Moldova - Transport sector review (Vol. 1 of 3) : Main report

Report No. 13891 -MD Moldova Transport Sector Review November 16, 1995 CoLuntry Departnient IV Europe and Central Asia Region -~~~;,, . ...... ,:, - f, z .. ., ... . . - * . . . . L ... . - .- .  CURRENCY UNITS and EQUIVALENTS Lei Lei US$1 = 4.3 Lei (as of November, 1994) DM Deutsche Mark US$1 = DM 1.5435 (as of September 9, 1994) ECU European Currency Unit US$1 = ECU 0.8109 (as of September 9, 1994) USD US Dollar USc US cent WEIGHTS, MEASURES and OTHER UNITS bln billion inh inhabitant kilo, kg kilogram km kilometer M, mln million pass passenger sq km, km2 square kilometer T ton (metric, 1,000 kg) th thousand vd vehicles per day CONVERSION FACTORS 1 mile 1.609 meters 1 kg = 2.205 lbs 1 US gallon = 3.785 liters 1 sq km = 0.386 square miles CHEMICAL COMPOUNDS CXHy, HC Hydrocarbons CO Carbon Monoxide CO2 Carbon Dioxide NO,, Nitrogen Oxides SO, Sulfur Dioxide  GLOSSARY OF ACRONYMS AND ABBREVIATIONS ATC Air Traffic Control CAA Civil Aviation Administration CIF Cost-Insurance-Freight CIS Commonwealth of Independent States EBRD European Bank for Reconstruction and Development EDI Electronic Data Interchanges EU European Union FIATA Federation Internationale des Associations des Transitaires et Assimiles FOB Free-On-Board FSU Former Soviet Union GATT General Agreement on Tariffs and Trade GDI Gross Domestic Investment GDP Gross Domestic Product IATA International Air Transport Association ICAO International Civil Aviation Organization IMF International Monetary Fund L/C Letter of Credit MDSMTO Moldovan Department for Standards, Metrology and Technical Oversight MOT Ministry of Transport NBM National Bank of Moldova OECD Organization for Economic Cooperation and Development PIP Public Investment Plan SAL Structural Adjustment Loan SGS FSU Railway Association SOE State Organizations and Enterprises SZD FSU's Soviet Union Railways TACIS Technical Assistance for Commonwealth of Independent States TEA Technical and Economic Assessment TIR International Road Transport VAT Value-Added Tax   ACKNOWLEDGEMENTS The Review is based on the findings of a World Bank mission which visited Moldova in October 1994. The members of the mission were P. N. Taborga (mission leader), F. Bartunek (railway engineer), A. Bonnel (financial analyst), R. Bonney (road engineer), J. Desgranges (aviation specialist), W. Lane (environmentalist), 0. Salama (trade facilitation specialist), and N. Sumardi (systems support). J. Holt and R. Schultz were the peer reviewers. V. Iovv, Minister of Transport, was the main counterpart of the mission on the Moldovan side. The study has relied heavily on official sources of information - statistics as well as interviews and meetings with Government ministries and agencies. It also draws on the Moldova Structural Adjustment Lending operation, on-going Bank work on the macro economic conditions of the country, other sector work, studies supported by EBRD and the EU, and findings from various Bank missions.   MOLDOVA TRANSPORT SECTOR REVIEW TABLE OF CONTENTS I. INTRODUCTION A. Purpose of the Study .................................... 1 B. Organization of the Study ................................. 2 II. TRANSPORT AND ECONOMIC ADJUSTMENT A. Structure of the Economy ................................. 4 B. Macoreconomic Performance ............................... 5 C. Role of the Transport Sector ............................... 7 1II. TRANSPORT DEMAND A. The Transport Sector in a Changing Economic Situation .... ......... 9 B. Growth Scenario ...................................... 9 C. Historic and Projected Traffic .............................. 10 IV. TRANSPORT AND TRADE FACILITATION A. Overview ........................................... 12 B. Excess Costs and Corrective Actions by Physical Source ............. 13 C. Further Benefits - Trade and Welfare Gains ..................... 23 V. ROADS AND ROAD TRANSPORT A. Road Infrastructure ..................................... 24 B. Road Transport ....................................... 31 C. Urban Transport ....................................... 35 VI. MOLDOVAN RAILWAYS A. Organization and Staff .41 B. Physical Description .41 C. Traffic Levels .42 D. Railway Operations .44 E. Real Estate Laws and Labor Agreements .46 F. Financial Issues and the Need for Restructuring .46 VII. CIVIL AVIATION A. Overview .........................54  B. Institutional Organization of the Sub-Sector ...... . . . . . . . . . . . . . . . 54 C. Airline Operations .......... . . .. . . .. . . .. . . .. . . .. . . .. . . 55 D. Airports ............. .. .. .. .. .. ... .. .. .. .. .. .. .. .. . 57 E. Air Traffice Control .................................... 58 F. Financial Issues and the Need to Restructure ..................... 59 VIII. TRANSPORT, ENVIRONMENT AND RESETTLEMENT A. Background .......................................... 66 B. Involuntary Resettlement ................................. 69 IX. RECOMMENDATIONS A. Overview ........................................... 71 B. Sector Adjustment ..................................... 71 C. Investment Priorities and Possible Bank Assistance .80  I. INTRODUCTION 1.1 Moldova is a landlocked country -- it has an imprecisely defined 500 to 900 meter frontage on the Danube -- situated between Rumania and Ukraine. It became independent on August 27, 1991, as the Soviet Union disintegrated. Moldova is ethnically diverse and is the most densely populated country in the Former Soviet Union (FSU), with a population of 4.3 million and a land area of 33,700 square kilometers. GDP per capita was $1,300 in 1992. About half of the population is classified as urban, and Moldova's capital, Chisinau, has a population of about 1.2 million. 1.2 Under the Soviet system, Moldova's role was one of producer of raw and processed foodstuffs, such as grapes, grains, wines, vegetables and livestock, and Moldova's land and climatic endowment give it a potential comparative advantage likely to remain unchanged. Agriculture and agro-industry have historically exceeded 50% of GDP while manufactures, including technologically advanced items for the military, has recently declined from its traditional share of 37% of GDP to less than 30% in 1994. Most inputs, particularly primary energy supplies like oil, gas and coal, are imported from the FSU. 1.3 In addition to its agricultural and industrial base, Moldova's geographical proximity to markets in the West and East and its extensive transport infrastructure amount to significant strengths on which to base its economic recovery. The relative political stability and the commitment to economic reform were recognized in the approval by the World Bank of a Structural Adjustment Loan (SAL) on December 8, 1994. 1.4 Moldova has endured an internal armed conflict following independence, driven by ethnic factors combined with differences in approaches to economic reform and restructuring. The conflict ended with a cease fire in July 1992 and resulted in a de facto partition of the country, with the eastern part of the country across the Dniestr river (Transnistria) under separate control. High level discussions are underway and there are indications of budding economic cooperation. Parliament, elected in February 1994, appears to have a majority in support of economic reform. 1.5 Moldova's well developed transport sector (albeit with institutional and physical deterioration problems) consists of 10,531 km of roads (excluding municipal, agricultural and forestry roads), 1,318 km of railroad (about 100 km electrified), and four airfields, one of which is of international standard. In addition, the vehicle fleet consists of 169,100 passenger cars, 69,600 trucks and 10,000 buses. 1.6 The economic reforms underway are likely to make most of Moldova's traditional sectors competitive, provided that transport and trade related services support and enhance the country's comparative advantages. It is expected that after a difficult period of economic and political adjustment, Moldova will enter a phase of increased efficiency, trade orientation, including assistance to transit trade, and significant reduction in Government involvement in direct economic activities. A. Purpose of the Study 1.7 This study has been carried out as a direct response to the Government's request to develop a program of assistance in support of a comprehensive transport strategy, with emphasis on the following objectives:  2 I Introduction a. identifying key policy reform; b. introducing a privatization program into the sector; and c. formulating action plans for restructuring railways, managing road infrastructure, reorganizing civil aviation and urban transport. In addition to meeting the above objectives the study identifies priority expenditures for inclusion in the Government's Public Investment Plan (PIP) and eventual discussion with other donors. 1.9 The study has relied heavily on official sources of information--statistics as well as interviews and meetings with government ministries and agencies. It also draws from past and ongoing World Bank and IMF economic work, other sector reviews, e.g., trade, agriculture, in addition to studies being carried on behalf of EEC, EBRD, and findings from various World Bank missions. B. Organization of the Study 1.10 The study is presented as nine chapters and a statistical appendix. The chapters are as follow: 1.11 Transport and Economic Adjustment. Chapter II gives a summary description of Moldova's economic situation, current constraints and agenda for reform, followed by the role of the transport sector and possible contribution to economic recovery. The current situation of the transport sector, its cost recovery performance, lack of mobilization of resources and unrealistic investment plans are highlighted, followed by a discussion of the potential for transport and trade facilitation. 1.12 Transport Demand. In Chapter III, the future transport demand of Moldova is explored and analyzed, and the link with macro-economic and sector reforn made. Particular attention is given to the most likely growth and trade development scenario. 1.13 Transport and Trade Facilitation. Chapter IV addresses the barriers to transport and trade, the costs they impose on the economy, and the facilitation measures required to alleviate them. The potential of transport as an internationally traded service, implications of facilitation measures on the balance of payments, and their costs and benefits are also catalogued. 1.14 The Road Sub-Sector. Chapter V covers the current situation, main issues and financial problems of the sub-sector. The presentation is organized as follows: a) Infrastructure; b) Road Freight and Passenger Transport; and c) Urban Transport. In addition to discussing privatization of bus and truck fleets, the restructuring of urban transport to make it sustainable is presented. 1.15 Railways. Chapter VI addresses the many issues faced by the Moldovan railways. It gives a description of the physical condition of the railway, nature and quality of operations, current traffic and prospects, and main and financial issues affecting the railway. Institutional performance is forecast with and without restructuring to illustrate the path of possible recovery for the railways. 1.16 Civil Aviation. Chapter VII gives an account of the present situation of civil aviation, its institutional issues and organizational characteristics, priorities in infrastructure and air traffic control and financial difficulties. The potential of institutional and financial restructuring in addressing the problems of the sector closes the chapter.  I Introduction 3 1.17 Transport, Environment and Resettlement. Chapter VIII covers the current situation, legislation and institutional authorities with jurisdiction over environmental and resettlement questions arising in the transport sector. The presentation is made in two sub-chapters, Environment and Resettlement. 1.18 Recommendations. Chapter IX gives a recompilation of the specific recommendations. Under accelerated economic reform, the most likely scenario, the recommendations are presented under the following headings: a. Policy b. Transport and Trade Facilitation c. Sub-sectors d. Environment and Resettlement e. Investment Priorities and Possible Bank Assistance  II. TRANSPORT AND ECONOMIC ADJUSTMENT A. Structure of the Economy 2.1 The economy of the country is largely based upon agriculture and agro-industry. Since 1990, industry has been limited to construction materials (cement) and manufactures of some consumer goods (most of the technologically advanced industry was oriented to military supplies). The country is dependent on imports of most raw materials and energy. Price adjustments to world levels have amounted to severe external shocks. In addition, physical infrastructure is deteriorating due to an historical neglect of maintenance. 2.2 The share of the industrial sector in the GDP in 1991 was 37.7%, close to the average for the FSU', and slightly higher than the average for Westem Europe which was 34% in 1989. The contraction of the economy has affected each sector's relative share of GDP, as seen in Figure 11. 1. Historically, the transport sector has amounted to about 6% of GDP. Shares of GDP by Sector (%) 100 - 90 80 70 Other Services 60 T Transport of GDP and is expected to remain at that level or slightly higher throughout the ecoIndustry 40 30 Agriculture 20 1980 1985 :991 1992 1993 Figure vel Source: Trends in Developing Economies, The World Bank, 1994 and Mission Estimates 2.3 Trade is significant to the economy of Moldova. The value of exports and imports is about 74% of GDP and is expected to remain at that level or slightly higher throughout the economic adjustment process. 2.4 Moldova has significant strengths. It is endowed with fertile soil, a mild climate, a well educated labor force, and geographical proximity to Western and Eastern European markets. In addition, it has developed a manufacturing industrial base and a good transport and communications infrastructure, albeit with some serious deterioration problems. But perhaps the most important factor is that it has decided to pursue an unambiguous reform program. The pace of economic recovery will now depend on how I Based on 1989 figures in P. Marer, J Arvay, J. O'Connor, M.Schrenk and D. Swanson, "Historically Planned Economies: A Guide to the Data", World Bank,1992.  II Transport and Economic Adjustment 5 well the macroeconomic reforms are reflected in specific sectors. 2.5 The structural constraints expected to be removed as a result of economic reform include: * Resource intensiveness of energy, transport and industry, as prices increasingly reflect economic costs. * Deterioration of physical and social infrastructure, as a result of systematic cost recovery and emphasis on maintenance and priority rehabilitation. 2.6 The primary institutional constraints to be addressed are: * Economic management capacity needs to be strengthened to allow the timely implementation of the program. * Financial management of enterprises needs to be restructured to respond to the new situation. * The financial sector needs to increase its intermediation and credit assessment capacity. B. Macroeconomic Performance Agenda for Reform 2.7 In 1994, Moldova implemented successfully a stabilization program with IMF assistance. This accomplishment is fragile and needs to be buttressed by market-oriented reforms to allow the economy to recover. Such an economic reform program, developed with World Bank assistance, culminated in the approval on December 8, 1994 of a SAL operation. A pre-export guarantee facility to support the development of exports to new markets (see World Bank Report# P-6444-MD) has been approved by the Board in March 1995. 2.8 Since 1990, Moldova's GDP has declined by about 60%. This wrenching contraction of economic output resulted from the collapse of the Soviet Union control-and-command structure and its budgetary transfers, a sharp contraction of demand in the traditional FSU markets, natural disasters such as a "fifty year drought" in 1992 and floods in 1994, and civil strife in Transnistria resulting in a de facto partition of the country. 2.9 The concept and main principles of transition to a market economy were adopted by parliament in 1990 and 1991. Since 1992, a series of laws have been passed putting in place the legal framework for business and including laws on collateral and bankruptcy. Privatization of agriculture started gradually in 1992. During 1993 and 1994, the Government has moved to eliminate regulations limiting labor market flexibility and introduce private sector wage determination. Since 1992, the structure of taxation has undergone reforms with the introduction of progressive rates of personal and corporate income tax; Value Added Tax (VAT) at a basic rate of 20%; equalization of payroll taxes across the economy; and excise taxes on a wide range of imported and domestic goods. Prices of energy have been adjusted to reflect its true cost and subsidies to consumer goods have been removed.  6 ll Transport and Economic Adjustment 2.10 The authorities realize that decisiveness and determination will be needed to accelerate privatization of the economy, harden the budget constraint on enterprises, and ensure minimum protection of the most vulnerable groups in the population. Under these conditions a growth and development path with adjustment can continue to unfold. 