowed the government to preparea supplementary budget, which was mainly aimed at increasingcapital investment-and MAFCP's final allocations increasedby 37.4 percent from its initial level. This increase was allocated mainly to itemsrecordedunder O&M (which also appear to include some subsidies, rather than investmentprojects-though there i s a lack of clarity on what the O&M expenditures are for). 5.13 One resultof this unpredictabilityis under-spendingof plannedbudget allocations,equatingto mismanagementof resourcesand the needfor an improved managementcycle. MAFCP's total actual spendinghas gone down from 100percent of its final allocation in2002 to around 98 percent in2003, 86 percent in2004 and 67 percent in 2005. Finalfigures for 2006 are not yet available, but MAFCP spending over the first eight months of the year amounts to only 41 percent of total final allocations. Although spending i s traditionally concentratedinthe second half of the year, especially for investment project^,'^' it seems unlikely that MAFCP's budget execution rate will be satisfactory in2006. 5.14 Externalfinancingtends to suffer most. During 2002-2005, under-execution of spending was concentratedoverwhelmingly inexternal financing, reflecting difficulties in forecasting disbursementand expenditure levels on externally financed projects. This is the result of over-optimistic forecasts and unrealistic budgeting by MAFCP project and central staff; under-reporting of actual expenditures from foreign sources (especially grants); lengthy procurementand disbursement proceduresfrom foreign donors and/or insufficient familiarity of project staff with these procedures (especially following changes instaff or changes in priorities under the new government following the 2005 elections). 5.15 Allocationof expendituresamongfunctionaland economic categories could be improvedto increasethe transparency of the budget process. MAFCP's budget is presentedboth by economic classification (Le., betweenpersonnelexpenditures, O&M, subsidies and investments) and on a functional basis. MAFCP activities are implemented underseven programs: (a) Planning, management and administration; (b) Agricultural and food safety inspectionsand services and consumerprotection; (c) Irrigationand drainage infrastructure; (d) Support to agricultural, livestock, agro-industrial production and marketing; e Researchand extension; (f) Managementof natural resources; and (g) Rural development. 128 Planning and recording of expenditures on the basis of economic as well as functional classifications is useful to enable analysis of MAFCP's budget. However, the allocation of expenditures among categories and the definitionof functional programs remainrather rough and could be improved. All foreign contributions (from donors or lending agencies) are consideredinvestments, even when they belong to other economic categories and include 127Over the first eight months o f 2006, MAFCP spending on investments alone was only 32.5% o f the total annual allocation. Details of planned and actual expenditures by economic and hnctional classifications are given in Annex B, Tables B6-Bl2. Prior to 2003, there was a separateprogram on "land reform and administration". Also in 2004 and 2005, there were two differentprograms respectively for researchand extension, which have been merged in the functional classificationstarting in2006. 68 activitiesthat require continuedgovernment fundingafter completionof the externally financed project(e.g., ongoingpersonneland operatingcosts). Some externalprojectshave several componentslinkedto different programs, yet the entire project is classifiedunder one mainfunctionalprogram.Personnelexpendituresfor field extensionstaff are not includedin the "Research and extensionprogram." Insteadall personnelexpendituresfor MAFCP field staff incurredby regional directoratesare recordedunder the "Agricultural and food safety inspections and servicesand consumer protection" program.Finally, while farm subsidiesare undoubtedlyextremely modest, it is unclear where some ofthem are recordedinthe economic classification(possiblyunder O&M or investment).This reduces transparency ofthe budget and will needto be correctedinthe future, especiallyinthe event of a possiblefuture increase infarm subsidiesinthe contextofEUintegrationprospects. 5.16 Capacityto manage publicexpendituresinMAFCP needs to improve. Although public expendituresinagricultureare currently rather low (paragraph5.49, the impactof current expenditurescouldbe significantly improvedwith better capacity inMAFCP. Improvingthe impact of public expendituresinagricultureis also importantprior to receiving potentially sizeableEUassistance funds (Chapter 4). Substantialsupport will be required (technical assistance, IT systems, etc.) inthe future for improvingMAFCP capacity. It will also be important for MAFCPto developits capacity to plan, monitor, and evaluatethe effect of policies.Giventhe limited availabilityof resources, improvedanalytical capability to select the most appropriate investmentsis also extremely important. ANASSESSMENTPUBLICEXPENDITURES AGRICULTURE OF IN 5,17 This section analyzes the effectivenessof public expendituresinagriculture, starting with expendituresoutsideMAFCPandthen lookingat MAFCP expenditures. 1.Non-AgriculturalExpenditures 5.18 The institutionalframework for expendituresoutside MAFCP that affect agriculture, likeinfrastructureand publicservices, needsto be improved.The distributionof spendingacross and within sectors of governmentas well as the quality and efficiency of spendingneedimprovement.12' This will require continuedimprovementsinthe institutional framework for translatingpoliciesinto budgetplans and ensuringeffective execution.The World Bank's recent "Public Expenditureand InstitutionalReview" highlights the several shortfalls inpublic expenditurethat have direct negative impacts onthe agriculturalsector, as detailedbelow. 5.19 While the level of publicinvestmentin infrastructureis in linewith comparable countries,serious bottleneckspersist in key infrastructuresectors. The electricity Under the 2006 budget and mediumterm fiscal framework, the government's strategy-as outlined in the Memorandum of Economic and FinancialPolicy(MEFP) concludedwith the IMF in July 2006-is to strike a balancebetweendebt reductionand the need for growth-enhancingand poverty-reducingexpenditures. Over the program period, total expendituresrelativeto GDP are programmedto be containedat 30 percent of GDP. Within this envelope, capitalspendingwill increaseby 2.25 percentagepoints of GDP. Additional allocations underthe supplementarybudgettabled in July 2006 (based on additionalrevenuegains and unbudgeted privatizationreceipts) have been allocated largely to infrastructure projects, primarily road construction. 