PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Public Disclosure Copy Report No.: PIDC1722 Project Name MD Competitiveness Enhancement Project II (P144103) Region EUROPE AND CENTRAL ASIA Country Moldova Sector(s) Public administration- Industry and trade (34%), SME Finance (33%), General industry and trade sector (33%) Theme(s) Regulation and competition policy (34%), Other Financial Sector Development (33%), Micro, Small and Medium Enterprise support (33%) Lending Instrument Investment Project Financing Project ID P144103 Borrower(s) Ministry of Finance Implementing Agency Ministry of Economy Environmental F-Financial Intermediary Assessment Category Date PID Prepared/ 08-Jan-2014 Updated Date PID Approved/ 09-Jan-2014 Disclosed Estimated Date of Appraisal Completion Public Disclosure Copy Estimated Date of 29-Jul-2014 Board Approval Concept Review Track II - The review did authorize the preparation to continue Decision I. Introduction and Context Country Context 1. Economic growth in Moldova from 2000-2008 was driven by a boom in domestic demand funded by remittances, while agriculture and manufacturing struggled. In the early 2000s, Moldova began to recover some of the economic losses suffered after the disintegration of the Soviet Union in the 1990s, though there was also substantial migration abroad. From 2000 to 2008, Moldova became one of the world’s most remittance-dependent countries, with remittances growing from 11.5 percent of GDP in 2000 to 30 percent by 2008. Remittance-fueled consumption, services, and housing were the drivers of growth in the period leading up to the global financial crisis. 2. More recently, macroeconomic performance has been volatile, reflecting vulnerability to global economic and climatic conditions. After a 6-percent contraction in 2009, real GDP grew at an average rate of 6 percent in 2010-11. Under favorable external conditions remittances recovered and Page 1 of 5 export growth was strong. However, growth came to a halt in 2012, as a result of the Eurozone crisis combined with the effects of a severe drought on agricultural production. In the first half of 2013, growth recovered to 4.9 percent. Public Disclosure Copy 3. Moldova’s recent economic performance reduced poverty and promoted shared prosperity. The national poverty rate fell from 30.2 percent in 2006 to 17.5 percent in 2011. Over the same period, extreme poverty fell from 4.5 percent to 0.9 percent. Much of the reduction in poverty has been driven by growth. Also over the period, growth in the consumption of the bottom 40 percent of the population outpaced average growth in consumption, with growth averaging 5.8 percent per year for the bottom two quintiles, compared to 2.9 percent for the average. However, despite this decline in poverty, Moldova remains one of the poorest countries in Europe. Sectoral and Institutional Context 4. Moldova’s economy has gone through significant sectoral changes, but there has been little job creation, and performance of “tradeables” has been poor. The service sector has been the largest contributor to economic growth over the past five years. Agriculture and manufacturing have stagnated. Moldova's GDP expansion in the last decade has to be attributed to “jobless” growth. In 2000-2012, Moldova's employment to population rate decreased from 58 percent to only 38 percent. 5. There has been little dynamism in exporting sectors. Between 2004 and 2008, Moldova’s exports of goods and services grew at less than five percent annually (in real terms): at a pace slower than overall GDP, and slower than exports in many other CIS countries (as stated in the 2011 Moldova Country Economic Memorandum). Much of the export growth that Moldova did experience was driven by re-exports – additional processing of goods using raw materials and design specifications produced elsewhere. The CEM showed that re-exports do not create jobs, but direct exports do. Crucially, there has been little expansion of direct exports to non-CIS countries in the past several years. Exports have also remained relatively concentrated in a few industries (including wine, fresh fruit and nuts, and textiles). Public Disclosure Copy 6. In response to the vulnerabilities inherent in the remittance-driven model, the Government of Moldova has made a decision to pursue a strategy of export-oriented economic growth. The national development strategy, Moldova 2020, is centered around the need to transition to a dynamic economic model based on increased investment and the development of goods- and services-exporting industries. The Moldova 2020 strategy is built around seven priorities: the business environment, access to finance, education, and infrastructure, which are defined as critical areas; the judicial sector as an issue area that underpins all others; and consumption of energy resources and the pension system, which disproportionately affect the poor. 7. The World Bank has been supporting the government in its reform efforts through the 2006-2013 Competitiveness Enhancement Project (CEP I), which focused on: i) regulatory reform, including regulatory reform strategies and the institutional structure for regulatory impact analysis, among others; ii) access to finance, including a credit line and matching grants for business development services; and iii) quality infrastructure, including equipment and institutional reform in the area of metrology, standards, testing and quality, as well as matching grants for enterprise access to these services. Substantial progress has been made, but more is needed. 