2.11 The measures already taken enabled some recovery in export volume in 1994. The trade deficit, expected to be about $325 million in 1994, is likely to fall under $100 million in 2005 with a doubling in the volume of trade. During the same period foreign investment is expected to grow ten fold from its 1994 level of $23 million. The economy is expected to grow by 5.5% on average by 2000 after a small positive growth in 1995 (see Figure 11.2 below). Achieving Economic Growth 2.12 Achieving economic growth based on markets is a response to a sound economic framework providing clear signals to economic agents. Under the Government's adjustment program, monetary, fiscal and exchange rate policy will be harnessed to this end. In addition to ensuring that the economy adjusts to the new framework, a set of mutually reinforcing structural measures across sectors of the economy, including transport, would be needed to achieve the following objectives: a. Ownership Change. In this case it means to continue the transfer from public to private ownership by (i) completing the implementation of the 1993/1994 privatization program as fast as technically possible and (ii) defining, adopting and implementing a new privatization program for 1995/1996. b. Hardening the Budget Constraint. A budget constraint is essential to changing economic behavior from the incentives created by liberated prices and ownership change. The Government plans to strengthen fiscal discipline through withdrawal of subsidies, improved tax collection, recovery of debts to the budget; use of collateral and bankruptcy laws; liquidation of State Owned Enterprises (SOEs) without a future; and improved banking discipline to help develop a modern banking sector. c. Creating a Competitive Environment. Further steps in the development of the private sector need to be supported by further liberalization2 of trade, prices, and foreign exchange policies, and by establishing state procurement on a competitive basis. d. Provision of Social Protection. During the transition period and beyond, social protection for vulnerable groups would be addressed by: financing pension liabilities; introducing targeted income supplements; providing severance payments; and provision of unemployment benefits and training. 2! "'Liberalization" is taken to mean that prices and trade should be deregulated (freed), and administrative controls removed.  II Transport and Economic Adjustment 7 Implications for Growth 2.13 The recovery of economic activity as a result of economic adjustment will further benefit from higher productivity following the efficient allocation of resources on the basis of Moldova's comparative advantages in the world economy. It would also lead to X HistoriandProjected GowthRates,GDrandGDP'-(% export-led growth reflecting the resource endowment of Moldova, and provide the 20 speediest possible recovery of output and 1X employment. Expansion of trade and L deepening of the service sectors are expected 0 to allow positive growth in 1995, moderate 196 . 199 1 I 192 993f 1 19 1997 1999 1999 growth in 1996 and 1997, and a sustainable growth rate of about 5 % thereafter (see GDP Figure 11.2 below3). Exports are expected to -- GDI grow from 31 % to 38% of GDP in the ten X year period up to 2005, at an average rate of about 6.5 % per annum. Imports would grow more slowly at under 4% for the same Figure 11.2 Source: Trends in Developing Economies, The World period. Bank, 1994 for historic data, and SAL for projections C. Role of the Transport Sector 2.14 The transport industry has experienced a drop in traffic of about 72% for freight and 77% for passenger between 1991 and 1994 (see chapter III). This is mainly due to the fall in trade with FSU countries, sharp increases in energy prices, economic contraction, internal conflict and natural disasters. The major issues related to the transportation industry are: a) the slow pace of reform in the sector (privatization of trucking and bus transport according to the 1993/1994 privatization program is much delayed); b) erosion of the asset base of the transport sector, and mounting rehabilitation, maintenance and renewal backlogs; and c) technical innovation and equipment upgrading needs not being addressed. 2.15 The performance of the transport sector will be closely tied to the recovery of the overall economy. The export-led expansion and the continued dependence on imported energy will stimulate the development of transport services, such as trucking, freight forwarding, shipping, terminal services and merchandise insurance. Furthermore, under competitive conditions, merchandise trade will be stimulated by cost reductions in these services, i.e., containerization, inter-modal transport and freight forwarding, and insurance and management of door to door transport. Transport in the Balance of Payments 2.16 Moldova is a net importer of transport services. In the services balance for 1994, a deficit of at least $60 million for freight and travel services is expected. This characteristic is likely to remain unchanged particularly as the cheapest transport options are searched for in support of trade development. This views transport as an internationally traded service, as opposed to simple support to the production 3/ GDP and especially GDI figures might appear too volatile because of hyperinflation between 1990 and 1993.  8 ll l'ransport and Economic Adjustment function or a social service to consumers. 2.17 The balance of payments account (see Table 2. 1, Statistical Appendix, and Figure II.3 below for historic and projected trade balances) is, in the case of' Moldova, the only source of internationally comparable information on interniational service transactions, including transportation. Moldova Trade Balance, Historic and Projected 1991 - 2000 US$ mln Balance, US$ mln 5,000 100 4,500 0 4,000 3,500 -tO0 3,000 1 2,500 -200 ExpWs (lob) 2.000 Impalrts (cif) 1,500 -300 Bajance 1,000 500 --- -400 0d* - - -500 1991 1992 1993 1994 1995 1996 1997 1996 1999 2000 Figure 11.3 Source: SAL 2.18 Transport is the largest item in the service balance in Moldova. In 1993, it represented 84% of all service transactions or $53 million. With the removal of unnecessary transport costs to trade, significant direct savings could be obtained. Freight factors, defined as the proportion of freight costs to merchandise value, are significantly higher in Moldova than in Western Europe. The overall freight factor , i.e. the ratio of the absolute sum of freight debits and credits to total merchandise value is 5.8% ad valorem for overall merchlandise foreign account transactions. This is more than three times the freight factor for Europe4. 2.19 Freight factors are high throughout the FSIJ. If they could achieve the European Union (EU) averages, Estonia could improve its balance of payments surplus/deficit by about 17 %, Lithuania by 25 %, Turklnenistan by 30%, Belarus by 100% and Moldova by 35W. 2.20 Given Moldova's USS996 million merchandise flow in 1993, this discrepancy represents a potential loss of abouit US$42 milillioni. T otal excess costs resulting from various barriers to trade are estimated at US$62 million annually (see Chapter IR - Tranisport and Trade Facilitation). 2.21 Given the importance of transport to the development of Moldova's economy, possible efficiency gains in the sector would contribute both to macroeconiomic stabilization and further development of trade. 4,; For the 198X-1991 period. the fr-eight factor for mme Furopeall I w.ZI01 \Vas 1.5%.  III. TRANSPORT DEMAND A. The Transport Sector in a Changing Economic Situation 3.1 In the transition from a planned to a market economy, the transformations that would take place in the transport sector would be substantial. The number of operators, clients and decision makers would increase substantially. Initial beneficiaries of the opening and expansion of the sector would be transport users, operators and specialized commerce, and financial intermediators. Of these, the operators may call for control of further entry to protect their initial market shares. As markets expand, new entrants join in the belief that they can beat the current cost structures. If so, the new entrants may lure away customers from first generation operators. The defense of the openness of markets would become one of the main new functions of the State in a restructured economy. 3.2 A freer transport sector would actually nurture and encourage entrepreneurial activity in other sectors. Small enterprises would be launched, and significant amounts of labor absorbed. The main areas of expansion and growth would be trucking and bus transport, freight forwarding, regional aviation and to a lesser extent, railways. Recurrent maintenance and rehabilitation would not be dependent on the central govermnent budget, and would become a new market for a privatized civil works contracting industry. 3.3 The actual pace of economic reform in Moldova's transport sector has been at best unhurried. Under the program of reform underway, a continuation of this trend is not conceivable. Attempts to continue with old structures under the guise of privatization by means of joint stock companies operating in markets with restricted entry and protected from foreign and domestic competition would be no longer possible. Public services would operate under cost recovery policies and in a competitive environment. As a result, unneeded investments and excess transport costs would be drastically scaled back, and expansion of sector output with consistent productivity gains would take place. B. Growth Scenario 3.4 The growth scenario of the Moldovan economy was developed during preparation of the SAL recently approved by the World Bank. It reflects the adoption of a program of macroeconomic policies conducive to the opening of the economy and sustainable growth. Under these conditions the fall in traffic would be arrested in 1995 and would be followed by a gradual increase in economic activity and consequent output of the transport sector. Beginning in 1998 growth rates consistently larger than 5 % would be observed. Thus, one scenario has been developed: Following the introduction of an accelerated economic reform program, the consumption of the government would be smaller, govermnent ownership would decrease substantially, investment levels would begin to increase as privatization takes hold. GDP growth would restart in 1995, would reach 3.5% by 1997 and average 5 % from there onwards, with the possibility of sharper growth towards the year 2000. Such growth performance would be feasible provided that the expected significant change in the pace of economic reform takes place. During this period transport enterprises would undergo a restructuring process and would reach sustainable operations in an open, competitive transport sector.  10 III Transport Demand C. Historic and Projected Traffic 3.5 Freight. Between 1990 and 1993 total tonnage transported decreased by 73%, and partial information for 1994 indicates that the yearly decrease has slowed down to less than 3%. Total road transport's share has remained above 75%, even with the exclusion of Transnistrian road traffic which now goes unrecorded. The railways share has also been relatively stable at or about 20% (plus or minus 3%); river transport's has remained below 1 % while decreasing to about 0.3% by the end of the period; and air transport's share has been insignificant throughout. Historically, the railways' share has been dominated by international traffic and by three groups of commodities within it: agricultural products, construction materials and petroleum products. Railways traffic is vulnerable to competition from a liberalized road transport industry. 3.6 Passengers. The total number of passengers has decreased by 80% between 1990 and 1993, to about 90 million passengers. The dominant mode has been road transport with a share of 95% in 1990 which decreased to 75% in 1993 due to lack of fuel, fuel price increases, and worsening cost recovery in the railways. Urban and suburban transport has decreased mainly due to a reduction in the number of available vehicles because of insufficient cost recovery. 3.7 Forecasts. Traffic growth from 1994 to 2002 is expected to approach 35%. This in turn represents less than half of the traffic recorded in 1991. Total tonnage transported is expected to reach 120 million tons, and the railways share is expected to remain at 22% mostly owing to the continuing importance of FSU trade and its dependence on rail transport. Road freight transport's share would approach 76% with air and river freight transport combined having a less significant share of about 2%. Passenger traffic would grow about 32% to 114 million passengers. Road transport's share in total passenger traffic would be 86%, while rail would come down to about 13%. Air and river passenger transport would retain a residual of less than 1 %. Accordingly, spare capacity in the sector is to be expected throughout the forecast period. Figures 111.1 and 111.2 and Table III. 1 below give further details.  Figure 111.1 Figure 111.2 Traffic Forecasts, Freight Traffic Forecasts, Passenger I Does not include Transnistrian traffic for 1992 and 1993 ^ Does not include Transnislrian Traffic for 1992 and 1993 350 500 300 Air 450 Air 400 2501 .]Road- 350 Road'I 200 ~~~~~~~~~~~~~~~~~~~~~~~~~300 E15 200 025 og Railways 5L 2 Railways ~~~~~~~~~~Tb 150. 100 F River 1501 River 50 1994 Traffic 50 1994 Traffic 0 ~~~~~~~~~~~__0 !I m O CII n ~~~~~~T In Co r, CO M 0 0 N~~~~~~c' 0, T LO ID r-. - 0) 0 - c 0 ~~~~~~~~~~~~~~0) 0) 0) 0) 0) 0) 0) 0) 0 0) TRANSPORT SECTOR FREIGHT .,d PASSENGER TRAFFIC (Ad..1 19S9-I993 -nd Prejeted 1Ig4-2002) 1999 1990 1991 It2 1993 1994 1995 1996 1997 1993 1s99 2010 2001 2002 FREIGHT (mlin ton) River 3.60 2.90 2.30 0.60 0.30 0.30 0.31 0.31 0.32 0.34 0.35 0.37 0.39 0.42 Railways 68.1 65.4 52.9 35.0 22.1 20.1 20.5 20.9 21.3 22.5 23.7 25.0 26.4 27.9 Road' 273.6 262.8 251.9 113.7 66.9 66.9 68.2 69.6 71.0 74.9 79.0 83.4 88.0 92.8 Air (thousand ton) 26.7 18.7 18.3 4.4 2.1 1.5 1.5 1.6 1.6 1.7 1.8 1.9 2.0 2.1 TOTALFREIGHT 345.3 331t1 307.1 149.3 89.3 87.3 89.0 90.8 92.6 97.7 103. 108.8 114.8 121.1 PASSENGER (min passengers) River 2.44 2.48 1.75 0.44 0.30 0.30 0.30 0.31 0.32 0.33 0.35 0.37 0.39 0.41 Railways 22.3 21.0 16.5 19.0 18.2 15.2 15.1 15.0 15.0 15.0 15.0 15.0 15.0 15.0 Road 467.1 446.9 362.0 173.8 71.0 71.0 72.4 73.9 75.4 79.5 83.9 88.5 93.4 98.5 Air 0.87 0.84 0.86 0.31 0.16 010 0.10 0.10 0.11 0.11 0.12 0.12 0.13 0.14 TOTAL PASSENGER 492.7 471.3 381 1 193.6 8997 866 8860 89.3 90.7 94.9 99.3 103.9 108.8 114.0 Source: Statistical Departmenl. Air Moldova, Railway Department and Mission Estimates I Does not include Urban Transport; does not include Transnistrian Traffic for 1992, 1993  IV. TRANSPORT AND TRADE FACILITATION A. Overview 4.1 The present chapter identifies the physical and institutional barriers to trade and transport on all main transport modes, as seen from Moldova and its trading partners, and estimates the excess-costs to international shipments they cause, on the basis of interviews with government officials, private entrepreneurs, transport operators and international comparisons. A tentative cost estimate of corrective measures is suggested although pre-feasibility studies and budgets would be required to refine such estimates. Corrective measures are presented in Chapter VIII - Recommendations. 4.2 Trade performance can be significantly enhanced by progressively eliminating excess-costs due to trade and transport distortions. Such unnecessary costs inhibit the country's commerce and act as self- imposed trade barriers which compound the effect of tariffs and quotas that the country already faces in its markets. They also defeat the purpose of tariff reductions which may be consented to by Moldova's trade partners, particularly the OECD (Organization for Economic Cooperation and Development) and GATT (General Agreement on Tariffs and Trade) countries. They affect the balance of payments, the availability of convertible currency, and restrict entry into foreign markets. 4.3 Shifting from inward and exclusive policies (such as remaining export licensing requirements, state order systems affecting 5% of trade, and barter agreements) to freer practices both in trade and in transportation would lower costs and strengthen international cooperation in the transport and services sector. It would promote movement towards a larger and mutually beneficial trade and economic interdependence, promote an efficient allocation of resources, and foster export-led growth. 4.4 While the geographic dimensions of Moldova are relatively small, the barriers and restrictive practices prevailing in the country and affecting transport and trade are significant. This observation is paradoxical as the country is considered to have stabilized its monetary system and progressed in harmonizing its economic system to European standards. Estimated direct excess-costs of all trade and transport barriers identified amount to $62 million, or about 6.2% of total trade (exports + imports). Some of these costs relate to trade control barriers and their removal depends on trade liberalization measures under implementation and on the political will of the Moldovan Government to implement them. The remaining excess-costs ($40 million), however, could be offset by implementing corrective actions iiiitiallv estimated at only $10.6 million (See Table IV. 1). A further benefit from the expansion of foreign trade (export increase of S60 million) would accompany the direct cost savings. 4.5 The following sections cover: a. The issues at stake, assessment of direct transport and services excess-costs and costs of corrective actions. b. Balance of payments benefits which are in addition to pure transport and services cost reductions.  IV Transport and Trade Facilitation 13 Table IV.1 Trade and Transport Facilitation Excess Costs and Cost of Corrective Actions 1993 Exports (FOB): US$ mln 449 Total Trade: US$ mln 996 1993 Imports (FOB): USS mln 547 Barriers Estimated Excess-Costs Estimated Excess-Costs Estimated Cost of Corrective Actions min US$ per year % ad vatorem of total trade min USS Road Transport 20.00 2.0% 3.2 Rail Transport 15.00 1.5% 5.5 Mullimodal Transport 5.00 0.5% 1.9 Banking and Documentation Services 7.00 0.7% 1.0 Trade Control 10.00 1.0% 0.8 Custorns Procedures 2.50 0.3% 3.5 Certification 2.50 0.3% included in trade control Totea 62.00 6.2% 15.9 Notes: - Athough the percentages apply to total trade, actual excess-costs are not uniformly distributed accros markets and commodities - Totals mignt not add-up due to rounding B. Excess Costs and Corrective Actions by Physical Source 4.6 The presentation is organized according to the origin of the excess-costs: a. Road Transport b. Rail Transport c. Multi-modal Transport d. Banking and Documentation Services e. Trade Control f. Customs Procedures g. Documentary and Financial Procedures h. Telecommunications (not quantified) 4.7 The cost effects result from: freight damage and losses, delays, turnaround time, inventory costs and financial costs. Excess-costs can be expressed either as a percentage of transport costs or as a percentage of the value of the goods transported (i.e., ad valorem). They have been valued to the extent possible in terms of ad valorem rates, i.e., equivalent tariff protection rates. The figures show that overall excess costs are twice as important as those associated with physical transport only. 4.8 The estimates are conservative since the ad-valorem excess costs were calculated in detail only for the goods exported by Moldova to non-FSU countries, and the results applied to imports from non- FSU countries. Trade with CIS countries is available only in volumetric terms. Extrapolation of the above results to both imports from and exports to CIS countries would assign to the goods involved in this trade the same efficiency found in Western markets.  