69 transmission and distribution systems require immediate upgrading; water and sanitation systems need replacement and expansion to increase very low levels o faccess, especially in rural areas; and about 67 percent o f the national network and an estimated 80-85 percent o f rural and local municipal roads are inpoor ~ondition.'~'These are all areas that holdback agricultural competitiveness (Chapters 1 and 2). Solutions include reducing inefficiencies, generating savings through sector reforms, and encouraging private sector participation in infrastructure investment . 5.20 Critical under-spendingon maintenancein the road and water sectors is creating future contingentliabilities,and likewisehas a significant effect on agricultural competitiveness. There is no systematic allocationof appropriate O&M allowances for new investmentprojects, and over-emphasis on expansion versus O&M has perpetuated the poor condition o f Albania's road network inparticular. Spendingon maintenance i s some 40 percent lower than the amount required, creating a backlog o f almost US$45 million (0.5 percent o f GDP). 5.21 Public services are also neglected. Non-wage recurrent spendingis generally low. In education and health, severe under-fundingo f non-wage inputs leads to low levels o f education attainment and inadequate health care, and both sectors requireadjustments o f intra-sectoral allocations (reallocation from primary to secondary education, increases in preventivecare and key public healthfunctions). Poor public services inrural areas needto be addressedas part o f rural development (Chapter 1). 5.22 Governmentspending is inequitablebetweendifferent regions. Government spendinginAlbania is also very inequitable, with stark variations inexpenditures and outcomes at the local level (especially inhealth, education and water sectors) (Chapter 1). 2. Public Investmentsin Agriculture 5.23 Investmentsin irrigation and drainage infrastructure account for the bulk of MAFCP expenditures. Three main programs account for the bulk o fMAFCP spending(80- 90 percent inrecent years). The "Irrigation and drainage infrastructure" and "Support to agricultural, livestock, agro-industrial production and marketing" programs have beenthe largest, both composed largely o f investments (Figure 8). The "Agricultural and food safety inspections and services and consumer protection" program i s the third largest, and significant increases are planned. The decrease inthe "Management o f natural resources" program is linkedto the reallocation o fresponsibilities among ministries, and with the creation o f a new MinistryofEnvironment in2001. "Rural development" activities at MAFCP also decreased significantly inthe early 2000s, but are expectedto resume. The `Research and extension' program accounts for only about 3-5 percent o f total MAFCP spending. I30This compares with 22 percent of the nationalnetworks in Croatia and Bosniaand Herzegovina. 70 Figure 8. The bulk of MAFCP expenditures are investments in irrigation and drainage infrastructure. MAFCP Budget Spending by Main Programs 3s00 2 3,000 - 8- Irrigationand drainage 2,500 - infrastructure 2,000 - Support to productionant marketing cl OJ 1,500 - 0 AgriculturaVfoodsafety 1,000 - and consumer protection 0 Others 500 - 0 -' I , I I , 2002 act. 2003 act. 2004 act. 2005 act. 2006 2007 plan plan Source: Annex B Table B10 Irrigation andDrainage 5.24 Sustainabilityof the irrigationsector has improved,but significantwork is still needed. As discussedinChapter 2, access to irrigationis still a constraint on agricultural competitiveness.Since 2002, the "Irrigation and drainage infrastructure" program has accountedfor 40-50 percent of MAFCP's total spending, and 50-65 percent of total MAFCP investment. Large inter-annual fluctuations inthe size of this program, mainly its investment component, reflect variations inforeign funding. Duringthe period reviewed, external funding has beendevoted almost entirely to irrigationinvestment, whereas the government has continued to finance investments indrainage and flood control. Substantial institutional change and improvements, especially inO&M, have beenimplementedinthe irrigation sector. Water Users Associations (WUAs) have now largely taken over the management of irrigation ~ysterns'~'and sustainability has improved. The government has largely ceased financing O&M of irrigationfacilities, except for maintenanceof a few small schemes not yet takenover by the WUAs.13* Cost recovery from farmers has increasedand it now covers the costs of operation and short-term maintenance.133However, full sustainability will be achieved only when farmers contribute to long-term maintenanceand repair.134 Only a few WUAs have made initial steps toward this. More information needs to be made available regarding collection rates, how resources are used, and the level neededto ensure adequate 131Irrigationinfrastructure is still owned by the state. 132This practicewas to be discontinuedin2006 as all irrigation schemes would be transferredto W A S . However, MAFCP receivesexceptionaltransfers from the budget every year to deal with "emergencies" (which have in the past been ordinary activities). Therefore, MAFCP has not entirely left the sub-sectorto W A Sand FWUAs. 133Cost recovery from farmers has increased from about US$2/hain2000 to about US$5-7/ha in2004. '34This will cost an additional US$ 10-15 per ha. 71 expenditures on O&M. There i s also a needto strengthenthe MAFCP's capacity to provide training and support to WUAs. Untilnow, this function has been carried out by the project management unit o f the World Bank-financed Water Resources Management Project, outside the Ministry's regular structure. 5.25 Progress is also beingmadeon institutionalreforms inthe drainage and flood controlsector. A total o f 17Drainage Boards (DBs), formed since 2003 by restructuringthe former Water Enterprises,are now responsible for drainage and flood management.'35Main stakeholders (including farmers, local governments and businessentrepreneurs)participate in their management, with supervision by MAFCP. The DBs are responsible for identifying priority drainage investments,preparing and implementingbusinessplans and monitoring impacts, and are expected to work inpartnership with the government on flood protection. Until2005, part ofthe personnel'36expendituresofDBswas financedunderthe MAFCP budget (ALL 86 million in2005 for 11out o f 17 DBs).Although this practice ceased in 2006, all DBs continue to receive substantial amounts o f subsidies to cover O&M costs o f drainage and flood control infrastructure (ALL 610 million in2005 for all 17 DBs, ALL 500 million planned for both 2006 and 2007). Most DB activities are non-exclusive public goods, such as flood protection and erosion protection, making it difficult to recover costs from beneficiaries. Nonetheless, the involvement o f beneficiaries inDB management i s having positive impacts, such as prioritization o f budget allocation and increasingly efficient use o f public budget funds. 