8. The upcoming project can build on the successes of the CEP and help the Government respond to its current medium-term priorities. CEP I was a successful project, with the Project Page 2 of 5 Development Objective and nearly all intermediate targets met, and some targets substantially exceeded. This project directly supported the achievement of the several indicators under the “Improving economic competitiveness to support sustainable economic growth” pillar of the Public Disclosure Copy 2009-2013 Country Partnership Strategy. The Ministry of Economy, its Project Implementation Unit, the Credit Line Directorate, and other beneficiaries have been strong and committed partners during this project. Relationship to CAS 9. The proposed Second Competitiveness Enhancement Project (CEP II) is consistent with the WBG's global and regional (ECA) strategy and is directly linked to the pillars of the 2013-17 Country Partnership Strategy (CPS). The loan will contribute to shared prosperity and poverty reduction through improvements in employment and entrepreneurship as sources of livelihoods. The loan will support improvements in the business environment, access to finance, and access to business support infrastructure and business development services, which will help enterprises to become more productive, competitive, and resilient to shocks. In this way, the loan will help improve enterprise performance across sectors and sizes of firms. This will have positive impacts on enterprise owners and employees. The regulatory reform component will have a horizontal impact across all enterprises, the line of credit may be focused more on exporters, and the risk-sharing facility will be focused more on small and medium enterprises (SMEs). The SME component will also target this sub-set of firms, which represents nearly 98% of companies in Moldova and nearly 60% of employment. While a breakdown of employment by type of firm and quintile of employment is not available, because of the loan’s broad reach it is safe to say that the livelihoods of employees and owners of firms that are in the bottom 40% of the income range will be positively impacted by the activities described above. Regarding firm owners, entrepreneurship and self- employment are well known to be sources of livelihoods for both the poor and the bottom 40%. The loan will improve opportunities for the private sector and job-creators overall. 10. The proposed loan is fully aligned with the competitiveness pillar of the ECA strategy, Public Disclosure Copy which aims to improve the business environment and innovation policies and increase economic diversification. The loan also addresses the financial inclusion and financing for entrepreneurs focus within the social inclusion pillar. 11. The proposed loan is directly linked with the first pillar of the 2013-17 Country Partnership Strategy (CPS) which addresses “increasing competitiveness”. The proposed operation will directly support achievement of the following outcome indicators: i) decreased regulatory burden on enterprises ii) improved access of private enterprises to formal sources of finance. The project will help improve the competitiveness of Moldovan enterprises by removing regulatory bottlenecks and leveling the playing field for private companies, expanding bank lending to enterprises, improving the creditworthiness of enterprises’ investment projects through improved financial management and business planning, and improving the capacity of companies to compete in important export markets. II. Proposed Development Objective(s) Proposed Development Objective(s) (From PCN) 20. The project will help increase the competitiveness of Moldovan enterprises, in particular small and medium enterprises by increasing their linkages with markets, improving their ability to Page 3 of 5 access medium to long-term finance, and improving the business enabling environment in a way that reduces transaction costs. Key Results (From PCN) Public Disclosure Copy 21. This project will support the following key results: • Reduction in management time spent meeting regulatory requirements • Increase in SMEs’ exports • Increase in lending to SMEs by participating financial institutions III. Preliminary Description Concept Description The proposed project will have three main components: regulatory reform, SME development, and access to finance. Regulatory Reform Component The objective of the Regulatory Reform component will be to strengthen accountability and capacity for the implementation of priority reforms. It will include activities focusing on implementation of monitoring and public-private dialogue as well as capacity and awareness- building of public sector authorities related to business enabling environment reform, and funds to support reform implementation. As mentioned earlier in this note, the Government has a good set of strategies that cover the most important reform areas; the challenge now is to implement them well and fully. Implementation has been a weakness in the past, so this project aims to strengthen implementation mechanisms and accountability. SME Development Component The objective of the SME Development component will be to strengthen SMEs’ links to markets and ability to compete in those markets, by improving the effectiveness of government institutions that provide public goods in support of this objective, and by providing targeted assistance to SMEs (for instance, in the form of matching grants) to access business development services focused on Public Disclosure Copy increasing their competitiveness. Access to Finance Component The objective of the Access to Finance component will be to improve access to medium to long- term finance for export-oriented enterprises and improve banks’ credit risk assessment methodologies for SME financing. IV. Safeguard Policies that might apply Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment OP/BP 4.01 ✖ Natural Habitats OP/BP 4.04 ✖ Forests OP/BP 4.36 ✖ Pest Management OP 4.09 ✖ Physical Cultural Resources OP/BP 4.11 ✖ Indigenous Peoples OP/BP 4.10 ✖ Involuntary Resettlement OP/BP 4.12 ✖ Safety of Dams OP/BP 4.37 ✖ Page 4 of 5 Projects on International Waterways OP/BP 7.50 ✖ Projects in Disputed Areas OP/BP 7.60 ✖ Public Disclosure Copy V. Financing (in USD Million) Total Project Cost: 45.00 Total Bank Financing: 45.00 Financing Gap: 0.00 Financing Source Amount BORROWER/RECIPIENT 0.00 International Bank for Reconstruction and Development 30.00 International Development Association (IDA) 15.00 Total 45.00 VI. Contact point World Bank Contact: Melissa Rekas Title: Private Sector Development Specialist Tel: 473-8902 Email: mrekas@worldbank.org Borrower/Client/Recipient Name: Ministry of Finance Contact: H.E. Anatol Arapu Title: Minister of Finance Public Disclosure Copy Tel: Email: Implementing Agencies Name: Ministry of Economy Contact: Valeriu Lazar Title: Deputy Prime Minister/ Minister of Economy Tel: Email: VII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Page 5 of 5