14 IV Transport and Trade Facilitation Road Transport 4.9 Some aspects of trade and road transportation are still subject to some form of government interference. The portion left to actual private enterprise is narrow and the privatization program for 1993/1994 is much delayed. As a result, efficiency suffers and the dwell time of goods at various points in the transport chain is excessive. Computerization of different aspects of the profession is minimal and does not translate into savings. Administrative procedures associated with customs clearance are lengthy and complex. 4.10 The identified barriers are: a. Fleet composition impediments b. Border crossing difficulties c. Insurance d. Infrastructure and equipment barriers e. Restrictions due to regulation and deferred privatization 4.11 Fleet Composition Impediments. The current fleet of Moldova will suffice for most domestic markets over the short-term but is not suitable for trade in Western Europe. Most trucks in Moldova are of outmoded design, of poor quality, fuel-inefficient and costly to operate. In addition, few of them would meet the emission regulations in Western Europe and this limits their use for international traffic. By comparison, modern heavy trucks would lower unit costs of road transport significantly, albeit constrained by the existing infrastructure in Moldova, since the state of some road pavements and design characteristics of East-West roads are not always suitable to international trucking. 4.12 In addition, it is difficult to find specialized trucks to ship agricultural products (i.e., mainly wine, processed foods and tobacco products, representing about 40% of all exports in 1993) over long distances. 4.13 Maximum trailer volume adapted to Moldova's road conditions, and satisfied by the SuperMaz trucks, is 68 cubic-meters, while in the West, it goes up to 84 to 92 cubic-meters. This difference is large from the point of view of scale economies. Fuel consumption and suspension systems are different. Therefore, the type of goods which may be shipped on the two trucks types is different. Foreign trucks are more competitive in terms of quality and quantity of transport, but their charges are higher: the going rates are US$ 1 per km in the West, against US$ 0.5 per km in the CIS. Thus, for a shipment from Paris to Moscow, the rate would be US$ 1 between Paris and Brest (Belarus), and US$ 0.5 between Brest and Moscow. 4.14 However, lack of international insurance (see below) precludes the leasing of foreign trucks (e.g., Volvo, Mercedes, Daf, etc.), hence a further loss of competitivity of the local trucking industry. 4.15 Insurance. Insurance is newly introduced in the system. Not all trucks are insured, unless they are leased. Insurance rates, which are traditionally quoted ad-valorem, are about 1 percent higher than international averages, reflecting higher risks. Trucking companies are not allowed to get insurance abroad. Foreign insurance companies are not allowed to operate in Moldova. Furthermore, international insurance is not available, as the country is classified as a war zone.  IV Transport and Trade Facilitation 15 4.16 Border Crossing Difficulties. Several obstacles to trade and transport identified are not the responsibility of the Moldovan authorities but are spill-overs from neighboring countries. Excess costs bearing on foreign trade transactions are not totally incurred within the country's territory, but rather take place along the overall transport chain. Thus, at Ukrainian customs, it was once common to wait from 6 hours to 3 days, a situation which caused lines to backup into Moldova, particularly at the main northern passage of Soroca. The situation has since much improved under the combined effect of reduced throughput and better customs cooperation. On the Rumanian side, at Leusheni, the combined waiting time once could reach 6 hours. Recent statistics on peak months and weeks provided by customs, and field visits to three border crossing points, show moderate average waiting times of four hours. 4.17 Specific border crossing problems were observed in Transnistria points (Dubasari, Grigoripol, Causheni, Stefan Voda, and Pervomanisk), which do not have customs offices administered by Moldova. They are generally avoided by truckers: passage is possible by means of informal payments, and traffic is active but it precarious and unpredictable, as anyone can stop the truck at gunpoint. Towards Russia, southwards, there is a non-Transnistrian passage at Palanca (in Tighina) open for all types of transport and international traffic, but the bridge there is in such a state of disrepair that a 10 ton truck could not pass. 4.18 Ukraine's transit charges are calculated on a truck-km basis and amount to US$ 175 for the longest possible stretch of road, i.e., the 800 km stretch from Ataki to Glukhow. In addition, Ukraine recently introduced an "environmental" tax of US$ 50 per truck. The Moldovan side is in the process of "harmonizing" its transit charges to match the Ukrainian ones. The charges at US$ .50 per km or greater are about 10 times the road infrastructure cost recovery charges.5 For the time being, however, these factors cannot be considered as generating excess-costs attributable to Moldova's government or operators' actions. 4.19 Infrastructure and Equipment Barriers. The national highway is in relatively good condition for normal traffic, but several of its sections are in bad state of disrepair, and cause considerable traffic slowdowns, particularly at night, as road design standards are not adequate for modern trucking purpose. 4.20 Unsafe highway designs are unattractive to foreign trucks who could circulate in Moldova. It is almost impossible to use Western made trailers in Moldova, very few of them can be seen on the network, for the following reasons: - they quickly break down on Moldovan east-west roads which are in bad state of repair; - there are no roadside service stations available for minor repairs and parts replacement; - refueling stations are few and far between, of difficult approach and inconveniently located; and - low quality fuel damages engines of foreign origin, particularly the booster pumps, very sensitive to impurities. 5/ What constitutes a barrier is not the charge in itself, but the fact that it is so much higher than cost recovery.  IV Transport and Trade Facilitation 4. 2 1 Itestrictions Due to Regulation and Deferred Privatization. The present situation is characterized by lack of incentives to cost-effective behavior, due to a weak private sector and a regulated transport sector. The widespread belief is that regulations protect the revenues of existing companies slated for privatization. This belief is cultivated by anti-deregulation lobbies of large road transport para- statals who have a vested interest in perpetuating their benefits from restraints on competition. The effect of these policies is to delay evolution towards an efficient and competitive trucking industry. They extend tihe existence of excess-costs noted above in connection with the fleet characteristics, and perpetuate them. 4. I) Direct Costs Resulting from These Barriers. Most of the excess-costs are related to fleet impediments. Thie are estimated at US$20 milliont or about 4% ad-valorem of the non-energy non-barter i;.ade (U$ 555 mmltn). 4. 23 Costs Associated With Corrective Actions. A one total of US$3.2 mnillion, whether spent by the Government of Moldova or obtained as a grant, would provide the technical assistance necessary to remove road transport barriers, and stimulate the development of a private road transport industry. Rail T'ran,sport 4.24 Mloldovan railways are seen as slow, albeit somewhat safer than trucks by shippers. Still, shipmients to the East are sometimes provided with on board guards to deter pilferage outside Moldovan borders. Thae railways have a dominant position in FSU trade. Although with substantial excess capacity, they .ack specialized tank cars for the transport of bulk wines and edible oils as well as refrigerated and air-suspenided cars. 4.25.i. All types of vehicles, mostly inherited from the former Soviet Union system, are not renewed. In addition, transport costs have increased due to energy costs. In all, it is increasingly difficult to commercialize fresh produce, whether by truck or by rail. Fresh produce is one of the big resources of Moldova whichi is in serious jeopardy today because of transportation failures. 4.26 iDirect Costs Resulting from these Barriers. The costs resulting from these barriers have been csi,rinl ujarl tit 4Y% ad vaiorem of the railway-based trade (US$ 375 mltz), for a total of $15 million. 2 27 Costs Associated withi Corrective Actions. The costs of corrective actions have been estimated az 5k:.5 111lion. They cover the technical assistance needs to restructure the railway, training of managers an I s.aff, introduction of up to date office technology, transfer equipment for multi-modal transport, and sp~cific equipment items necessary to trade which are in short supply. M"lulti-modal Transport 4.28 Ocean Shippinig of Moldova's Traded Goods. As Moldova is a landlocked country, trade requiring ocean shipping is by definition multi-modal. The Ukrainian port of Odessa is 3 hours by car troTn Chisinau. Future use of the port is contingent upon bilateral agreements between these two countries. Studies on the feasibility and efficiency of Moldovan port facilities for oil products at Giurgiulesti are underway.  IV Transport and Trade Facilitation 1 '7 4.29 Russian ports are avoided whenever possible because of their permanent bottlenecks, and widespread corruption, e.g., personal payments must be made to port managers to get the merchandise "accepted"; the railways would not carry the merchandise to the port unless it is accompanied by a "letter of acceptance" cabled by the port). Transportation will have to evolve to make possible overall logistic schemes Truck-Rail-Ship (via Hamburg or Constanza) or Truck-Air (very expensive, but justified in exclusive cases, via Frankfurt or Vienna). 4.30 The development of multi-modal (or combined) transport is necessary to ensure growth of tral.1e activities, and it represents a future opportunity for the railroads. However, the extreme iimportanice oi quality required for this type of service must be addressed and resolved before major investments are made. There is no need to make expensive infrastructure improvements when their benefits are eliminated or undermined by the prevailing: cumbersome customs or other border formalities: outdated commercial and transport documentation; and deficient insurance arrangements. 4.31 Multi-modal shipments heavily depend on containerization. Private shippers find it difficult to obtain containers from the Railways, even though containers are standing idle. Before being in a positioni to capture multi-modal traffic, the Moldovan Railways should first be restructured to adapt to a new but reduced role (see Chapter VI - Railways). 4.32 Freight-Forwarding. There are practically no freight forwarders in the countrv. neither local nor foreign. For the Moldovan trader, the logistic problem is to get the goods out to the first available proficient Western freight forwarder, and let him handle the rest (and vice versa for imports). Some of them operates through Kievneshtrans (who has an "expedit" office in Moldova, but is not a real freight forwarder) and deliver imports on any itinerary, up to Moldova's border with Ukraine or Poland. Traders handle their freight themselves from there, by means of local trucks. 4.33 Another messenger service, TNT, operates legally, and deals with shipments of up to () !or!s. Reliability and dependability are obtained by means of air shipments on Lufthansa from Kiev or Odessa, following railway shipment from Chisinau. All shipments, even if east-bound (Moscow's Sheremetyevo 2 Airport, for example), are made to transit via Frankfurt airport, for security reasons. Another company. MDTrans attempted to start a freight forwarding operation but had to stop because of the payment delays all along the transport chain. Several companies separated from the Moldovan Railways or from Air Moldova to form transport, messenger, or freight services. 4.34 The freight forwarding profession. however. plays a fiduciary and financial role. The trcig,ht forwarder is more than a freight broker or a customs broker: he legally acts as the temporary ow.\ner of the shipment. If the shipment is damaged or disappears, he must be protected against hlis client's claiuis Conversely the client must be protected against fraudulent losses. These activities are prac-ically impossible in the present context where commercial commitments are very risky. transactions outcoimx are uncertain, and partners' solvency is put in question on a daily basis. Special training is req.cred tl' operate a freight forwarding operation in this high risk environment, including training in the usec various forms of hedging, routing on alternative and safe - but more costly - itineraries, and adop-1,t'ng efficient payment channels.  18 IV Transport and Trade Facilitation 4.35 In practice, the freight forwarder substitutes himself to the importer or exporter for several operations, and thus bears the brunt of the volatility of import-export markets and irregularity of payments. Several small trucking companies act also as import-export brol-ers for raw materials and merchandise, and operate mainly through the commodity exchange of Constanza (Borsa Maritima de Merfuri). 4.36 Direct Costs Resulting from these Barriers. The shortcomings in the multi-modal transport chains, ranging from inadequate worldwide freight forwarding services to the unsuitability of local trucks, and restricted and costly port access, significantly complicate the process of multi-modal exporting and about double the transport cost of potential exports, according to entrepreneurs surveyed by the mission. This translates to about 5% ad valorem of the non-barter non-energy trade. Part of this is already included under road and rail excess costs. Thle specific multi-modal excess-costs amount at most to 1 % of the value of the non-energy nion-barter trade, and are estimated to be of the order of US$ 5 Million. Yet the main impact of these deficiencies is constituted by the trade opportunities foregone, and the failure of the transportation system to contribute to the country's economic recovery. 4.37 Costs Associated with Corrective Measures. The costs of corrective measures is estimated at $1.9 million. Banking and Documentation Services 4.38 The banking, insurance and telecommunications systems are antiquated and do not respond to the sophistication and multiplicity of fast documentary transmission required to enable the movement of merchandise on international routes safely and securely. Other services are also short of being at par with modern standards. Rates of interest of over 100 percent per year or about 7% per month during 1994 (and sonmewvhat reduced since) translate these delays into excessive costs which are reflected in the final price of the product. 4.39 A two-tier banking system currently exists. With the banking law of June 11, 1991, Moldova created the National Bank of Moldova (NBM). This institution, subordinate to the Parliament, operates as a central bank, supervising the financial and monetary systems, including hard currency transfers. The NBM has recently taken over the functions of foreign exchange management, including foreign exchange auctions. The Bank intends to transfer 10 percent of its profits to a reserve fund in order to remedy the under capitalization caused by inflation. Currently there are no Western banks in Moldova. The closest alternatives are the Vozrozhdeniye Bank, which is based in Kiev, and a Romanian bank. 4.40 Up until July 15, 1994. 24 commercial banks were registered in Moldova. Seventeen of them are licensed to carry out hard currency operations; 11 of them have the right to open corresponding accounts in foreign banks; and 6 banks have internal license to conduct banking operations in foreign currency. According to the legislation the banks do not depend on the state and administrative power. 4.41 The letter of credit procedure is the mode of payment of choice for Moldovan sellers. For example, letters of credit can be opened by the client's bank and paid through Banca Sociale, which has correspondents in Bucharest and Brussels, but unfortunately nowhere else. Most nationals are not permitted to have accounts abroad. Such permission is only granted to large firms, capable of reporting on a monthly basis on all foreign operations, resources, movement of funds, currency balances and accounts to the National Bank, and having the necessary "expertise, transparency and honesty". In such  IV Transport and Trade Facilitation 19 cases, and when an overdraft facility is also obtained, this facility can serve as a guarantee up to this amount. These privileges enable the traders who can obtain them to borrow at Western rates, for example 12 percent, instead of the 100 to 130 percent interest rate prevailing in Moldova at the time of the mission. This restricted access to credit and banking is the source of rent seeking behavior. 