5.26 Greater prioritizationis needed in planningfuture investments.Investmentin irrigation and drainage i s necessary and can be very high.This makes it all the more important that priorities for investmentsare clearly defined and selectivity applied to ensure that they have an impact commensurate with their cost. Some irrigated areas rehabilitatedinthe late 1990shave not beenused by farmers, for reasons including rapid urbanization and resulting loss o f arable land, and limited availability o f electricity at pumpingstations due to changing local energy priorities. Since then, progress has beenmade on selecting rehabilitationareas basedon farmers' demand and commitment to irrigated agriculture. Still, potential demand may well exceed economically justified schemes, since farmers makeno contribution to investmentcosts and cover only part of long-term O&M costs. Inthe drainage and flood control sector, specific studies are needed to prioritize investments and define the overall financial envelope. So far, funds spent by the government on drainage and flood control have beenscattered over a large number o f projects. Delays have beencommon and the results disappointing. In2006, joint efforts were launched with the DBsto concentrate investmentsin priority areas (e.g., Lezhe area). This will needto be continued inthe future, along with a consolidationand reduction inthe number o f investmentprojects. Improved analytical capacities are needed to help select the most appropriate investments. 135During the socialist period, the state-owned, district-based Water Enterprises(36 in total) had sole responsibility for operation, management and maintenance ofthe entire irrigation and drainage sector. They were directly controlled by the Ministry of Agriculture without any consultationwith direct beneficiariesfor drainage and flood control. I36Total number of employeesof the DBs is 1,071 as of2006, following a reduction of about 20% compared to 2005. Furtherreduction inthe number of staff could be envisaged, to be accompaniedwith modernization and equipment. 72 5.27 Transparency in the use of investmentfunds needsto be improved.Efficiency in the use of public resources depends on competitive andtransparent procurement practices. In irrigation and drainage, as well as inother sectors o f the economy, Albania's record on these aspects has beenparticularly weak. Farmers complain about the lack o f transparency in MAFCP investments,and this has beena main reason for implementingdonor-funded irrigation projects through a separate project management unit. 5.28 Institutionalimprovementsenhance the effectiveness of these expenditures. Efficiency and productivity growth inthe agriculture sector dependas much, ifnot more, upon improvements inthe wider policy and institutional environment, as uponthe provision and levels o f spending on publicly fundedinvestments,subsidies and farm services. Inthis regard, Albania has made substantial progresson the institutional side, inparticular on improving the O&M o f state-financed irrigation facilities, by transferringresponsibilities for management and financial contributions for O&M to water users. Other Public Investment 5.29 MAFCP's supportto agricultural,livestock,agro-industrialproduction,and marketingincludes a broadand diverse range of activities,which need to be examined carefully.After irrigation and drainage, the bulk of public investmentinthe agriculture budget is made under the program "Support to agricultural, livestock, agro-industrial production and marketing". This includes a very diverse range o f activities, reflecting the government's desire to tackle constraints to competitiveness on all fronts, but making it difficult to analyze. Investmentsinrecent years include wholesale market infrastructureto facilitate marketing o f agricultural products, and activities carried out under the World Bank- supported "Agricultural Services Project." Another important source o f financing i s the 2KR project supported by Japanese bilateral aid, which has involved sales o ftractors and machinery through subsidized credit to farmers. Policy objectives o f this program for the next few years include fostering private investmentinmilk collection centers, strengthening marketing channels and increasing farmers' access to the cash economy, and fosterin private sector investment inhorticultural processing and inviticulture and wine production." Loans for investmentinagro-processing are expected to be made available through a revolving fund for investmentinprocessing facilities in dairy, horticulture, viticulture, and olive production. Construction o f new wholesale markets and rural markets i s also foreseen inthe Medium- Term BudgetProgram (MTBP). Inan attempt to increase private investmentinvineyards, fruit trees and olive production, MAFCPhas allocated funds for investmentsinthese activities (and possibly the credit fund envisaged inthe MTBP) inthe 2006 and 2007 budget plans.13*However, it i s unclear inwhich budget category they are included (most probably O&M andor investment).To increase budgettransparency, funds for subsidies or other incentives to private investment shouldbe included under the economic category "subsidies", and the category "investment" should be reserved for publicly owned infrastructure. Overall, given resource and capacity constraints, MAFCP needs to be very strategic indecision- making about which activities and investmentsto engage in.It should avoid addressing rural 137As defined inthe MTBP (2006-2008). 13*According to the MAFCP PolicyDepartment,there is a commitment for about ALL 450 million earmarked for an investment f h d for these purposes over the next four years. 73 credit directly, and insteadlook at the structural issues holding back private sector activity in this andother areas. 