Moldova - Second Private Sector Development Project

Document of The World Bank Report No. 16496-MD STAFF APPRAISAL REPORT REPUBLIC OF MOLDOVA Second Private Sector Development Project May 15, 1997 Enterprise and Finance Division Country Department IV Europe and Central Asia Region  CURRENCY EQUIVALENTS (as of April 1997) Currency Unit = Moldovan Leu I Leu US$0.22 US$1 4.54 Lei WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ARIA - Agency for Restructuring and Enterprise Assistance CAS - Country Assistance Strategy CEE - Central and Eastern Europe CPC - Competitiveness and Productivity Center EBRD - European Bank for Reconstruction and Development EU (TACIS) - European Union Program of Technical Assistance for Commonwealth of Independent States FSU - Former Soviet Union FTA - Funds Transfer Agreement GOM - Government of Moldova GPN - General Procurement Notice GTZ - Deutsche Gesellschaft fur Technische Zusammenarbeit IAS - International Accounting Standards IBPI - Investing in Best Practice Information IDA - International Development Association IIMS - Investing in Improvement of Managerial Skills MEBO - Management-Employee Buy-Outs MOF - Ministry of Finance PIU - Project Implementation Unit PSD I & II - Private Sector Development Projects I & II QCBS - Quality- and Cost-Based Selection SAL - Structural Adjustment Loan SMEs - Small and Medium-Sized Enterprises TA - Technical Assistance TOR - Terms of Reference TU - Technical Unit MOLDOVA'S FISCAL YEAR January 1 - December 31 Vice President: Johannes Linn, ECAVP Director: Basil G. Kavalsky, EC4DR Division Chief: Paul J. Siegelbaum, EC4EF Staff: Vladimir Goran Kreacic, EC4EF Alessandra lorio, LEGEC Gregory Jedrzejczak, EMTPS Saha Meyanathan, EDI Vesna Petrovic, EC4EF  MOLDOVA Private Sector Development II Project CONTENTS I. ENTERPRISE SECTOR ........................................................1 A. Sector Status ....................................................... I B. Issues and Progress ........................................................4 C. The First Private Sector Development Project (PSD I)-Early Results ........... 6 II. PROJECT DESCRIPTION A. Background, Objectives and Scope ...................................................8 B. Project Structure ...................................................9 C. Investing in Best Practice Information Component (IBPI) ........................... 10 D. Investing in Improvement of Managerial Skills Components (IIMS) .......... 12 E. Economic Analysis and Rationale .................................................. 13 F. Detailed Project Costs and Financing Plan .................................................. 17 III. PROJECT IMPLEMENTATION ....................... 19 A. Implementation Arrangements ................................................. 19 B. Investing in Best Practice Information ................................................. 19 C. Investing in Improvement of Managerial Skills ........................................... 20 D. Procurement ................................................. 21 E. Disbursements ................................................. 25 F. Project Accounting, Financial Reporting, Auditing and Supervision ........... 25 IV. BENEFITS AND RISKS ................................... 27 A. Project Benefits ................................... 27 B. Project Risks ................................... 27 V. AGREEMENTS AND RECOMMENDATIONS . ................................ 28 A. Agreements ................................... 28 B. Recommendations ................................... 28 ANNEXES: Annex I: IIMS Component: Participants' Guidelines Annex II: IIMS Component Implementation Plan Annex III: Performance Indicators Annex IV: Project Implementation Plan Annex V: Supervision Plan   I. ENTERPRISE SECTOR A. Sector Status 1.1 Moldova's industrial and agro-processing enterprises have been coping with a number of factors inherited from the Soviet era: too many resources located in large loss-making enterprises, outdated equipment with almost no process or product flexibility, loss of traditional inter-republic markets and cooperation links, and perhaps most critically, inadequate management skills to cope with market- induced changes. These structural challenges have been magnified by the implementation of a stabilization program and rapid privatization. Early success with the stabilization program and mass privatization was not complemented by adjustment at the enterprise level. By 1995, output had decreased to 40% of its 1989 level. Contraction in industrial production appeared to have bottomed-out in mid-1995 but following a slight recovery in early 1996, it continued to fall, reaching 8% for 1996. With few exceptions, Moldovan enterprises have reacted to the new environment, with its hardening of budget constraints, almost exclusively through passive strategies: the accumulation of arrears to the budget, energy sector, wages and to the fragile commercial banks, as well as by increased recourse to barter trade. Without inducing a more proactive stance of managers, a majority of privatized enterprises would be forced into bankruptcy over the next few years. Moldova's First Private Sector Development Project (PSD I), through its successful completion of radical restructuring in over 15 enterprises, has demonstrated the benefits of non-investment, aggressive, cost-cutting and downsizing measures. These enterprises, which are well down the road of recovery, are now demanding increasingly more sophisticated forms of assistance. Such demand for Management Information Systems, Marketing and Sales, Total Quality Management, ISO certification, as well as training of managers abroad, will only increase as an additional 40 private enterprises are restructured in 1997. 1.2 Enterprise Sector Structure. Between 1992 and 1995, employment in the economy shrank by 18 percent (377 thousand people). This was mostly due to a sharp reduction of employment in industry (more than 50 percent) while during the same period employment in agriculture increased by 3 percent. In spite of reductions in employment in large enterprises--mostly in the former military complex--and continuous labor reductions in the rest of the sector, large enterprises remain the dominant employers. As in the other republics of the FSU, industrial enterprises are grossly oversized with a number of employees listed on the employee rolls but without having been paid for months. The virtual non- existence of a supportive network of industrial SMEs is a particularly acute problem for Moldova -- with its small domestic market and traditional agricultural and agro-processing specialization. Over-sized enterprises are still heavily dependent on cooperation with the producers and traders from the other republics of the FSU. With the breakup of the USSR, and delay in re-establishing trade links with the FSU, many production lines and markets were lost. In recent years, Moldovan enterprises have also faced growing foreign competition in local markets. Participation of firms with foreign capital is low, despite their dynamic growth in recent years in relative terms. Between 1992 and 1995, their volume of production increased almost 50 times but by end 1995 they contributed only 3.3 percent of overall industrial production and employed just 7566 people. This trend continued in 1996. 1  1.3 There have been Bx 1 bnd strial Output y Stors significant changes in the (constarntrces, percntge of total00 output industrial output of particular sectors (see Box 1). The most Sector 1991 1992 1993 1994 1 995 1 996 consequential are: (1) the practical collapse of light Er 2. ;8;0 1 17.;8 14.6 16. 16 industry and (2) the fast relative Engineern 5.7 13.6 14.3 10.7 9.2 7.4 growth of the energy sector. d aperpocessing 3.4 3.1 4.4 4.3 4.1 3.6 growth ~~~~~~~~~~~Conistruction Materiafs 4.3 3.9 3.6 4.5 3.8 30 Structural changes measured in GOssPoeig06 1. 1. 2. 25 26 t et ra c an~~~~~~~ges mesurdi ciIsssing:::;;00;-0;; li Xft0-t0..l 1 [ .51 i;$