4.42 Imports are financed on medium term commercial credit (one year or less). As far as exports are concerned, letters of credit opened through a Western bank, at the usual accepted rate average of 0.25 percent, are sometimes used for various goods by large Moldovan trading concerns, and are combined with bank guarantee. While it takes one hour for a large company to open a letter of credit, the procedure would take two to three weeks for a small firm, resulting in an unavoidable restricted access. With important Western clients (Coca Cola, Tropicana, Rauch, etc.) Moldovan exporters do not require letters of credit but rather a percentage advance pavment, say 40 percent, not to be used as guarantee. In the Russian Federation, advance payment is required. 4.43 Local commercial banks charge from 5 to 10 times the rate of Western banks for letter of credit and other services. For example, the commission locally charged to change dollars in lei is 1 %, and for small firms and individuals 3.5 %, while similar commissions in the west, to convert dollars in Deutsche Marks, for example, are 0.025 percent. Local banks are not equipped to handle electronic fund transfers. They are linked through a chain of local banks and correspondents, which all charge a commission, resulting in very high and widely applied final costs, estimated at 5 times the cost of modern bank standards. 4.44 Direct Costs Resulting from these Barriers. Poor banking services have been estimated to increase transaction costs by at least 30%, wvhich translates to about 1 % ad valorem excess-cost, for about one third of the non-energy non-barter transactions, i.e., about US$ 2 million annually. Furthermore, the lack of competition and diversification in banking services adds corresponding excess- costs offinancial transactions estimated at 3 % ad-valorem, applicable to one third of the non-energy non- barter trade, amounting to about another US$ 5 Million. 4.45 Costs Associated with Corrective Measures. The development of a modern banking sector is a significant element in the Government's reform program. The necessary technical assistance to guide the formulation of the requiredframework and bank upgrading is estimatedfor 1994 at $1.0 million. The World Bank, together with a number of other donors is active in the sector. Trade Control 4.46 Trade control measures are legislated and regulated to direct and promote commerce. Their frequent modifications, additions, and specifications create a climate of uncertainty which is detrimental to decision making and investment in transport or other capital equipment. If commercial transactions cannot be based on trust and reliance on stable traditions and regulations, traders must protect themselves through costly arrangements. Both exports and imports are subject to licensing requirements according to different lists of products. These lists act as barriers given the frequency and unpredictability of  20 IV Transport and Trade Facilitation changes of their schedule6, its length and complexity, and the various favored nations provisions. They cause severe distortions and complex and lengthy checking of rules of origin and manufacturing specifications upon customs clearance. 4.47 Beginning January 15, 1994 all import-export operations in Moldova were to be carried out for hard currency and without any licenses. This order was specified by decree of the Republic of Moldova "on regulating Imports and Exports in 1994" and is administered by the Ministry of Foreign Economic Relations. The government produced soon thereafter a reduced list of goods which still need export licenses. The list includes live animals, meat, fermented and non-fermented tobacco, processed and raw pelts, cereals and products from them, sugar, vegetable oil, milk and milk products, sunflower seeds, energy and energy resources. This list has been further reduced to include only grain, which is expected to be removed in June 1995. 4.48 Barter in export-import operations is still permitted for imports of energy resources, raw materials, medicines and medical equipment. Moldova's energy imports alone represent 50% of all imports in value. Considering that barter imports must be compensated by barter exports, a significant proportion of trade is excluded from the market mechanism, with the resulting loss of the above incentive for manufacturers to produce export-grade products. 4.49 The decree also cancels the necessity to register economic agents as "participants of foreign economic activity". Instead, all economic agents of Moldova receive this status automatically while registering in the state registration Chamber of the Ministry of Justice under condition that their activity is permitted by charter of an enterprise or a firm. In fact, obtaining this charter and the corresponding permission is more restrictive to entry in foreign trade professions than the previous registration process. The result is a lack of openness to competition and a rent, which is drawn by those who have the required permission. 4.50 The tax structure and high interest rates are combining to act as a barrier to trade development. For instance, taxes on imported trucks are high and amount to 30 percent (customs duty), other taxes that may apply to the industry are a 20 percent value added tax, and a 20 percent excise tax. Furthermore, VAT and excise tax exemptions or rebates available to exporting producers do not apply to the trucking industry operating under license in the CIS or in Europe. When combined with real interest rates of about 7% per month, the result is a surcharge for imported trucks of about 70% of their FOB price. 4.51 Direct Costs Resulting from these Barriers. Trade control measures, licensing, complex authorization processes, and inability to operate in foreign currencies for most enterprises add significant costs to trade transactions. The licensing procedure itself is lengthy, can take up to one month, and can cause inventory costs, which at the high prevailing interest rates, may amount to 1 to 2% of the value of the final merchandise immobilized. Applied to the sum of import and export values totalling US$ 996 Million in 1993 (see Balance of Payments, Table 2.1, Statistical Appendix), this trade control related 6/ The tariff schedule is published by Logo-Press in russian and is not easily available. Recent changes in tariff took place in January 1994, then in March 1994, June 1994 and most recently in January 1995. Tariff modifications are not made readily available to the public at large, and affect products, country differentiation, or rates. There is no export tariff schedule, but some exports are subject to non-automatic licenses delivered through the Department of Foreign Economic Relations.  IV Transport and Trade Facilitation 21 excess-cost was estimated in average to US$ 10 Million, as of October 1994, and it has since been reduced. 4.52 Costs Associated with Corrective Measures. Trade is being liberalized as a political decision involving a choice of economic system for the country. The corrective measures necessary are not associated with physical investments. As far as the trade and transportation sectors are concerned, the costs involved in taking these actions are small, amounting to $0.8 million for technical assistance. Customs Procedures 4.53 Under the program of reforms supported by the SAL, import tariffs are being reduced to a maximum of 30% in April 1995, and 20% in December 1995. In addition to import tariffs, the review of Moldova's customs procedures elicits a number of non-tariff barriers which have a bearing on trade costs. 4.54 Cost increases associated to customs are the following: - slow procedures at inland clearance depots due to lengthy customs declaration and documentation preparation, and lack of trained customs inspectors; - excessive time required at border crossings; - insufficient physical facilities (absence of separate lanes for empty trucks, bonded warehouses, no priority itineraries for transit traffic, no safe parking lots for the night, no hotel accommodations, etc.); - informal transactions and payments and their effect on freight immobilization; - unsatisfactory liability provisions for international traffic; - insufficient number of computer terminals and their absence at inland locations and in certain industrial sites, causing time consuming queues; prevalence of manual tasks; and absence of Electronic Data Interchange (EDI) facilities; - complex recourse procedures to resolve disagreements regarding interpretation of customs classification rules, valuation methods and local contents requirements; - difficulty in obtaining title dispensations in simple cases; and - rigidity of administrative formalities, such as those of temporary admission, and security deposit requirements. - lack of training of customs officers both in Moldova and in its neighboring countries. 4.55 Direct Costs Resulting from these Barriers. Informal payments are estimated at US$ 30 per checkpoint per truck, with a 30 percent probability of having to pay them, and an average of 5 checkpoints per transport chain. On the Transnistria route, it can take from US$ 50 to 100 to pass without waiting, but this route is not in widespread use due to safety concerns, although it is the shortest route from Bucharest - Chisinau to Moscow, along with the route passing through Kiev and Odessa. A conservative average of informal payments of US$ 50 per trip has been adopted in the following. Applied to an estimated annual traffic of 36,000 trucks (twice the volume of the peak month), informalpayments lead to an excess cost estimate of US$ 1.8 Million.  22 IV Transport and Trade Facilitation 4.56 Waiting time at border crossings, which averages 4 hours at main points (an decrease from two years ago, when it could average 12 hours)', add excess costs. The excess trucking costs due to waiting at customs is of about US$ 0.5 Million per year, which is passed on to the transport cost of the goods. The Government has requested and is receiving assistance to reduce customs delays and improve customs functions. 4.57 Costs Associated with Corrective Measures. The typical budget for improvements at border crossings may vary from US$200, 000 to US$1 million per border crossing site, and a total cost of 3.5 million has been estimated8. Product Certification 4.58 Beginning August 1st, 1994, the Moldovan government decided to require certification of imported products. The Moldovan Department for Standards, Metrology and Technical Oversight (MDSMTO) recently signed accreditation licenses with the Geneva-based SGS (FSU Railroad Association). According to these, beginning August 1st, 1994, the Moldovan customs offices will not permit entry of goods without certificates. The certification requirement adds 0.5% ad-valorem to the goods as everything on the packing list has to be examined, its content certified as declared, weighed repacked and sealed. Product certification is a mechanism to expedite trade. FSU standards, if imposed on trade, may prove to be a hinderance to trade diversification. 4.59 Direct Costs Resulting from this Barrier. Applied to 1993 import values, certification procedures add US$ 2.5 Million in excess-costs. 4.60 Costs Associated with Corrective Measures. The cost of corrective measures are small and have been incorporated into the costs measures to ease trade controls. Telecommunications 4.61 Even though not quantified, other barriers to trade were identified, particularly in the field of telecommunications. The Ministry for Data Processing, Information, and Telecommunication (MIT) is the sole provider of telecommunication services, policy, operation, licensing, frequency allocation, and regulatory matters. The international telephone tariffs are the lowest in Central and Eastern Europe. The system in use, a crossbar type, does not allow for much flexibility. There were 1,013,200 subscribers 7/ Applied to a US$ 100,000 total truck value (in fact, a DAF truck costs US$ 116,000) which has an economic life of 7 years, it represents a loss of US$ 70 per day, in the assumption of 200 working days per year. This calculation is conservative, as it is based on Western rates of interest. The statistics provided to the mission by the Customs Department (Statistics for one peak day, one peak week. and one peak month in 1994 are found in Table 4.1, Statistical Appendix, for every relevant border crossing) show a monthly truck traffic through all custom points of about 18,000 for July 1994, which is a peak month. The calculation assumes that annual traffic is equal to 2 times that of July, i.e. 36,000 trucks, for an average wait of 4 hours costing US$ 2.9 each (or US$ 70 per day). 8/ The budget for computer equipment and office technology is estimated, for each border post, at US$ 200,000, based on the provision of: 10 PC computer terminals at each post; a file server at each post; land based communications links between the posts; readily available data base software; and ancillary equipment such as printers, photocopiers and fax machines.  IV Transport and Trade Facilitation 23 at the beginning of 1994, of whom 25 percent were businesses. While most individual subscribers are reportedly satisfied, businesses with heavy daily communications needs find the system inadequate. Foreign financial institutions have facilitated the efforts of equipment suppliers. Still, telephone switchboards are saturated, so that telephone and fax are difficult. The system was reported to work for single calls or faxes, but becomes ineffective when a company has to send over 20 faxes per day, for example. This assumes that a "good" line has been acquired (at an additional informal cost), as opposed to a "medium" line and to a "bad" line, also available. C. Further Benefits - Trade and Welfare Gains 4.62 In addition to the pure transport and services cost reduction effects on the balance of payments, the decrease in the CIF cost of goods will decrease the domestic price of imported products, provided that they are not subject to restrictive quotas (welfare gains), and increase Moldova's exports to traditional and new markets (trade gains). 4.63 From an imports perspective, welfare gains arise from the benefits that consumers in Moldova derive from the lower domestic prices after the removal or reduction of the ad-valorem incidence of non-tariff distortions. The net welfare gain (loss) is estimated as the difference in import value times the average variation between the ad valorem incidence of the barriers before and after elimination. 4.64 On the export side, trade gains are obtained simply by summing the trade creation and trade-diversion effects. The trade creation effect is the increased demand in the importing country for a commodity from an exporting country, resulting from the price decrease associated with the elimination or reduction of distortions. Trade diversion accounts for the tendency of importers to substitute goods from one source to another in response to a change in the import price of supplies from one source. The elasticity of substitution between alternative suppliers observed in trading economies is about 1.5, assuming that Moldova, as an exporting country, has no significant supply constraint in the medium term. 4.65 For each ad-valorem percentage cost reduction, a trade increase can be computed as the sum of trade creation and of trade diversion. In all, the expected balance of payments improvement (removal of direct excess costs + export benefits) wvould be close to US$120 million per year in the medium term.  V. ROADS and ROAD TRANSPORT 5.1 The Moldovan transport sector's major decline is especially noticeable in the road transport sub- sector. It is typified by falling traffic and a critical shortage of road maintenance funds. Consequently, transport operators (still mainly state owned) are in severe financial difficulties and the infrastructure is seriously deteriorated. The country's economy is highly dependent on road transport and it is clear that if economic recovery is to take place, the overall decline must be arrested and reversed. The critical issues are identified and discussed in the following sections. A. Road Infrastructure Current Situation and Key Issues 5.2 Road Administration. The Roads Department of the Ministry of Transport, headed by an Assistant Minister, is responsible for the administration, construction and maintenance of the public (national and local) road network. The individual municipalities are responsible for the urban network, and agricultural enterprises administer agricultural and forestry roads, frequently using Roads Department resources on a repayment basis. The Roads Department, including state construction companies which are also involved in building works, employs approximately 9,500 staff at all levels. 