5.30 Investmentsin processingfacilities and other activitieswhere the private sector operates should probably be left to the private sector. A key example is the plan for the construction of a network of slaughterhousesusing MAFCP budget resources. As discussed in Chapter 2, such investmentsare undoubtedly neededincertain areas to improve the functioning of Albania's agri-food supply chains. However, it is not clear that such investmentsshould be undertakenby the state. Public investments, whether fully or partly state-owned, should be consideredvery carefully, as there is a highrisk of over-dimensioning and underutilizing this type of facility and crowding out private investment that could be encouragedby more effective enforcement of regulations and public education (see Chapter 2). More generally, when considering investmentsinthe supply chains,'39public investments should be selected on the basis of careful examination ofthe structural, regulatory, financial or technical constraints currently preventing private investment where there is a potentially good rate of return.Only inthe event of market failures not resolved after addressingthese constraints is there a case for the public sector to use its scarce resources to deliver the goods and/or services. Eventhen, there i s the question of whether the government can deliver the service in an effective and efficient manner. Every program inthe budget should be evaluated against the rationale for public intervention ina market economy, especially inlight of resource constraints inMAFCP. 5.3 1 Rural developmentprogramming provides a valuable opportunity to focus resources on priority needs like infrastructure. MAFCP's rural development activities are expectedto pick up inthe coming years (see Chapters 2 and4). The mainpolicy objectives definedfor this program inthe MTBP period (2006-2008) includethe strategic coordination of rural developmentpolicies and investments, piloting of new rural development models, and establishing a Paying Agency to coordinate rural developmentfunding. Here again, all funds plannedfor 2007 have beenrecordedunder"investments", eventhough at least some would be expectedto be "subsidies" (e.g., small rural investment grants). MAFCP's crosscutting strategy on rural development should encompass all aspects of rural development, and should consider the full range of potential investmentsand other rural development activities-not just those that are under the responsibility ofMAFCP. Underaconstrainedoverall resource envelope for public investment inAlbania, priorities for rural investment will have to be determinedbetweenareas as diverse as irrigationand drainage, rural roads, health and education, etc. Ruralproducers often point to the lack of good roads as one of their biggest marketing problems, while other studies also report the impact of poor road infrastructure on schoolenrollment andthe use of healthservices. The benefit of substantial investmentsin irrigation and drainage systems, on the other hand, has sometimes beenquestioned. Decisions over future levels of public funding for activities inrural areas should be based on an assessment of the relative impact of these activities. So far, MAFCP has not evaluatedthe impact of its spending. I39Marketingchains are analyzed in Chapter 2. 74 3. Direct Cash Support (Subsidies)to Farmers 5.32 The minimalsubsidies currentlydisbursed are of limitedimpact.Farm subsidies inAlbania are presentlyminimal. The only subsidiesexplicitly recordedas suchinthe MAFCPbudget are drainagesubsidies to the DBs, some ofwhich also usedto receive, prior to 2006, additionalsupport (implicit subsidies) inthe form ofpartialpayment of their personnelcosts directly from the MAFCPbudget.The only other subsidiesto farmers mentionedby MAFCP are fuel subsidies, consisting of exemptions on excise taxes andtaxes on fuel usedfor agricultural purposes (about halfthe marketprice). The economic impact and efficiencyof sucha subsidy is doubtful.Farmershave also benefitedinsome cases from implicit credit subsidies under foreign funded projects, suchas the 2KR2 project for tractors and machinery. 5.33 Subsidies for fosteringinvestmentin fruit andvineyard productionneed to be designed and implementedcarefully.MAFCPhas recentlyintroducedsubsidiesto support an increase ingrape, fruit and olive production.Ingeneral, subsidies for fosteringprivate investment(andhence growth) are preferableto recurrent subsidies.However,the subsidy programneeds to be carefullydesigned,with clear andtransparentproceduresand effective monitoringand evaluation.Inaddition, the programmust take care not to be too selective in choosing specific crops, insteadselectingbeneficiariesbasedon clear criteria and the quality of the proposal.A matchinggrant mechanism, such as that practicedsuccessfully inthe government's Competitive Grant Programofthe World Bank-supportedASP or the EU's IPARDprogram, is preferableto setting up a revolvingfund for credit, which is more complicatedto administer and/or generates distortions vis-a-vis the existingbanking system. Directuncoupledincome support mechanisms, includingpaymentsper hectare or per headof animal, are the presenttrend inthe EU's CommonAgricultural Policy (CAP). However, their introductioninAlbania would not seem to be directlyrelevant for the promotionof agricultural growthinAlbania, whichhas significantlydifferent agriculturalconditions than WesternEurope, and where, for example, it coulddiscouragemuch-neededlandconsolidation unless carefulthought i s givento its design. 5.34 Ruraldevelopmentprograms,on the other hand, couldbe a forerunnerto future EUIPA funds, while also benefitingAlbania's ruralareas. As discussedinChapters2 and 4, this requires the identificationof a set of appropriaterural development supportmeasures, together with the effective involvement of field support servicesto ensure broad-basedaccess of potentialbeneficiariesto this support. An importantpolicy issue inpreparinga rural developmentstrategy is achievingan appropriatebalancebetween`productive' support measures (aimedat ruralgrowthand enhancing productivity) and `distributional' measures (targetingthe poor). 5.35 Adequateaccountabilitymechanisms and monitoringand evaluationarevital. In all cases, adequate accountabilitymechanismsare an essential pre-requisiteto increasingfarm subsidies, to ensure transparent allocationand distribution. As well as ensuringan adequate paymentand control system, monitoringand evaluationofthe impact of different types of subsidies is necessary to allocate public subsidy funds efficiently. 75 4. Delivery of Public Services 5.36 Food safety policy needs to be designed to meet Albanian producers' and consumers' needs. One of the policy goals of MAFCP i s to harmonize Albania's veterinary, phytosanitary control, and food safety legislation with EUdirectives. MAFCP's General Directorate of Food Safety and Consumer Protectionoversees two directorates:the Directorate of Food Safety andthe Directorate of Animal Health andPlant Protection (Chapter 3). 