Project Brief Investment Climate | World Bank Group 91182 Minimizing Distortive Incentives and State Aid in Moldova Project At A Glance Results and Impacts Country/Region Moldova/Europe and Central Asia • An online information portal for state PRODUCT Private Participation in Infrastructure and aid will help to increase transparency Social Sectors and level the playing field for all firms, THEME Competition Policy including new entrants and small and medium enterprises. Many developing economies still do not fully enjoy the benefits of competitive markets. Distorted markets reduce investment • Systematic screening of state aid is expected to produce at least 5 percent opportunities, increase business risks, raise the cost of essential savings of public state aid funds and business inputs needed to compete in domestic and international a better allocation of government markets, and lessen the benefits of private sector participation for resources. economic development and poverty reduction. • Criteria for the design and evaluation The World Bank Group’s Investment Climate Competition Policy of state aid that does not hinder a team is helping the government of the Republic of Moldova design competitive economy will benefit all mechanisms that minimize the distortive effects of incentives market participants. and state aid. Selective government aid targeting only a few firms diminishes the incentive for firms to be more efficient and negatively impacts productivity in those sectors. By reducing selectivity and increasing transparency in the granting of state aid, the project aims to level the playing field and maximize benefits for all market players. This project will also facilitate a more effective use of state resources. In Partnership with FIAS World Bank Group Context Our Role Most governments provide state aid with the intention Promoting policies that enable a competitive economy is of correcting market failures and supporting policies that a key objective for the government of Moldova. It is one of benefit their citizens (such as initiatives to support education seven medium-term objectives of the National Development or foster innovation). However, targeting aid toward specific Strategy for 2012–2020 and an important component of firms can negatively impact market competition. Firms that Moldova’s efforts to join the European Union. In light of unduly receive state aid may enjoy a comparative advantage this policy commitment, the government of Moldova is over their competitors that is not necessarily reflective of working with the World Bank Group’s Investment Climate their efficiency or contribution to policy objectives. Competition Policy team to reduce the market distortive impacts of its state aid. State aid granted in Moldova accounts for around 8 percent of the government’s budget expenditure and 3 percent of With the support of the Bank Group team, the government gross domestic product (excluding agriculture, fisheries adopted the Law on State Aid in 2012, which regulates and transport). The government of Moldova directs state the procedures for authorizing, granting, monitoring, aid to support regional development, small and medium and reporting state aid provided to various entities of the enterprises, research and development, services of general national economy, in line with the EU’s rules on state aid. interest, and other policy objectives. While most of The Moldovan Competition Council (CCRM), an autonomous Moldova’s state aid schemes are meant to target a broad agency, was created in 2013. The Bank Group is helping number of beneficiaries, lack of transparency has resulted in CCRM develop and implement a competition and state state aid benefiting only a few market players. For example, aid control framework by supporting amendments and on average, 12 percent of aid administered from 2009–2011 targeting state aid instruments that create the most was documented as aid to individual firms, but much more distortion in the economy, such as those that (i) benefit only individual aid was likely granted as unplanned or “ad hoc” a few competing firms or unevenly distribute the amount aid. In addition, around 90 percent of state aid is in the form given to each firm, (ii) offer repeated benefits, and (iii) of tax exemptions and subsidies—instruments that, when directly affect the aid recipient’s variable costs and, thus, combined with lack of transparency, can be used to provide pricing and output decisions which can create an undue benefits to just a few firms. advantage in the market. The Bank Group is also supporting these changes by: “The Republic of Moldova is in transition towards • Developing an online information portal to aid in record a market economy, and its main goal is building a keeping, strengthening collaboration between CCRM and competitive economy. Thus, a careful evaluation other public entities that grant state aid, and increasing and monitoring of state aid is of paramount transparency on how public resources are spent. importance to achieving development results • Advising on the tools needed to evaluate and monitor in the most efficient and least distortive ways, state aid and ensuring all eligible market players benefit especially in light of European integration. To from available resources. achieve this task, the technical assistance provided • Supporting communications strategies, creating media by the World Bank Group is crucial as it will help us products, and hosting events to increase awareness of implement the state aid control framework and set state aid rules and regulations among public and private up a web-based record-keeping system of state aid sector stakeholders. in Moldova.” • Helping to build the capacity of CCRM and other agency VIORICA CARARE staff through on-the-job training and workshops to help President, Competition Council of the Republic of Moldova them appropriately analyze state aid and minimize the negative impact on market competition. Contact Georgiana Pop | Economist | Investment Climate Email: gpop@worldbank.org | TEL: 5753+1346 | www.wbginvestmentclimate.org