5.3 Construction and maintenance of the road system is carried out by 45 regional direct labor organizations and 5 semi-autonomous construction enterprises which also undertake building works. These enterprises also tender for and obtain contracts in neighboring countries. Although it is proposed to privatize some of these operations; today, there is no timetable for doing this. 5.4 Road Network. The total length of the Moldovan public road network (excluding municipal, agricultural and forestry roads) is 10,531 km of which 3,170 are classified as national and 7,361 as local roads (Table V. I below shows details of Moldova's road network, excluding urban and farm roads). The density of the network averages 0.31 km per sq km which is adequate coverage as most settlements are easily accessible by road. However, the condition of the system is poor with about 60% exceeding its economic and engineering life, resulting in bad operating conditions. The urban road system is also extensive but information on its total length and condition is not yet available. Table V.1: Moldovan Road Network (kms) Type and Condition National Roads Local Roads Total Roads Total Network 3,170 7,361 10,531 Concrete 426 59 485 Asphaltic Concrete 2,316 2,872 5,188 Pre-treated Macadam* 235 485 720 Macadam 193 3,442 3,635 Earth/Gravel 503 503 Design life expired 1,883 4,255 6,138 * bitumen / oil Source: Ministry of Transport, Roads Department  V Roads and Road Transport 25 5.5 Traffic and Fleet. Traffic, as measured by traffic counts and freight and passenger figures, has fallen by about two-thirds since 1990 in response to the economic decline and recession. This is not reflected in the vehicle fleet statistics as vehicles are still retained even if they are not used. Vehicle statistics are scarce as can be seen from the Table V.29 and Figure V.1 below. Table V.2: Moldovan Vehicle Fleet (thousands of vehicles) Vehicle Type 1990 1991 1992* 1993* 1994* Total Vehicles 323.9 336.3 273.2 263.1 263.8 Total Trucks, of which na na na na 69.6 Private Trucks na na na 3.6 4.7 Total Buses, of which na na na na 10.0 Private Buses na na na 0.6 0.8 Total Cars, of which 201.1 210.4 168.7 163.4 169.1 Private Cars na na na 159.2 163.6 Unspecified "cars na na na na 15.1 * excluding Transnistrian Region Source: Ministry of Interior Road Traffic and Vehicle Fleet, 1990 - 1994 L J Freight (min ton) Passenger (min pass.) a Total Vehides (thousands) 4504 400t 350 300t , 250_ r- _ 200_ 50 100 __*1 50 t__11 11 1990 1991 1992 1993 1994 Does not indude Transnistrian region for 1 992, 1993 and 1994. Estimates, 1994 Figure V.1 9/ The National Statistics Department considers such numbers to be strategic and full infornation could not be given to the mission within the available time.  26 V Roads and Road Transport 5.6 Traffic volumes on key routes have fallen drastically since 1991, in some cases by as much as 76% (See Table 5.1, Statistical Appendix for details). The composition of traffic on national roads in 1994 is shown in Figure V.2 below. Traffic Composition on National Roads, 1994 buses trucks > 10tons 5% cars 10% % trucks 5- 10 tons 17% \ /~~~~~~~~ trucks < 5 tons 46% Figure V.2 5.7 It is estimated that over 80% of domestic freight is carried by road and although data are not comprehensive, there are indications that the proportion of international traffic (including transit) on the roads is growing. Vehicle (car) ownership is approximately one car for every 27 people and there is considerable potential for growth as the economy expands. 5.8 The majority of the commercial vehicle fleet is old, technologically outdated and inefficient. Most freight vehicles are less than 10 tons in capacity and while useful in serving local services such as agriculture, are fuel inefficient and completely inadequate for modern transport services, especially over long distance and for international routes. This, together with the poor state of much of the road network, leads to high vehicle operating costs (voc) which are 25% to 30% above normal, and to transport bottlenecks limiting economic activity and development. 5.9 Road Design Standards. Two factors have to be taken into account when considering road design: engineering design standards (pavement strength and geometry) and the quality of work. In Moldova, the original construction standards of many roads are low and the quality of work is deficient in many respects: concrete roads are poorly built and deteriorate much more quickly than they should. For example, surface dressing has a life of only about three years. Additionally, roads are divided into four categories according to pavement width (Table V.3 below) but there are no corresponding pavement strength categories and, in fact, there is often no record of the original construction standards.  V Roads and Road Transport 27 Table V.3 Road Categories (knns) Road Category National Roads Local Roads Total Network 1 4 x 3.75 meter lanes 64 -- 64 II 2 x 3.75 meter lanes 1,180 12 1,192 III 2 x 3.50 meter lanes 1,610 613 2,223 IV 2 x 3.00 meter lanes 316 6,734 7,050 ource: Roads Department, Ministry of Transport 5.10 With the exception of some relatively new roads, including concrete pavements, it is probable that the design was based on eight tons or maybe lower axle limits. Furthermore, many of these roads have long passed their design life even assuming axle loadings in conformity with the original design standards. 5.11 In all, design standards and engineering performance need to be reviewed and improved. All new construction and rehabilitation should aim at raising pavement strength standards which should conforn to the European 11.5 tons axle criterion. Last but not least, within the constraints of limited budgets and rundown equipment, the maintenance organizations cannot currently stop the steady deterioration of the road network. This is clearly a matter that requires attention (see below Financial Issues, para. 5.14 and following). 5.12 Road Safety. Road safety in Moldova is poor. Although there has been a reduction in road accidents since 1989, this is due almost entirely to the decline in traffic, which has actually declined more than road accidents (see Figure V.3 below). Road Safety, 1989- 1993 Ratio 8,000l 350 7,000- ^ 300 6,000 250 No. of reported acddents - 200 I Injuries 4,000 150 Fatalitis 2 00 Fataltes to Traffic Ratio' 1,000- i iWt** t 50 O - - 1989 1990 1991 1992 1993 Defined as the ratio of the number of fatalities to aggregate traffic (freight in min tons + passenger In min pass.) Figure V.3 Source: Ministry of the Interior, Traffic Police and Table 5.2, Statistical Appendix  28 V Roads and Road Transport 5.13 Not only is the rate of road accidents high at 0.24 fatalities per 100,000 vehicle/km (1993), but the severity is also high with an estimated 1.1 injuries and 0.17 fatalities per accident. This needs urgent investigation and attention in order to identify causes and black-spots and to design and implement remedial measures. An immediate measure would be for the police to devote more time to controlling driver behavior instead of random checks on vehicle and driver documentation. Financial Issues 5.14 The financing of road infrastructure covers construction, rehabilitation, maintenance and repair expenses on the two categories of roads in Moldova: national and local roads. Transnistrian roads are under the responsibility of the unrecognized Transnistrian Ministry of Transport and are therefore not financed by the official Ministry of Transport of Moldova. 5.15 The state budget finances construction and rehabilitation of national roads. Funding for construction and rehabilitation of rural roads usually comes from repayment of works for other agencies and organizations. However, export contraction and budget restrictions have stopped much of these activities, and today, construction and rehabilitation expenses only account for 14% of all road expenses (i.e. construction and rehabilitation + maintenance and repair expenses), down from 28% in 1989 (see Figure V.4 below). 5.16 For both national and rural roads, maintenance and repair is supported by and extra-budgetary fund based on road taxes. There are four main categories of road taxes: (a) The Road Tax: All commercial enterprises, except marketing, wholesaling and retailing, must pay 1.5% of their turnover or gross income for the Road Tax. Marketing, wholesaling and retailing activities are taxed at 0.06 % of their gross income. Finally, all vehicle owners pay a yearly fee on each vehicle in their possession. Depending on the type of vehicle, the fee is of 10% to 85% of the minimum monthly salary". (b) Vehicle Purchase Tax: Excepting private cars, the purchase of buses, lorries, trailers and semi-trailers incurs a 20% tax; taxis incur a 10% tax. (c) Transit Fee: Except in the case of bilateral agreements, vehicles coming from other countries are charged a fee for the utilization of Moldovan roads. Fees are collected at the entry point in Moldova and are basically determined by the load and the distance of travel according to the following rules: - Private cars: $5 charge; - Buses carrying up to 30 passengers: $30 initial fee, plus and additional $0.10 for each kilometer that is expected to be driven inside Moldova; - Buses carrying more than 30 passengers: $40 initial fee, plus $0.15 per kilometer in Moldova; - Trucks of up to 10 tons per axle and of total weight under 36 tons: $25 initial fee to enter the Republic, and $0.15 per kilometer driven inside 10/ In July 1994, the minimum salary was of 18 Lei, or US$ 4.5.  V Roads and Road Transport 29 Moldova; - Trucks of up to 10 tons per axle and of total weight superior to 36 tons: $50 initial fee, plus $0.25 per ton.kilometer; and - Trucks of over 10 tons per axle: specific overweight charges apply. (d) Overload Tax: This charge applies for vehicles that are overloaded and have non-standard sizes. 5.17 The current taxation system has a number of serious deficiencies. Primary among these are the following: (i) the system is complex and the rates of tax ludicrously low and will not provide adequate resources (see para. 5.19); (ii) the estimation of maintenance and improvement needs (e.g., based on a road maintenance management system) is not related to road user charges and revenue collection; and (iii) the road user charges are not related to the costs occasioned by different categories of road users. 5.18 This system needs to be revised to provide optimum funding and use of transport resources. Fuel taxes should be included as a major component of the taxation system. Current petrol and diesel prices at about US cents 24/liter and US cents 21/liter respectively are too low. A proposed law shifting the main characteristics of the tax from a "producer-payer" to a "road-user-payer" system failed to pass earlier this year. The projected law includes the implementation of a 20% gasoline tax and a reduction of the Road Tax from 1.5% to 0.6 or 0.8% of gross income. If the new law is to be voted, tax collections for road purposes is estimated by Ministry of Transport officials to triple. The Government has proposed to undertake a review on this issue as part of a wider banking and taxation study in cooperation with the World Bank and IMF, and this should be followed up. 5.19 As a result of budget restrictions and low tax collections under the current system, there is a significant cost recovery and resource mobilization problem with the current road financing system (see Figure V.4 below and Table 5.3, Statistical Appendix). Only the minimum of road maintenance is being undertaken and rehabilitation has virtually come to a halt: ongoing construction and improvement projects have to all intents been halted indefinitely. Revenues today are at about 20% of the requirements for routine and periodic maintenance, and at about 5 % of the maintenance backlog. Total 1994 revenues will represent around 25% of 1989 revenues, when the Ministry of Transport was already short of covering all needs. 5.20 This situation is developing an idle labor force within the Ministry that continues to draw salaries. Another problem lies in the fact that local authorities often use road tax revenues for other purposes than road construction, rehabilitation or maintenance. Moreover, with the weak and deteriorated condition, much work is necessary to raise the roads into a maintainable state. The Roads Department is receiving no technical assistance nor training in engineering methods and technology, which are priorities.  30 V Roads and Road Transport Ministry of Transport Road Expenditure I Repair and Maintenance - Construction and % of Necessary Maintenance Rehabilitation Completed mln 1994 La! 350 T T 100% __1 r--- 9, 300T90 80% 250 ~~~~~~~~~~~~~~~~~~~~~~70% 200 ~~~~~~~~~~~~~~~~~~~~~~60% 40% 20% 10% 1989 1990 1991 1992 1993 Planned, 1994 Figure V.4 5.21 All the funds collected for road purposes are fully spent. Given the existing macroeconomic conditions, high interest rates (real interest rates of about 7 % per month) and generalized lack of working capital, there is no room for borrowing today. Additionally, the Ministry of Finance is delaying its payments to the Ministry of Transport for road maintenance. As a result, about 4 % of all collected funds are actually not made available to the Ministry of Transport. Ministry of Transport officials have repeatedly highlighted the problem, but it has not yet been addressed. 5.22 Proposed Projects. Owing to the uncertainty of resource availability and allocation, planning of road works and maintenance is only carried out on a yearly basis. Moreover, without an appropriate road maintenance management system, based upon a detailed survey of road conditions, effective planning would not be possible. Consequently, the government in cooperation with the EBRD is preparing a project for the rehabilitation of about 500 km of priority roads. The proposed project, currently estimated at US$60 million, will also have an important technical assistance and training component which will encompass the design and implementation of a road maintenance management system. The reform and implementation of the road user charges and financing scheme is an essential feature of this overall program. Summary of Key Issues. 5.23 The key issues that require addressing are (i) reform of the road user charging system; (ii) design and implementation of an adequately funded road maintenance management system (RMS); (iii) rehabilitation and strengthening of priority roads and preparation of an economically evaluated program of road improvement; (iv) improvement in maintenance and construction technology and standards; (v) development and introduction of road safety measures; and (vi) a strategy for the privatization of road construction and maintenance.  V Roads and Road Transport 31 B. Road Transport (Trucking, Inter-Urban Bus Transport, Taxis) Current Situation of the Road Transport Industry. 5.24 The road transport industry in Moldova was, until recently, primarily state-owned and comprised a number of "enterprises" which were the responsibility of the Ministry of Transport and other ministries and organizations. The Ministry of Transport currently owns part of the trucking (14% of all trucks in Moldova) and most of the inter-urban bus transportation activities (85 %). The Ministry of Transport also owns a state taxi company which operates in a competitive environment. All Transnistrian road transportation falls under the responsibility of the unrecognized Ministry of Transport of Transnistria; the Ministry of Transport of Moldova has no information about nor any kind of formal agreements with its Transnistrian unofficial counterpart. About one hundred (100) enterprises run the road transport activities of the Moldovan Ministry of Transport, and a privatization plan is currently being implemented. 5.25 Privatization. The 1993-1994 privatization plan includes two phases: first, the Ministry of Transport owned enterprises are to become Join-Stock companies, where state-owned shares still represent the majority. Second, state participation in these companies is to be progressively phased-out. Fifty (50) enterprises are scheduled to reach the first step of the privatization plan by the end of this year; full privatization of all concerned enterprises is to be achieved by the end of 1995. As of October 1994, the privatization plan was running major delays, and only 3 to 4 enterprises are really going through the process as scheduled. Furthermore, not all transport enterprises will be privatized. Suburban passenger transportation as well as specific trucking activities involving transportation of basic products such as fuel would remain under the ownership of the Ministry of Transport. 5.26 Aggregated Ministry of Transport accounts for all three activities (trucking, inter-urban bus transportation and taxis) show no losses and even small profits for 1994 (see Tables V.4 and V.5 below). However, allocations to depreciation are extremely low, and no new units were purchased since 1992. Trucking, bus and taxi transportation are living off their fleet, and if depreciation was taken into account, they might actually run deficits. This is emphasized by the very low utilization coefficients (ratio of operating units to total fleet) in all three sub-sectors: 81 % for taxis, 30% for inter-urban buses, and only 15% for trucks (See Figuro '1.5 below). Ministry of Transport, Road Transport Utilization Coefficients I i~~~~~~~~ 80%l - I 40%1 t991 '2 T-A 1 1991 1992 Trudcs 1993 1994 N*dPd, 194 Figure V.5  32 V Roads and Road Transport Freight Transport 5.27 Fleet and Traffic. There were 69,300 trucks at the end of 1993 (excluding Transnistrian region) of which 6,316 were owned by the Ministry of Transport including 5,454 of more than ten tons capacity. The Ministry of Agriculture owns the largest share of the remaining trucks, which carry agricultural products and are mainly used in state farms for daily activities. Most of the fleet is of Russian manufacture and old technology, and is not suitable for international transport. The road transport industry is estimated to carry over 80 % of Moldovan domestic freight. Most freight forwarders engaged in international traffic express a strong preference for road transport. There is also an increasing participation of foreign transporters with origins and destinations in Turkey, Bulgaria, Rumania, Ukraine and Germany. Various transport protocols have been signed with countries in Western and Eastern Europe and the FSU. 5.28 Basic data on the Ministry of Transport fleet and its operations are summarized in Table V.4 below. More details can be found in Table 5.4, Statistical Appendix. Table V.4 Ministry of Transport -- Freight Transport Operations Item 1990 1991 1992 1993 First Half,1994 Total Vehicles 11,060 9,528 7,183 6,316 na Vehicles > 10 tons 9,507 8,085 6,250 5,454 na Vehicles < 10 tons 1,553 1,443 933 862 na Tons carried (millions) 86.2 66.7 20.5 7.8 2.4 Average trip (Iam) 21.6 22.0 24.2 29.5 25.3 Average tariff 0.036 0.03 - 0.08 - 0.18 - 0.25 - (1994 Lei per ton.km) 0.16 0.26 0.56 0.90 Profit/(Loss), mln 1994 Lei 21.6 9.0 5.7 3.7 0.9 Utilization coefficient (%) >60 52.0 31.7 23.1 15.2 ource: Ministry o ransport 5.29 In common with the rest of the economy, freight traffic, as is clear from the table, has shown a decline of about 90% between 1990 and 1993. However, the decline is patchy and while some companies are operating below 10% capacity, others, especially those well on the way to privatization and engaged in import/export traffic, are reported to be operating at full capacity and are seeking additional vehicles. These official figures, however, cannot be entirely relied upon as reflecting the true operating position of the official freight fleet. The figures can only be used as general indicators and not as reflecting a commercial operating environment: it is doubtful if an enterprise operating at 23 % capacity or less could be profitable.  