140The main objectives of MAFCP's `Agricultural and food safety inspections and services and consumerprotection' program for the MTBP period (2006-2008) are to (a) strengthenthe legal framework for veterinary inspection andcontrol; control the spreadof contagious animal diseases, especially those with risks for the human population (e.g., anthrax, brucellosis, etc.); (b) introduce nutritional standards for the food industry; (c) strengthenveterinary andphytosanitary controls and inspections at borders inline with EU standards; and (d) improve animal breeding. Funding for this program is expectedto increase inthe coming years, including for capacitybuildinginagriculture andveterinary inspections and food contr01.l~~The mainpolicy challenge for MAFCP will be to define a realistic food safety policy and to introduce improved standards ina gradual manner, so as to be compatible with actual field implementation capacity and to be affordable to both small-scale producers and consumers.'42 5.37 Reform of research and extension has been effective, but further improvements are needed to improve efficiency and impact of services. Chapter 2 highlights the need for effective extension and rural advisory services. MAFCP's "Research and extension" program includesmainly funds relatedto research, since "field extension staff' is includedunder the "Agricultural and Food Safety and Consumer Protection Program" as part of MAFCP's twelve regional directorates. Inrecent years, MAFCP has reorganizedand streamlined its agriculture research network, going from 14 institutes inthe early 2000s to seven main centers at present(National Seed Institute, Institute for Food Safety and Veterinary, and five Centers for Agricultural Technology Transfer). Fundamentalresearchhas beentransferred to universities. Extension services were first supported by a PHARE project inthe 1990s, followed by support from Dutchbilateral aid until2001, and thereafter successfully integrated into MAFCP's central and regional organization. Despite tight budgets and restrictions in ministry staff inrecent years, the number of extension staff and field workers has been maintained(about 245). Together with recent changes inresearchto align it more with the needs of farmers, and efforts to improve linkages betweenresearchand extension through the Agricultural Technology Transfer Centers, these are moves inthe right direction. There is, however, a needto review actual implementation inthe field and assess the efficiency and impact of the reorganized researchand extension system.Findings from the HBS suggest that targeting and access of extension could be improved to make it more equitable (Chapter 2). I4OThe Organization Chart of MAFCP is providedinAnnex B Table B4. 14'All the staffof MAFCP's twelve regionaldirectorates (about 997 people) are accountedunderthis Program. Although a majority ofthem are involvedin veterinary, phytosanitary and food controlmatters, substantial numbersof staffdeal with differentactivitiessuch as extension (about 245 people intotal includingfield extensionworkers in rural communes), statistics, etc. 14'The food safety system is analyzedin Chapter 3, 76 5.38 Other MAFCP services also need strengtheningin order to help improve competitiveness. These include plant quarantine, seed certification, and inspection (although this could eventually be inthe private sector), and improvedveterinary and meat inspection. The National Seed Institute i s not yet operating at full efficiency, although no further material investment i s neededat this stage. Better legal enforcementof regulations i s required not only infood safety but also inplant protection, fertilizers and seedlings. There are still concerns about the sale and use of expired and unregisteredchemicals, mislabeling, selling in illegal containers, and safe disposal of containers and unusedchemicals, etc. Some of these issues could be partly addressedthrough a food safety program. The legal protection of brands, which are increasingly being developedinthe country, is also of major concern. 5.39 A high percentageof personnelcosts in the overallMAFCP budget suggests that there is room for greater efficiency. MAFCP's central administration is currently organized into four general directorates (Agricultural Policies, ResourcesManagementand Services, Food Safety and Consumer Protection, Support Services) that oversee a total of ten directorates, which inturn supervise 23 sectors. The total number of central staff is 125 (as of March2006), down from about 170 in2005. Inaddition, a number of field institutions- includingtwelve regional directorates (997 employees intotal) and several specialized agencies or institutes (228 employees intotal)-report to MAFCP. This brings the total numberof staff onMAFCP's payrollto 1,350 (as ofMarch2006).143Comparative data suggest room for improved efficiency of personnel.Table 11suggests that the number of staff i s high interms of implementedbudget, suggesting low effectiveness per employee. This i s consistent with the finding that capacity inMAFCP is generally low. After Kosovo, the share of salaries intotal ministry spending i s higher than all other countries for which comparator data is available. This could be countered by reducing the amount spent on salaries and improving staff effectiveness.It i s recommendedthat the Ministry review its staffing structure and develop a planto reducethe number o f staff over the next few years. At the same time, technical staff should be recruitedto meet EUaccessionrequirementsinagriculture. Table 11. Personnelexpensesare higher as a percentageof the Ministry of Agriculture budget than for most neighboring countries. Total Share of Staff inof Budget Ministry , Administrative k'n'stry's Salaries in Average total Salary per Budget Total Salaries Agriculture Number of Cost/NumberStaff(e) (e) Of Ministry Month (e) (1 Staff(e) Budget Kosovo (2007 plan) I/ 609 10,549 4,872 25.4% 223 6,424,283 1,629,682 Montenegro(2007 plan) 21 123 102,468 7,02 1 5.3% 450 12,603,545 664,500 Serbia(2006 plan) 3/ 964 214,296 35,342 3.6% 640 206,58 1,000 7,401,000 Macedonia(2006 plan) 4/ 430 57,607 7,468 10.7% 514 24,770,865 2,654,386 Albania (2007 plan) 51 1,350 36,969 12,499 15.2% 467 49,907,653 7,571334 Note: Figuresare indicativeas countries apply different accountingpractices.For notes, see footnote.'44Source:Ministry of Agriculture. '43As explainedin the description of MAFCP's irrigation and drainage program, part of the salaries o fthe DrainageBoard membershave also beenpaidunder MAFCP's budget and were includedin its personnelexpendituresprior to 2006. '44 I/Kosovo'sbudgetdoesnotseparateadministrativeexpenses.Itwasassumedthattheentirebudgetotherthancapital spending(some of which has agriculture programcharacteristics)is administrative costs. 