V Roads and Road Transport 33 5.30 Although there is a surplus of vehicles, the quality is so low that there is a strong case for either buying or leasing modern ones. However, the high rates of import duties, which can double the cost of a vehicle, militate against upgrading and modernizing the fleet and should be amended. In addition, the entry of foreign operators into the Moldovan transport industry either individually or as joint ventures should be facilitated. 5.31 Tariffs. Some incomplete efforts have been made to ease the way for market competition: freight tariffs are now free, provided that the "rentability" generated by the transport enterprise is below a fixed 30% ceiling. However, the current definition of this "rentability" (ratio of profit to total costs, including depreciation) differs from the classic definition of the rate of return (ratio of profit to the capital value of assets), and actually acts as a barrier to free market entry. Indeed, let us take the example of a potential entrant which sets its "rentability" at the 30% ceiling, but calculates that given this restriction its rate of return will not be above, say, 10% (companies that need an important asset base to run their activity like trucking or bus companies need higher "rentabilities" to generate better rate of returns). Under current legislation, even though this enterprise could enter the market, it would not do so because its rate of return is too low (much below real interest rates, today reaching in excess of 60%). 5.32 In addition, data obtained from commercially oriented operators indicate that, using modern vehicles, costs are between one and a half and four times the official tariff -- even assuming 100% load factors. One possible contributory factor is the treatment of depreciation: in 1993 depreciation on official trucks averaged Lei 24 (US$5.8) per vehicle. Information on vehicle operating costs is not very reliable but estimates for a range of vehicles is given in Tables 5.5a and 5.5b, Statistical Appendix. An in-depth examination of the operation of the official fleet is required and an improved cost accounting system may need to be introduced as a stage in the privatization program. 5.33 Summary of Key Issues. The key issues facing freight transport are (i) inexperience in operating and managing freight on a cost effective and commercial basis in a competitive environment; (ii) absence of a modern cost accounting system and a cost based tariff; and (iii) old and inefficient vehicle technology. Passenger Transport 5.34 Fleet and Traffic. Road passenger transport in Moldova is almost entirely state or municipality owned and operated, although there are growing long distance bus services between Moldova and countries such as Bulgaria and Turkey which are operated by private foreign companies. The statistics are not very precise in describing the true situation of the passenger transport operations as conditions do not permit reliable scheduling of services and availability of equipment is uncertain. Allowing for these data imperfections, Table V.5 below and Tables 5.6 and 5.7, Statistical Appendix, provide information on the size and make-up of the fleet, traffic and the financial situation for both buses and taxis owned by the Ministry of Transport.  34 V Roads and Road Transport Table V.5 Ministry of Transport -- Passenger Transport Fleet and Operations Item 1990 1991 1992 1993 First ___________ ___________ H alf, 1994 BUSES Total Buses 3,214 3,238 2,856 2,623 2,541 > 5 years 1,500 1600 1700 2000 na > 10 years 280 410 na new vehicles procured 267 121 26 Total Passengers (million) 336.3 273.9 173.4 71.0 19.2 international 0.7 0.4 na intercity 17.8 16.8 10.0 5.3 na suburban 76.2 67.1 33.2 11.9 na urban 242.3 190.0 129.5 53.4 na Average trip (km) na 16.0 11.9 12.1 17.2 Average tariff na 0.01-0.02 0.02-0.03 0.03-0.10 0.05-0.06 (1994 Lei per pass.km) Profit/(Loss), mln 1994 Lei na 1.1 (7.5) (8.0) (0.01) Utilization coefficient (%) >60 59.7 38.5 26.0 30.4 TAXIS Number of Taxis 1,200 1,100 900 732 na Average tariff na 0.11 0.52 0.35-0.70 1.00-2.00 (1994 Lei per pass.km) Profit/(Loss), mln 1994 Lei na 0.80 (0.05) (0.13) 0.02 Utilization coefficient (%) > 75 76.5 63.3 57.2 80.6 Source: Ministry of Transport 5.35 Tariffs. Bus passenger tariffs are still controlled by the Ministry of Transport. Official tariffs are of 0.06 Lei per passenger.kilometer for "comfortable" buses, and of 0.05 Lei per passenger.kilometer for less "comfortable" ones. Taxi tariffs are free; the Ministry of Transport recommends a price ceiling which is not mandatory and can be changed according to the fuel consumption of each taxi. Taxis used to work with meters in USSR times; because of supply problems, no meters are currently in operation. When they become available, the Ministry of Transport will make it mandatory to have a meter in order to obtain a taxi license. 5.36 Summary of Key Issues. Commercialization and eventual privatization of bus and taxi services, in order to make them more cost effective and less of a drain on the public budget, is a desirable objective. However, operations and management restructuring, priority rehabilitation of the system and a re-evaluation of the assets is a necessary preliminary step and, indeed, will be important even in the  V Roads and Road Transport 35 case of continued public ownership. This will require (i) the urgent procurement of spare parts; (ii) review of the route structure and timetable; (iii) a selective fleet renewal; (iv) rationalization of the work- force and reform of fare levels and structure; and (v) a detailed analysis of the cost of providing services. 5.37 Although eventual privatization should be the goal, the preliminary stage of restructuring will take a considerable time. Inter-city and international services would be the prime candidates for privatization and there is no reason why private operators should not be pernitted to enter and compete on these services immediately following removal of price controls. C. Urban Transport Description and Key Issues 5.38 Urban Transport in the city of Chisinau is under the responsibility of the local government. It includes two types of transportation: trolleybuses (440 units) and, since recently, buses (334 units). The latter were under the responsibility of the Ministry of Transport until last spring. Traditionally, this type of transportation has always been heavily subsidized by both the State budget and the local budget: only 20% of total expenses (including taxes) were covered by passenger-ticket revenues in 1993. 5.39 Recent budget restrictions have transformed this pattern. State budget allocations will be minimal in 1994 (only 310,000 Lei--or about 1.1 % of total expenses in Chisinau alone -- will be disbursed this year for urban transport in the two main cities of the country: Chisinau and Belti). In other words, local governments have actually become independent for urban transportation. Local budgets, however, also show weakness: subsidies from the City of Chisinau will fall from 80% of total expenses in 1993 to 62% in 1994. 5.40 Table V.6 below and Table 5.9, Statistical Appendix, provide information on the fleet, traffic and tariffs of urban transport in Chisinau. Despite recent tariffs increases (set by the City of Chisinau), revenues are not sufficient to meet all costs, and the urban transport system is living on the ageing of its fleet and beginning to contract. Allocations for depreciation and fleet renewal are close to non existent, and utilization coefficients (the ratio of operational units to total fleet) keep heading down (65% for trolleys and 40% for buses in 1994). As a result of operational bus shortage, 8 of the 44 bus routes of the city of Chisinau are closed. All 25 trolley routes still work. 5.41 About 2.8 mln people (or 70% of the population) are exempt from paying urban transportation fares in Moldova. These people belong to one of the 37 categories (e.g., students, pensioners, disabled) eligible for transportation privileges. In the City of Chisinau, out of the 682,000 transported passengers on an average day, around 300,000 do not have to pay. Out of the total State Budget allocation, only 175,000 Lei were disbursed to compensate for this lack of revenues.  36 V Roads and Road Transport Table V.6 Urban Transport, City of Chisinau -- Activity Figures Item 1991 1992 1993 Estimates, 1994 Number of Trolleybuses 459 461 457 440 Number of Buses 403 361 337 334 Traffic (mln pass.), of which: 365 417 294 249 Trolley, paying 205 221 164 124 Trolley, non-paying 30 96 96 96 Bus, paying 126 87 21 16 Bus, non-paying 4 13 13 13 Average trip, Trolley (km) 2.97 2.38 2.15 1.92 Average trip, Bus (km) 4.78 4.46 3.82 3.38 Avg. tariff, Trolley (1994 Lei per pass.) 0.02 0.01 0.02 0.06 Avg. tariff, Bus (1994 Lei per pass.) 0.03 0.01 0.06 0.19 Utilization coefficient, Trolley (%) 79 77 74 65 Utilization coefficient, Bus (%) 62 55 40 40 Source: Urban Transport Department, City of Chisinau 5.42 An important number of passengers who are not exempted to pay full fare do not buy tickets and ride free of charge. Estimates concerning these "free riders" are very difficult to obtain. The system of checking tickets actually gives incentives for people to cheat: the normal procedure is that passengers get into the bus without tickets; a controller is supposed to walk by in between stops and collect the fare. When it is rush our or when buses are completely full--this situation is getting more and more common since less and less operational buses are available-- it is virtually impossible for the controller to collect fares from all passengers. 5.43 Last but not least, the urban transport department is accumulating huge arrears since state and local budget restrictions began. The trolleybus division has not been paying its electric bill for the past 6 months; total amount owed: 3.3 mln Lei. 5.44 Investment Needs. The urban transport department sees the need to invest about 7.5 mln Lei for tires and spare parts before this winter (see Table 5.8, Statistical Appendix). It also needs to renew around 50 buses and 50 trolleys in the medium term, for a total cost of 24 mln Lei. This would enable the department to come back to and sustain 1991-1992 levels of operation. The Need for Restructuring 5.45 If no consistent changes are implemented on current urban transport policies, all bus and trolley routes are likely to progressively shut down over the next 10 years (which is the estimated remaining life  V Roads and Road Transport 37 of the fleet), as it already happened for 8 bus routes (para. 5.40). Furthermore, the prospect of significant losses under controlled tariffs for the bus industry will not attract private operators, making private funds unavailable for the survival, and eventually the expansion, of the current network. 5.46 The Urban Transport Department of the City of Chisinau needs to implement a financial adjustment and restructuring plan with urgency. An indicative plan was elaborated from the information provided by urban transport officials (see Tables 5.9 to 5.12). This plan would enable the urban transport department to: In the short term: (a) Implement a cost-recovery program and become independent from any state or local budget allocations by 1996. (b) Pay back all accumulated arrears, particularly all electricity arrears, over a period of 3 years, as well as collect accumulated receivables over 3 years. (c) Ensure proper maintenance and acquire tires and spare parts according to needs. In the medium term: (d) Generate enough cashflow for trolley and bus renewals. The proposed plan enables the renewal of 100 units (50 trolleys and 50 buses) between 1996 and 1998, and of 250 additional units between 1999 and 2002. 5.47 Traffic projections included in this plan are that passenger traffic remains at 1994 levels, and that all passengers pay their tickets by 1996. The plan includes four major elements: * asset restructuring; * tariff adjustment and rationalization; * staff reduction and salary increases; and * a cost-reduction program. 5.48 Asset Restructuring. Even though an asset revaluation took place in 1993 (it was the first revaluation in the past 30 years), the fixed assets value is underestimated. A revaluation of all fixed assets to a preliminary estimate of 50 mln Lei (2/3 of which for trolleys and their infrastructure, and 1/3 for the bus fleet), as well as the witting-off and/or the auctioning of unnecessary and non-transport related assets should be realized as soon as possible. 5.49 The revalued assets should be fully depreciated over 10 years, which is their remaining life. Some of the written-off assets could be used as a temporary source of spare parts. The prolonged use of older equipment, however, does make operations less profitable and efficient. 5.50 Tariff Adjustment and Rationalization. In order for the urban transport department to meet costs and become independent of any type of subsidies, average passenger tariffs, for both trolleys and buses, need to be tripled over a period of 5 years. The final tariffs are of 0.19 Lei for trolleybuses and of 0.58 Lei for buses. In addition, fare privileges should be phased out over 2 years: all urban transport users should pay full fare by 1996.  38 V Roads and Road Transport 5.51 Staff Reduction and Salary Increases. Current number of employees is at around 1991 levels (see Table V.6 above), whereas the passenger turnover (in passengers.kilometer) is at about 40% of 1991 levels. This major drop in traffic primarily affected bus transportation, where fleet renewal and maintenance could not be achieved at a proper pace. Important staff cuts are needed for the urban transport department to become financially independent and viable. Staff levels in both trolley and bus transportation need to be reduced to 60% of current levels over the next 4 years (i.e., trolley staff must be cut by about 1,000 employees, and bus staff by 330). 5.52 Staff reduction would be compensated by severance payments. These are financially feasible, even at levels in excess of current legal prescriptions. This would give incentives for employees to consider leaving the entity, and would increase the number of voluntary departures. Contingent on labor productivity increases (see Figure V.6 below), salaries should increase in real terms to up to 300% of 1994 levels over the next 5 years. By making it more attractive to work in urban transport, a selective program of staff development would be implemented. Salary and wage increases would also compensate urban transport employees for the diminishing role of the company's benefits package. City of Chisinau, Urban Transport Labor Productivity * 1991 - 2002 *Defined as di. rado of paseng.n rasisported (In mnd) to di. number of enWloye. Figure V.6 5.53 Cost Reduction Program. Non-transport related costs should be reduced by divesting from non- transport activities. The urban transport departrnent finances for instance municipal housing for 2,000 of its employees. It has also committed itself to lodge an additional 800 families. In this kind of municipal housing system, the employees pay for part of the services, and the urban transport department covers the rest of the bills. This activity should not remain under the responsibility of urban transport, and should be transferred to relevant entities. Figures V.7 and V.8 below picture how the cost structure of the urban transport department would be affected by the proposed cost-reduction program. 5.54 Operating costs as well as investment needs for fleet renewal could be significantly reduced by allowing private companies to operate bus lines. These private companies could also expand the capacity of current urban transport routes. For this to happen, however, prices should be completely liberalized so that entry in the market is attractive for private investors. Other privatization should be encouraged by ensuring that all operators have equal access to support industries such as vehicle and spare parts  39 V Roads and Road Transport 5.55 If this financial adjustment and restructuring plan is implemented, both the rate of return and the liquidity ratio (see Figures V.9 and V. 10) would come back to sound levels, enabling fleet renewal and other investments. City of Chisinau, Urban Transport Rate of Return * 0%~~~~~~~~~~~~~~~_ __ 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 *Defined as the Ratio of Profit to Net Assets Asset value is assumed rconstant for 1991-1994 Figure V.9 City of Chisinau Urban Transport Liquidity Ratio*, 1994 - 2002 '10% months i 191 19 931994 1995 1996 1997 1998 1999 2000 2001 2002 * Defined as the Ratio of Reserves to Total Expenses Figure V.10   VI. MOLDOVAN RAILWAYS 6.1 The Moldovan Railways were re-built after World War il using wide gauge tracks, and were made an integral part of the of the FSU's Soviet Union Railways (SZD). Centrally controlled by Moscow, each of the 32 regional railways of the SZD were operated by management centers across the FSU. The break-up of the FSU deeply affected the SZD; in order to manage the resulting problems an FSU Transport Council was formed. It was hoped that railway cars and containers would remain in a common pool; however, complaints from various railways make this plan difficult to administer. A. Orgaiiizatioii aiid Staff 6.2 The Moldovan Railways are a department of the Ministry of Transport, and are organized in the same principle as any other FSU railways. The structure is based on a production oriented railway. with transportation, locomotive, car department, engineering (track maintenance) and passenger as the main sections. The railway has a large non-operating section and medical section as well. However, and to a limited extend, it has recognized the changes imposed by the development of a market economy, and has formed in 1994 a Marketing Departnment whichi will help attract customers and plan and market its services. 6.3 In 1993. the total number of people on the Moldovan Railways was at 21.433. Out of these 16,582 were considered operating staff. A detailed break-down staff distribution by department anco service is shown in Table 6.1, Statistical Appendix. The maini departments are the Car department (3,374), the Railroad department (track maintenianice, 2,689 workers). the Locomotive department (2_425) and the Transportation department which has 2.262 workers. T'he remaining 4,851 employees are in non- transport activities, including loaders (716), capital repairs (656). 