2/ MAFWM and Veterinary Services.Does not include ForestAdministration,which is a separate agency in Montenegro.Operatingcosts include salaries and material costs. 3/ Excludesforest administration. Administrative costs include salaries, operatingexpendituresand capitalexpendituresfor administrative services. 4/ Staff include81 staffin regional offices and 117 forestry police. 77 OVERALL EXPENDITURE LEVELSAGRICULTURE IN 5.40 Settingthe right prioritiesfor public expendituresin agriculturecan have significanteffects on growth and povertyreduction.The first priority for public expendituresis to improvethe capacity ofMAFCPto spendmoney effectively, whichwill increase the impact of the resources currently directedat the sector. This will probably necessitate makingstrategic decisionsabout whichareas to direct resources to first. Once money is beingspent effectively,there are compellingarguments to increase the public funds availablefor agriculture.Strengtheningthe claim for public resources allocatedto agriculture requiresan understandingofthe links betweenspendingon agricultureand rural development, and wider economic growthandpovertyreduction.There have beenmany internationalstudies ofthe relationshipbetweengovernment spendingand economic growth, some ofwhich show positivegrowthandpovertyreductioneffects from public spendingin agriculture and rural infrastructure (Box 4). Box 4. Agricultural Spending and Economic Growth-A Review of the Evidence A recent study of public spendingin43 developingcountries shows average spendingon agriculturefalling from 9.8 percent of agriculturalGDP in 1980,to 7.9 percent of agriculturalGDP in 1998 (Fanand Rao, 2003). This compares to public spending on agriculturein developed countries of around20 percentof agricultural GDP. The Africa and Latin Americaregions experienced a fall in spendingon agriculturebetween 1980and 1990(the fall was especially sharp in LatinAmerica), with some recovery of spendingby 1998.Asia has experienced a more gradual but steady decline in spendingon agriculture, falling from 9.6 percent of agriculturalGDP in 1980to 8.2 percent in 1998. But what has beenthe impact of public spendingon agriculture?The analysis by Fan and Rao (2003) suggests that public spendingon agriculturehas a significantpositive impact on agriculturalGDP, with investmentsin rural infrastructure (primarily irrigation and roads) and ingenerationand disseminationof improved technology (Research and Development, R&D) contributingmost strongly to this growth. This is supportedby other studies that suggest investment inproductivity-enhancingR&D has a larger output-promotingeffectthan other forms o fpublic spendingon agriculture(includingsubsidies). Fanand Rao show that overallthe impact of government spendingon differentsectors is mixed.However, in Africa, governmentspending on agricultureand healthhas been particularlyimportantin promotingeconomic growth.InAsia, investment in agriculturehas also had stronggrowth effects (together with education and defense). The study also found growth in agriculturalproductionto be the most crucialelement in addressing povertyin ruralareas. Several lessons can thus be drawn: Governments should consider increasing spendingon agriculture, particularlyon investmentssuch as R&D and rural infrastructure.This type of spendingnot only yields high returnsto agricultural production, but also has a large impact on povertyreductionsince most ofthe poor still reside in rural areas and their main source of livelihood is agriculture. Sector spending has differential impacts on economic growth, implying that there is potentialto improvethe efficiencyo fgovernment spendingby reallocatingfunds among sectors. The estimated returnsto the generation and disseminationo f improvedtechnologies are as high now as they ever were, and highenoughtojustify greater investment of public funds. Source:Fan, S. andN.Rao, 2003. Administrativecosts include salaries and goods and services, andexclude subsidiesand currenttransfers, and capital expendituresand transfers. 51 Staff includes 125 central staff, 997 staff in regionaldirectorates, and 228 employees in specializedagenciesor institutes. Administrative costs includepersonneland O&M costs. 78 5.41 Albania's annual budget for agriculture varies, but is decliningoverall as investmentsdecrease. As detailedinAnnex B, Table B10, MAFCP's total actualbudget spending amounts to a total ofALL 4,237 millionin2005-of which over half(ALL 2,282 millionor about 54 percent) is investment, about 14percent, subsidies (ALL 610million), 19 percent, personnelcosts (ALL 783 million) and 13 percent, other operatingand maintenance costs (ALL 563 million). Irrigationand drainageinfrastructurealone accounts for about 48 percent of MAFCP's total budget and 58 percent of its investmentbudget in2005.'45Since 2000, MAFCP's budgetshows large annual variations and an overalldecline, bothinabsolute terms and as a percentageof GDP or total government spending(Figure 9). Almost all these variations are accountedfor by investment(over 50 percent ofwhich is inirrigationand drainage infrastructure);non-investmentexpenditureshave beenquite stable with a slight increase inreal terms ifmeasuredas a percentage of GDP or total governmentspending. 145 The centralgovernment budget (domestic budget funds) and foreign financing are the two main sources of financingfor MAFCP's activities,with more limited contributions from other local sources and/or its own revenues.The share o f foreign fundingto MAFCP has been decreasingsharply over the period2002-2005 (from about 50 percent ofthe total MAFCPbudget in2002 and 2003 to 25 percent in2005). Externalfunding is plannedto start increasingagain in 2006 and 2007. Although forecasts of external funding have been grossly overestimatedby MAFCP in recentyears, foreign fundingcan indeedbe expectedto start growingagain soon, following the approval of large new foreign-fundedprojects. This includes in particularthe Water Resource ManagementProject funded by the World Bank. The share of foreign funding in investment is substantial, equivalent to about46 percent(down from 60-70 percent in the early 2000s) of MAFCPtotal investment in 2005 (all foreign funding is recorded as investment).Separate recordsare kept for each externallyfunded project, with a total o f 17 external projects (includingone group o f small projects) monitoredby MAFCP in 2005 (Annex B, Tables B11-B12).(Data on external projects (foreign-fundedinvestment)reportedby MAFCP's "Sector of Coordinationand Monitoring of Projects" (Annex B, Tables B11-B12)are entirely consistent with data from MAFCP's Budget and FinanceDepartment for 2002 and 2005. In2003 and 2004, figures on actual spending, obtained from MAFCP projectdata, are lower than corresponding figures inthe budget reports.) Investments made under domestic projects, on the other hand, are all reportedunderthe same budget code and prioritization criteria (both for projectselection) and in the event of budget cuts, are not clear. 79 Figure 9. Albania's annual budget for agriculture varies 7,000 I I ----Other(noninvestment) 2000 act. 2001 act. 2002 act. 2003 act. 2004 act. 2005 act. 2006 2007 plan plan Source: Annex B Table B10 5.42 Public expendituresin agricultureare low and couldbe increased,but only once the efficiencyof expenditureshas improved.Inthe early 2000s, MAFCP total spending accounted for over 3 percent of Albania's total general government spending, with a decline to 1.8 percent in2005 and an expected2.1 percent in2006. Throughout the period, non- investment spending inagriculture has accounted for about 0.8 percent of Albania's total general government spending-a relatively low figure incomparisonwith other countries. The share of total public spending allocatedto agriculture is typically around 6-8 percent for developing countries and 3-5 percent for developed industrialized countries (Table 12).'46An alternative measure of assessing the level of spending inagriculture is to show spending as a percentageof GPD. InAlbania, total public budget spending inagriculture representedonly about 0.5 percent of GDP in2005 (down from around 1percent inthe early 2000s). Data for comparatorcountries tendto show public agricultural spending at 1.5 -2 percent of GDP. As a percentageof agricultural GDP inAlbania, public budget spending inagriculture i s around 3 percent inrecent years (down from over 4 percent inthe early 2000s). This is also relatively low incomparison with many other countries (Box 4), especially considering the large share of spending allocatedto investment inirrigation and drainage infrastructure. Moreover, several donor projects will close inthe coming years, which will decrease the public resources invested inagriculture. 146These figures should be taken with care, as the definition of what constitutes `agriculture spending'-as well as `total public spending'-may be quite variable. 80 Table 12. Comparator Country Agriculture Public Expenditure Data (approximate figures) Agriculture as Agriculture Agricultural Spending Share of GDP (Oh) Budget share (YO) As percentage of GDP Albania 23 1.8 0.5 Macedonia 12 1.7 0.6 Serbia 11 2-3 0.9-1.5 Poland 3 8 3.5 Turkey 12 6 1.1 Azerbaijan 18 6 3.1 Moldova 25 3 0.9 Nicaragua 30 8 3.5 Armenia 35 9 1.2 Kyrgyz Republic 47 7 1.8 Source: World Bank PERs and country studies.Figures are only indicativeas different accountingpracticesare applied in differentcountries. Agriculture spendingin Poland includes a large subsidy and pensionselement, equivalent to around2.5 percent GDP. 5.43 To increaseits allocationof public resources, MAFCP needsto improveits ability to analyzeand measurethe impactof expenditures.Decisions over future levels of public fundingto agriculture shouldbe basedon an assessment ofthe quality of expenditures. Analyses ofthe efficiency with which government investmentand services to agriculture are provided-and ofthe impact ofthese investmentsand services-have beenvery weak, ifnot non-existent, inAlbania. For MAFCP to strengthenits future claimonpublic resources for agriculture and rural development, it is essentialthat it should develop its capacity to demonstrateeffectivenessand efficiencyinthe investmentsand services it providesto the sector. The draft SSAF demonstratesa commitment to strengthencapacitiesinthis area. 81 REFERENCES CARDS, 2005. 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Council Regulation (EC) No 1085/2006 of 17July 2006 establishing an Instrumentfor Pre-AccessionAssistance, Official Journal of the European Union, Luxembourg, L210/82-L210/93, Brussels. EuropeanCommission, 2006b. Multi-AnnualIndicative Financial Framework for the IPA for 2008-2010 (COM(2006) 672 final), Brussels. EuropeanCommission, 2006c. CommissionStaff Working Document - Albania 2006 Progress Report, 11/08/2006,Brussels. 82 EuropeanInstituteFoundation, 2005a. Comparative Study on the SAPARD Programme - SevenPoints of View; SAPARD Review inBulgaria, CzechRepublic,Estonia, Hungary, Latvia, Poland, and Romania. EuropeanParliament ,Council ,EuropeanCommission, 2006. 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Project FA0 GCPIALBIOOSIITA "Agricultural Production Support inAlbania"; December2006 HouseholdBudget Survey, Albania Kacurri, Ermal, 2006. Establishing and Running a Market Information Systemfor Non- Perishable Productsfor Project Beneficiaries; Project F A 0 GCP/ALB/OOS/ITA "Agricultural Production Support inAlbania"; September 2006 Kemal-Ur-Rahim,Kazim, 2004.Albanian MarketingAssessment review - F A 0 GCP/ALB/OOS/ITA "Agricultural Production Support inAlbania"; 2004 Kulla,Agron andXhuljeta Lazaj, 2003. Milk and Dairyproduction -Afood chain study in the Communes of Dajci andAna e Malit (Skhodra district); F A 0 GCPIALBIOOSIITA "Agricultural Production Support inAlbania"; June 2003 Lemel, Harold, 2005. Mid-term Evaluation Study of theAgricultural ServicesProject,May 2005. McCarthy, N.,G. Carletto, B. Davis and I.Maltsogli. 2006. "Assessing the Impact of Massive Out-Migration on AlbanianAgriculture", World Bank, Washing ton DC. 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TheDynamics of Vertical Coordination in Agrifood Chains in Eastern Europe and Central Asia. Implicationsfor Policy and World Bank Operations. 84 World Bank, 2006d. Country Assistance Strategyfor Albaniafor the Period FY06-FY09. Washington DC, January 10,2006. World Bank, 2006e. Project Technical Annex for the Albania Avian Influenza Control and HumanPandemic Preparednessand ResponseProject, June 1,2006. World Bank, 2006f. Albania Restructuring Public Expenditureto Sustain Growth. A Public Expenditureand InstitutionalReview.Volume Iand 11. Washington DC, December 2006. World Bank, 2007a. Albania: Access to Credit. World Bank, June 2007. World Bank, 2007b. Albania: Urban Growth, Rural Stagnation and Migration, A Poverty Assessment. World Bank, July 2007. 