1.000 teachers and 2,479 others (storage, cleaners, workers). 6.4 In addition, the Railway has a medical section whichi employed about 2,100 professionals and workers in 1993. This included doctors (400), nurses (800) and support workers (900). B. Phlisical Description 6.5 The Moldovan Railways have 1.318 km of niain track, of which 1.096 km is signaled (most of the tracks are on wide gauge except for 26.4 km on normlal gauge at border crossings with Romania). The main track is double tracked on 222 km. Stations and access tracks cover 1,071 km and industrial trackage 219 km. The maximum axle load is 22.5 tons. 6.6 Today, the Railways have 269 diesel locomotives and 7 normal gauge locomotives for freight and passenger traffic (these are all double and triple uniits). There are also 44 permanently coupled self propelled diesel units to coaches in local passenger service. In addition. there are 658 passenger coaches. 472 long distance coaches (sleepers) and 186 suburban passenger coaches. 6.7 The freight transport is done with 12,521 cars. Out of these 3,594 are covered boxes. 1,092 flats, 3,192 gondolas and 4.703 other types. All rolling stock has automatic couplers as is a standard in North America unlike the European standard of "hook and loop" coupling. The stress permitted on a pull is 30 tons. The size of trains is usually 55 cars (siding length), which puts the maximium stress on couplers at about 5,000 tons.  42 VI Moldovan Railways 6.8 There are 4 main locomotive shops located in Chisinau, Belti, Tighina and Reni. Out of these, the Chisinau unit has separate freight and passenger locomotives shops (self propelled cars). The other 3 shops are for freight imain line locomotives (which are used in passenger ser"ice as well). The Railways also have 3 satellite locomotive shops at Ungheni, Ocnita and Basarabeasca. Switching locomotives could be serviced at any of these locomotive shops. 6.9 The Moldovan Railways have 4 car shops; two of them (located in Basarabeasca and in Tighina) are for regular freight cars; a third one (in Basarabeasca) is specialized for refrigerator cars and services the entire CIS railways. The fourth shop is for passenger cars and is located in Chisinau. There also is an intermodal facility of substantial size in Chisinau. This facility serves both older FSU style containers of less than 5 tons, and the international, 20 foot, containers. 6.10 The Railways have two fully mechanized sorting hump yards in Chisinau and in Tighina, with three sets of automatic retarders. There are six other semi-mechanized hump yards (these do not have automated retarders and skids are used instead to retard the cars rolling off a hump). 6.11 The Railways own large land and real estate assets to conduct its business and activities. Also, the railway has numerous assets in social facilities such as clinics, hospitals, recreational facilities, and residential apartment buildings. 6.12 Some of the properties and facilities owned by the Moldovan Railways actually are on Ukrainian soil: Reni is in Ukraine, and all assets located there are outside Moldova. In addition, Moldovan Railway tracks cross the Ukrainian border several times. C. Traffic Levels 6.13 Freight. Moldova is a heavy user of rail for freight transport, and the railway carries more than 90% of international traffic, reflecting its historical dominance of trade flows within the FSU. Since the peak year of 1989, railway traffic has been deeply affected by the FSU break-up and changes in the economic structure in Moldova. Today, freight traffic is at 30% of 1989 levels, and passenger traffic at 68%. One would have to look back to the early 1960's to find such low figures. Tables 6.14a and 6.14b, Statistical Appendix, and Figure VI. 1 below demonstrate this dramatic decline of freight traffic. Freight Traffic, 1989 - 1994 min tons 70 60 t 50 i *Transit 40 - * Export Local 30 E Fj7jj jjjjj7jj7jj j7j.7-7jg ~~~~Import, 20 _ 10 > ; X p*- gU.=s t1sas 1990 1991 1992 1993 1994 Projected, 1994 Figure VI.1  VI Moldovan Railways 43 6.14 Industrial traffic has also been reduced due to the total collapse of defense and military equipment production. In addition, agricultural products exports particularly suffered from bad weather conditions in the last few years that caused reduced crops. Furthermore, two cement factories and one asbestos tube plant have reduced production to few freight cars loadings per day from more than 150 per day a couple of years ago. Today, the predominant commodities that are being shipped are: grain, sugar, construction material, cement, meat, vegetable, food stuffs, butter, forest products, metal and raw ore from Ukraine to Romania. 6.15 Passenger traffic. Passenger traffic was also affected, to a lesser extend, by the harsh economic situation in Moldova (see Tables 6.15a, 6.15b, Statistical Appendix and Figure VI.2 below). The bulk of traffic comes from suburban traffic, and it is worth pointing out that local and transit traffic has grown over the period. Passenger Traffic, 1989 -1994 mln pass. 25 - 10- Local _II Suburban 1Q89 1990 1991 1992 1993 1994_ Projerced, 1994 Figure VI.2 6.16 Forecasts. Railway Department officials believe that the current traffic drop is very temporary, and that as weather conditions improve and agricultural output recovers to previous levels, demand will be back at 1991 levels over the next 2 years. This seems too optimistic (see Chapter III, Transport Demand) 6.17 More realistic projections would indicate a slight drop and a normalization in passenger traffic to about 1,200 bin pass.km over the next 3 years, mainly because of the massive increase in the relative price of fuel, shift in the composition of trade towards non-CIS countries, road transport competition and as a result of the necessary tariff restructuring that the railways already started and should continue to implement (see Financial Issues and the Need for Restructuring below). Freight traffic is expected to grow in line with Moldova's economic recovery projections: 2% yearly increase for 1994-1997; 5.5% yearly increase thereafter. The country will not reach the 1989 levels of 15.3 bln ton.km for a very long time.  44 VI Moldovan Railways D. Railway Operations 6.18 Cars. The passenger equipment is very outdated and it is being used to the maximum. The coaches are being repaired at a much faster rate than what is common in North America. Each coach is being fully refurbished every two years as some of the materials used in these coaches are made of wood instead of good quality metals and plastics. Furthermore, none of the coaches are air conditioned and moisture gets in through frequently opened windows. Also, the utilization level of available rolling stock is very high, causing wear and tear. Repairs are difficult to carry out as many spare parts are not available. 6.19 As a result of the considerable drop in traffic, the number of freight cars is generally more than sufficient. Even though there is a large oversupply of cars, many of them are not useable due to lack of spares, and are being slowly dismantled (covered cars, tank cars for fuel and hopper cars). Moreover, there is a critical short supply of a certain type of specialized cars, mainly tank cars to transport wine, butter and milk. This is also true for locomotives, and in all, there are about six (6) times more locomotives and wagons than actually needed. 6.20 The Moldovan Railways also has the responsibility for repairs, maintenance and staffing of refrigerator cars for the CIS states. The refrigerator cars are assembled in groups of five cars. Four cars are carrying cargo and the fifth car is used for cooling equipment and quarters for staff traveling with the cargo (two or three employees). The employees for the refrigerator cars being used on the CIS railways are provided by the Moldovan Railways (staff of about 1,500), which is outside the railway staff count. So far, this has been considered as profitable business to the Moldovan Railways. However, as the five packs require large pay-load and a large size of staff to support it, single refrigerator cars are considered more economical. The single cars are in very short supply. 6.21 Locomotives. The capital (major) repairs of locomotives are done in Ukraine. The running repairs are done in the four main shops in Moldova: Belti, Reni, Tighina and Chisinau. Chisinau does the running repairs of diesel locomotives for Odessa (Ukraine) as well. The number of units that the railway has and are being kept in reserve is high. Out of the 320 individual freight units, 94 are in reserve. Similarly with the switching units: out of 120 units, 36 are in reserve and 21 are marked for reduction. The freight locomotives are on an average about 18 years old, the switching locomotives are between 20 and 25 years of age. Many locomotive and car shops are under utilized and many portions of these shops are closed down. The shops' equipment is outdated and furthermore, many spare parts are not available. 6.22 A great difficulty concerning spares exists with diesel self propelled diesel units which are being used in passenger service, for local service. These units used to be manufactured in Hungary and their high utilization (due to an increase in local traffic -- see para. 6.16) made them reach the end of their life cycle very quickly. 6.23 Tracks. The railway track repair was traditionally at high level. However, today, with parts such as ties, rail and signal material in short supply, it is unmanageable to keep the railway in good shape. The Wood ties are at prices exceeding the level of concrete ties, which is the opposite situation to the North American market. The Moldovan Railways is being asked to pay 105 lei (about $20.00 US) for wood ties from Russia and 45 lei ($10.00) for concrete ties. Some rail is being bartered for from Ukraine.  VI Moldovan Railways 45 6.24 Many ties installed in a track are marked as defective and need to be urgently replaced. This results in permanent speed reductions on the main track. At many location in stations, rail and ties are pulled out and used in other areas. The engineering/repair section is calling for capital investments of 100 km of track material per year. Furthermore, engineering is asking for the purchasing of track repair machinery such as placers, tampers and ballast cleaning equipment. The bad track conditions and low traffic have caused the closing of 208 km of track and important speed limitations on 186 km; in addition, 170 signals are defective. 6.25 Information Technology. Information Technology is at a very low level and it is probably equal to early 1970's in North America. The main frame equipment is an old version and does not match efficient machines of today. The passenger department has a main frame application to control passenger booking on long distance passenger trains called "Expres". This is an older application and needs to be upgraded. A newer application exists to control freight cars distribution. Each car could be traced to an individual train or station. 6.26 No accounting, payroll, inventory and any other administrative packages exist either. Same could be said about individual staff productivity tools, as personal computers do not exist and the individual must rely only on "paper and pencil". 6.27 The movement of trains is controlled using a station to station principle (as opposed to centralized train dispatching) with relay interlocking systems at each location (with only few exceptions where stations are equipped with manual switches). All main line and siding switches are powered and linked to signals. Each station is usually staffed with one train movement director that controls the switches and light signals in the station and makes decision on train and switching moves. In addition, each locomotive is equipped with a cab signalling and automatic train stop which contributes to improved safety. A radio system covers the entire railway. Radios are mainly used for switching and general movement communications. The radio networks are managed through the Railways' own communication network. 6.28 Investments Underway. The Moldovan Railways started electrification of its lines on the Ukrainian border at a crossing at Razdelnaja (Ukraine). Many catenary support poles have been installed and even some catenary wiring has been installed as well (about 100 km). A transformer station was built at the entry point to Moldova. Railway department officials see the need to electrify the tracks from Ukraine to the Romanian border (Ungheni). However, the Railways do not own any electric locomotives, none of the locomotive shops are ready to maintain electric locomotives, and under reduced traffic, electrification is not the most cost-effective option. Furthermore, the railway's financial outlook cannot justify such expenses (estimated at around $30 mln for track electrification and $50 mln for electric- powered trains purchase, see Section F and para. 6.36 below). 6.29 The Railways has also started to open an old 12 km line between Cainari and Chisinau, with the goal to build 34 km of new tracks, including a tunnel, which would enable traffic heading south from Chisinau to avoid passing through Transnistria. This might be a helpful line for passenger traffic (about 5 villages would benefit from it) but probably not for freight: freight traffic has decreased so much that it is questionable how much traffic (between Chisinau and Reni) would benefit from this "short-cut". The only real advantage of this project is that traffic from Chisinau to Reni would not go through the conflict region. But again, the financial situation of the railways would not allow for these expenses (estimated at about $40 million, see Section F and para. 6.36 below).  46 VI Moldovan Railways E. Real Estate Laws and Labor Agreements 6.30 Currently, under the existing legislation, the Railways is not allowed to sell any of its land or buildings; they can only be leased or rented to other parties. The Sales Services department has the responsibility for leasing Railways properties. The area that is being administered by this department is 10,000 hectares (25,000 acres). The leasing of Railways' land is currently done mainly by new transportation companies (forwarding companies) as they are trying to establish themselves in the market economy. 6.31 Labor laws are less restrictive than in other former Soviet Union countries. Many employees are allowed to go on a long term vacation without pay, and with a promise to be rehired when work comes back. None of the Railways executives was concerned with the problem of massive lay offs that are necessary in light of the reduced traffic (see Section F below). F. Financial Issues and the Need for Restructuring Financial Issues 6.32 Background. The railways do not receive any subsidies from the State budget to cover their operating expenses as they are self-sufficient. They are free to set tariffs for local freight only. Transit, CIS and international freight as well as passenger tariffs are proposed by the railway, cleared with the Ministry of Transport and the Ministry of Finance and finally approved by the Prime Minister. 6.33 The accounting system separates the activities under the responsibility of the railway in three different categories: passenger traffic, freight traffic and the so-called "non-transport operations". Both freight and passenger transport have been running a deficit over the past years (1994 forecast is a 15 mln Lei loss). This deficit has always been covered by non-transport profits. Non-transport operations include a huge list of diverse activities, some of them actually being related to traffic like part of the loading and unloading services for freight or expedition services, and others being completely exterior to the traditional activity of a railway: factories, farms, social services and even banking (see Table 6.2, Statistical Appendix). 6.34 Issues. Hidden behind this budgetary approach are the generic issues of the Moldovan transport sector: overcapacity, ageing of equipment, lack of depreciation resources and minimum allocations for this purpose, tariffs too low to meet cost-recovery, too many employees, and the urgent need to renew part of the rolling stock in the next 4 to 5 years. 