85 ANNEX A: HOUSEHOLD BUDGET SURVEY DATA ANALYSIS Calculating. Technical Efficiency The stochastic productionfrontier has two components: one part that establishes the relationship betweenoutputs and inputs, and the other that accounts for variation inoutput that i s due to inefficiency. Y= f(K, L, Z) i-E The first part after the equal sign is assumedto explainthe level o fproductionunder existing technology. The second part, E, i s the efficiencyhnefficiency part. It i s usually specified to have, itself, two parts. E= u+e The small e is random error (on average, that is, across all farms it is zero and the variance is constant) and the urepresents technical efficiency. The way technical efficiency i s measured is as follows: a) First, we estimate output for given inputs and u.-call this PY (for predicted Y) [That is, Y=f(k,L, Z) +u] b) Thenwe estimate output for giveninput and u=O-call this MY (as for maximal Y): It is the output that we should expect the farmer to be obtaining ifthere were no technical inefficiencies. Thentechnical efficiency is the ratio of db. This can be done for the individual farmer or for all the farmers, with the usual step inthe latter o f aggregating individual estimates. As canbe seen above, the X can be any number o f inputs ranging from land size, land quality, different quality of labor and so on. Having more disaggregation of inputsalways helps and can tell us which farmers are utilizing their inputs inways that close the distance between the efficient output and current output. 86 Table A1:Correlatesof consumption,pooled 2002-2005 sample - Without regionalcontrols With regionalcontrols Dependentvariable: log of real consumption - - Estimated t-statistics Estimated t-statistics shortfall shortfall One child -0.088 -6.42 -0.088 -6.53 Three children -0.235 -12.98 -0.219 -12.08 Low dependency ratio 0.173 13.61 0.167 13.22 Female headed 0.158 8.82 0.152 8.48 Householdhead, primary -0.014 -0.67 -0.014 -0.71 Householdhead, secondary 0.141 5.89 0.146 6.15 Householdhead, vocational 0.172 7.78 0.167 7.64 Householdhead, highereducation 0.400 15.71 0.395 15.64 Numbersof days lost to illness (in logs) 0.016 1.62 0.022 2.33 Headof householdis unemployed -0.196 -23.19 -0.186 -21.84 Head of householdin inactive -0.017 -2.98 -0.013 -2.44 Rural resident -0.167 -13.85 -0.145 -11.43 Distanceto school in kms (in logs) -0.040 -5.45 -0.035 -4.88 Year dummy (2005==1) 0.108 9.88 0.109 10.07 coast 0.041 2.31 Central -0.045 -2.54 Mountain -0.131 -7.37 Constant 8.960 384.89 8.981 346.22 N 7237 1237 R-squared 0.255 0.27 Note:All the variables with t-valuegreater than are statisticallysignificant, ar -all the ones with t-values less I than2 are not statisticallysignificant.That is, in the first case, the variation in consumptionassociatedwith the variable is not due to chance, while inthe latter it may be due to chance. 87 Table A2: Correlatesof Consumptionby Year, Urban Areas Dependentvariable: log of real consumption Estimated t-statistics shortfall shortfall shortfall One child Three children Low dependency ratio Female headed Householdhead, primary Household head, secondary Household head, vocational Household head, higher education Numbers of days lost to illness (in logs) Head of householdis unemployed Head of household in inactive Distanceto school in kms (in logs) Coast Central Mountain Constant N R-squared Note: All the variables with t-valuegreater than 2 are statisticallysignificant, and all the ones with t-values less than 2 are not statisticallysignificant.That is, in the first case, the variation in consumption associatedwith the variable is not due to chance, while in the latter it may be due to chance. 88 Table A3: Composition of total agriculture output Unit All Rent in Autarchy Rent Out Purchase land Autarchy Sale Land Value total agriculture output composition crop production % 14.1% 17.4% 13.8% 18.3% 23.8% 13.6% 24.3% tree cropproduction % 5.8% 5.2% 5.6% 17.6% 5.2% 5.5% 24.1% livestock produciton % 48.3% 43.2% 49.2% 24.3% 40.6% 49.0% 27.8% livestock product production % 31.7% 34.1% 31.4% 39.7% 30.4% 31.9% 23.8% Table A4: Stochastic Frontier Estimate on gross value total agriculture production StochasticFrontier LOG TOTAL VALUE OF AG. PRODUCTION Log ha of land owned 0.473 *** (4.24) Log area o f land irrigated 0.037*** (4.18) Log value of hired labor 0.030 (1.01) Log number of family members working on 0.383 *** farm (5.72) Log cost of total inputs except hired labor) 0.446*** (17.00) # machine 0.001 * (1.85) Dummy has water pump 0.019 (0.1 8) Constant 4,875*** (26.91) Observations 1796 Sigma v 55% Source. Computedby authors Dummies for municipalities estimated but not reported. Absolute value of z statistics in parentheses. * significantat 10%; ** significant at 5%;***significantat 1% 89 Table A5: Determinant of TechnicalInefficiency-ofTotal Agricultural ProductionUsing Village Fixed Effects (A negativesign of the coefficient increasesfarmer's efficiency) Highestyearsofeducationinhh 0.044 0.01 1 3.79 0.000 Age o fthe head -0.009 0.002 -3.34 0.001 Householdsize -0.037 0.0 19 -1.91 0.056 Dummy has participatedto an irrigation program -0.269 0.248 -1.08 0.279 0.7 0.164 -4.43 0.000 Sharetransfer fromtotal income 1.029 0.124 8.27 0.000 Nb.ofyears since land was acquired 0.004 0.004 1.19 0.235 Dummy has deed from land since 1991 -0.112 0.092 -1.21 0.225 Dummyland is inherited 5 0.084 00 Community level variables Interactionbetweendistanceto bank and accessto credit from govt andprivate -0.019 0.004 -4.10 0.000 siness at the communitylevel 0.001 0.006 0.17 0.862 0.093 3.99 0.000 Constant 2.739 0.228 12.01 0.000 Source: Computed by authors Table A6: Land titling Unit All Rent in Autarchy Rent out Purchase Land Autarchy Land Sale Share of households % 100 6.22 90.16 3.62 6.65 91.78 1.57 Share of hh with deed from landsince 1991 % 75.1% 84.5% 73.6% 95.5% 20.3% 79.0% 89.3% deed from land since 1946 % 21.3% 8.7% 22.6% 9.0% 1.6% 22.9% 10.7% a will for land YO 1.4% 0.0% 1.4% 1.5% 1.6% 1.4% 0.0% a sales receipt for land % 6.8% 3.9% 7.0% 7.5% 95.1% 0.2% 0.0% a tribunal document for land YO 0.1% 0.0% 0.1% 1.5% 0.0% 0.1% 0.0% other legaldocumentfor land % 0.5% 2.9% 0.3% 0.0% 0.8% 0.4% 0.0% no legaldocumentfor land YO 3.2% 4.9% 3.2% 0.0% 3.3% 3.2% 3.6% 90 Table A7: Summary of Efficiency Parameters Technical Efficiency Share of households All household 28% 100% Rentout 12% 3.6% Autarchy 28% 90.2% Rent in 35% 6.2% Sale land 18% 1.6% Autarchy 29% 91.8% Purchase land 16% 6.7% Land class 0-0.25 Ha 24% 25.7% Land class 0.25-0.6 ha 27% 25.6% Land class 0.60-1.16 ha 29% 23.7% Land class 1.16-11.5 ha 31% 24.9% HHwith <=2 plots 25% 45% HHwith 3 plots 29% 22% HHwith 4 plots 30% 16% HHwith >5 plots 32% 17% Figure Al: Technical efficiency for rental market participants Te c hn ical E ffic ie nc y b y farm e rs 1 2 I L I I I 0 2 4 6 8 I 1 = R e n t o u t 2 = Autarchy 3= R e n t i n 91 2 m h! r r ai c P P ln b CI ln ,o e! 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