6.35 In addition, particular issues contribute to the mediocre financial outlook of the railway department. They are the following: (a) The size of the accumulated arrears and receivables: about 120 mln Lei each. As of September 1, 1994, the railways had accumulated arrears of 116 min Lei, or about the current value of their fixed assets. Receivables amount to similar figures. This situation stems from the overall lack of working capital in the Moldovan economy. However, the railway arrear record is worse than in other transport entities. One of the reasons is the disruption of the railways payment system after the FSU breakdown. Most of Moldovan railway transportation involves trips to the FSU originated in Moldova. Payment for the whole trip is usually  VI Moldovan Railways 47 effectuated in Moldova; the Moldovan railways then pay their FSU counterparts for their respective share of the trip. Reciprocally, the Moldovan railways get paid from their FSU counterparts for trips originated abroad. However, given the small size of the country, the amounts of money involved in transportation from Moldova are much higher than those received for transportation to Moldova. When the FSU railways payment system stopped working (basically from mid-1992 to early 1994), payables and receivables just accumulated all across the FSU, and payables did so more than receivables in Moldova. The net situation shows that the Moldovan railways owe around 60 min Lei because of this disruption. The railways are currently looking at possible barter exchanges to lower this debt. As for receivables, a recent government decision to force the railways to transport up to 80% of agricultural entities output without upfront payment aggravated the situation. These entities account for 36 mln Lei of the railway's receivables. (b) Purchase of fuel:. at 25 % above average private fuel prices. Currently, the railways have no restraints on energy purchase. Still, mainly because of lack of capital, almost all the fuel is purchased from the State Fuel Agency which prices are 25% above average private fuel prices. In exchange for not paying for fuel, the State Fue~l Agency ships freight free of charge. This potential loss on fuel prices as well as on earnings represents in the view of the railways a lower cost than that of borrowing at 90% nominal interest rates to pay for this fuel. (c) The situation in Transnistria and railway's accounts in Transnistrian coupons (100 mln Lei) Since the armed contlict of 1992, Transnistria has lived under a separate monetary system and has not taken advantage of the monetary adjustments of the rest of Moldova. Inflation rates remain extremely high in Transnistria, and even though a new currency was introduced in September 1994 (the New Transnistrian Coupon), little progress towards stabilization has been achieved. Unofficial exchange rates put the Lei at around the equivalent of 40 coupons in June this year. then at 66 coupons in September. and 90 coupons in October. The Moldovan Railways own all the tracks as well as three stations located in Transnistria. One of these stations, Tighina. is of particular importance in the current network: all the traffic coming from Ukraine and the East goes through this station, and is then distributed either on the Chisinau-Ungheni line, making the link with the North of Romania, or on the Bani line, heading South. Many operations --and therefore revenues-- take place in this focal point. Even though the city of Tighina is actually situated West of the Dniestr River and is geographically located not in Transnistria but Cis-Dniestr, it is still under the influence of the Transnistrian unrecognized government. The latter currently constrains the Moldovan Railways to collect the revenues of all their Transnistrian operations in coupons. As a result of this policy, the railways are stuck with coupons they cannot find uses for. Indeed, the only way to exchange these coupons into Lei is through the Transnistrian official exchange rate, which is extremely unfavorable when compared to the unofficial one. Additionally, very few entities are ready to accept payments in coupons, even in Transnistria. In the end, the railways have an account estimated at around 4,900 mln coupons of July 1994 (approximately 100 mln Lei) that is kept in coupons and that devaluates at high inflation rates (30% a month). Last but not least, if the railways disregard the constraint of using local currency in Transnistria, Transnistrians threaten to cut the line and divert all transit traffic to neighboring countries, as already happened in 1993. (d) Competition from other transport industries. Railway traffic seems vulnerable to competition from a liberalized road transport industry, and shares of railway traffic will decrease as it occurred in Western railways, irrespective of efforts towards more service-oriented operations. Due to the advantageous geographical position of Moldova. however, the railways will most likely continue to have transit cargo traffic, and exports to the FSU.  48 VI Moldovan Railways 6.36 The railways see a need to invest around $200 mln in the short to medium term. These projected investments include by order of urgency: rolling stock renewal ($60 mln), electrification of the Ukraine to Ungheni (Rumanian border) line ($30 mln), purchase of electric-powered trains ($50 mln), and construction of 34 km of new tracks, including a tunnel ($40 mln). At present, regardless of the feasibility and the justification (still to be proven; see paras. 6.29 and 6.30) of such programs, there is no investment capacity for any of these projects. Interest charges on a hypothetical $200 mln loan would represent about half of the total revenues of the railways. The Need for Restructuring 6.37 The Moldovan Railways are at a crossroads, facing two choices. The first choice is to keep the current structure without any adjustment, and wait for traffic to recover to FSU levels in order to generate investment capacity. It is very unlikely that demand will get back to 1989 levels in the next 4 to 5 years and rolling stock renewal cannot be delayed forever. It would be possible, by cannibalizing unused equipment to maintain enough operating rolling stock till 1998-1999. If by then there is no debt capacity, railway service will progressively fade down and eventually disappear. 6.38 The second option is to recognize changes and restructure the railways accordingly and with urgency. This option would bring the railways from a "production" oriented strategy to a market-oriented strategy. Using the financial information made available by the Railways department, an indicative financial adjustment and restructuring plan (see Tables 6.3 to 6.7, Statistical Appendix) was elaborated. This plan would enable the railways to: (a) Pay back all accumulated arrears over a period of 4 years, and collect accumulated receivables over 3 years. (b) Acquire investment and debt servicing capacity and generate enough cashflow for rolling stock and motive power renewal, which should be the only priority investment in the short and even medium term. A preliminary estimate of $20 mln yearly investments including locomotive, freight and passenger car renewals could be realized by 1997 if the plan is enforced immediately. 6.39 This indicative plan takes into account the demand projections discussed in section C, and includes four major elements: * asset restructuring; * tariff adjustment and rationalization; * staff reduction and salary increases; and * a cost-reduction program. 6.40 Asset Restructuring. As of July 1994, the Moldovan Railways's fixed assets were evaluated at about 116 mln Lei (see Tables 6.8 and 6.9, Statistical Appendix), far below the actual value of the current operational rolling stock. A revaluation of these assets to a preliminary estimate of 720 mln Lei should be realized as soon as possible. In this revaluation, 1/3 of the fixed assets accounts for locomotives, 1/3 for passenger and freight cars, and 1/3 for tracks. 6.41 The revalued assets need to be depreciated according to the following rules:  VI Moldovan Railways 49 - Fully depreciate locomotives in 5 years. - Fully depreciate cars in 8 years. - Depreciate tracks over 15 years. 6.42 Asset restructuring should also include the writing-off and/or the auctioning of unnecessary and non-transport related assets. Hospitals, schools, townships and other similar activities should not remain under the railways's responsibility. 6.43 Tariff Adjustment and rationalization. In 1994, according to the railways department and despite tariff increases in real terms over the past 4 years (see Table 6.10, Statistical Appendix), estimated passenger transport revenues will only cover 78% of passenger transport expenses, whereas freight revenues will represent 98% of expenses. These figures, however, were calculated with current depreciation allocations, which are extremely low: 3 % of the total value of current fixed assets--a value that is largely underestimated, as stated before--. In the end, when taking into account asset restructuring, real revenues will not cover more than 65% of transport expenses in 1994. 6.44 In order to meet cost-recovery, both passenger and freight tariffs need to be increased. This increase should be sharper at the beginning of the adjustment plan, in order to face the costs of asset restructuring and the need to create adequate allocations for depreciation. A preliminary indication of the magnitude of these increases is the following: - SDouble current average passenger tariffs in 1995, then progressively bring them to 275% of 1994 levels by 1999; and * Increase current average freight tariffs by 50% in 1995, then progressively bring them to 225% of 1994 levels by 1999. 6.45 Discriminatory pricing practices (see Tables 6.11 and 6.12, Statistical Appendix) must be eliminated as soon as possible. Domestic and export, import or transit freight tariffs for a given trip should be levelled. Tariff rationalization should also include cost-based justifications of any tariff differences in commodity transport. As for passenger tariffs, price discrepancies per pass.km for suburban, local, CIS and international trains need to be phased out, unless linked exclusively to level of service costs. For instance, under the current system, for a given trip, travel in a suburban train is 30 times less expensive than travel in an international train. 6.46 Staff Reduction and Salary Increases. Current number of employees is at 90% of 1991 levels, when aggregated traffic (passenger.kilometer + ton.kilometer for freight) was 3 times higher. Despite recent staff reductions. a considerable effort is still needed to reduce staff costs relative to traffic. Total staff needs to be reduced from current 20,896 to about 12,000 employees by 1998. This staff reduction is inclusive of the elimination of all non-transport activity staff by 1997, and a reduction of transport-related staff by 4,200. 6.47 Staff reduction would be compensated by severance payments. These are financially feasible, even at levels in excess of current legal prescriptions. This would make it more attractive for employees to consider leaving the entity, and would increase the numbers of voluntary leaves. 6.48 Contingent on an increase in labor productivity (see Figure VI.3 below), salaries should  50 VI Moldovan Railways increase in real terms to about 300% of 1994 levels over the next 5 years. While making it more attractive to work for the railways, a selective program of staff development could be implemented. Salary and wages increase would also compensate the railway employees for the diminishing role of the company's benefits package. Railways Labor Productivity* 1991 - 2002 o 601 o 50& A ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . _. '._'*.'.. . '. '.*. 1991 1992 193 19 195 19 197 19 199 20 201 02 Defined as the Ratio of Passenger and Freight Turnover (in mln t.km) to the number of employees Figure VI.3 6.49 Cost Reduction Program. The railways cost structure is mostly fixed, non-transport related costs: only 30% of all expenditures are related to the level of traffic. These fixed costs need to be reduced not only as a result of staff cuts, but also by divestiture from operations not directly related to railway transportation. 6.50 Currently profitable activities under railway responsibility such as expedition operations, industrial production, sales of consumption goods and even maintenance of rolling stock could be sold to the private sector and generate extra cashflow. This would also help the railways to focus on transport operations. Indeed, the current situation in which transport operations are subsidized by non-transport activities does not create any incentives to control costs and increase productivity in passenger or freight transport. 6.51 The railways are also involved in many social activities, such as the funding of educational establishments, hospitals and townships for railway staff. Expenditures for these activities are covered by both the State Budget and the railways department. Recent budget restrictions resulted in a sharp increase of the railways share of total expenses. Railway allocation to these expenses rose from 0% of total expenses in 1991 to about 30% in 1994 (see Figure VI.4 below). Divestiture from these activities should be completed over the next 3 years. Medical facilities should be transferred to the Ministry of Health, educational facilities to the Ministry of Education, and recreational facilities should be privatized or placed under the administration and maintenance of labor unions to be run on a cost-recovery basis. The increase in salaries and wages included in this plan would compensate for these structural changes.  VI Moldovan Railways 51 Railways Budget Allocations vs Railway Allocations Hospitals and Education U Ralway Allocation B2 Budget Allocation Total 7.1 min Lei 100% 90% 80% 70% 60%- 50% 40% 2030%0%I _____~ 1991 1992 1993 1994' Estimated, 1994 Figure VIA Source: Table 6.13, Statistical Appendix 6.52 Figures VI.5 and VI.6 below picture how the cost structure of the railways would be affected by this restructuring program. Railways Cost Structure, 1993 Total Expense (in 1994 Lei) 223 mln Lei Salary and Wages 13% Social Benefts 6% Other Activities' 37% Maintenance 8% Depreciation 4% Includes Social Development Fund, incentive-Bonus Fund and Production-Development Fund Figure VI.5  52 VI Moldovan Railwavs Railways Cost Structure, 1999 Total Expense (in 1994 Lei): 498 min Lei Salary and Wages Omer Activtles' Yobal Beneit Debt Repayment 1% 1% X_ ............. .>._ Si || ........Fuel t + .X I R ~~~26% Maintenan-e X~ 19% Depreciabon 21% Includes Social Development Fund, lncentwve-Bonus Fund and Production-Develpment Fund Figure VI.6 6.53 If implemented, this plan would bring both the rate of return (Figure VI.7) and the liquidity ratio (Figure VI.8) to levels enabling the railways department to invest as well as renew rolling stock according to needs. See Table 6.16, Statistical Appendix, for the proposed investment plan. Railways Rate of Return 1991 -2002 -5% I -30% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ' Defined as the Ratio of Transport Activity Profit to Net Assets Figure VI.7  VI Moldovan Railways 53 Rallways Liquldity Ratio* 1991 - 2002 i' I 4 months 1991 1992 1993 1994 1995 1998 1997 1998 199 200 2001 200 Defined as the Ratio of Reserves to Total Expenses Figure VI.8 6.54 The railways as an institution is aware of and concerned about the inevitability of measures to restructure and the urgency of rolling stock renewal. The need to restructure the asset base was acknowledged, but additional tariff increases as well as staff cuts were considered as very difficult if not impossible to implement over the short term. In the medium term, the railways still see the need of completing their electrification program. The potential for open- ended operating losses will continue to exist unless policies to establish commercially sustainable operations are consistently applied. 6.55 Restructuring is a lengthy and painful process implying strong commitment from the government, railway management and the workers. A change in the corporate culture inside the Railways is an absolute requirement for successful restructuring. In its new role in operation, the Railways must make a clear distinction between commercial transport services provided for profit and services provided at "governmental" request (i.e. passenger trains). Except when operated under "governmental" request and payments, unprofitable services will have to be abandoned in a market economy.  VII. CIVIL AVIATION A. Overview 7.1 Under the FSU, all air transport operations were centralized under one organization--Aeroflot. Aeroflot was based and managed from Moscow, and was exclusively responsible for providing public air services, managing airports, and Air Traffic Control (ATC) services while acting simultaneously as a regulatory body. Daily operations management was delegated to regional departments. 7.2 Passenger air transportation was one of the most heavily subsidized services in the FSU, more underpriced than even bread, vegetables or automobile fuel. Operating costs and the cost of producing aircraft were artificially suppressed due to low fuel and raw material prices, other cheap inputs, and subsidies. After normalizing in terms of exchange rate and purchasing power, the price of a 800 km air trip from Moscow appeared in 1989 as 43% of a trip of similar length from Brussels or 49% from Chicago. Only meat and subway fares had comparably low price levels when compared to the average purchasing power. An important share of leisure traffic was also stimulated by allowances granted by the State-owned employers to their staff for annual vacations. 7.3 With the breakdown of the FSU, Aeroflot was broken into national entities. Management finctions and investment funding which used to be undertaken from Moscow were transferred to entities which are still not structured accordingly. Air Moldova was Aeroflot's successor in Moldova, inheriting part of its physical assets as well as of its operating and institutional structure. Some recent institutional changes (separation of the regulatory body and of Air Traffic Control from the airline; see Section B), however, show the awareness of civil aviation officials concerning the necessary review of former concepts in a market-driven FSU. 7.4 Air transport may be a crucial tool for trade development in Moldova, where historic economic links with trading partners have been developed across a continent characterized by large distances while new markets are yet to be developed with Western Europe. Accordingly, the impact on the economy and economic costs of continuing the status quo must be re-examined. The success of the airline industry depends on how fast and efficient the airline can make the transition from the "command and control" system to a market system. The main issue lies in providing a decent air transport system promoting trade development while remaining in line with the country's scarce resources. B. Institutional Organization of the Sub-Sector 7.5 Civil Aviation Administration. Moldova's civil aviation is currently going through institutional reforms. Regulatory functions have been officially separated from operating with the creation, in February 1993, of the Civil Aviation Administration (CAA). Previously a Department of the Ministry of Transport, it now reports directly to the Government. Presently, it includes 48 positions of which only 36 are filled -- which should enable this administration to fulfill most of its regulatory roles in regard to international standards. Part of its sovereign activity such as aircraft certification or personnel licensing can be discharged and delegated to other countries, by means of international agreements such as those carried under the International Civil Aviation Organization (ICAO).  VII Civil Aviation 55 7.6 Aside from being a technical regulatory body, this administration should also focus on a new aviation policy. In particular, consideration should be given to the potential economic advantages for developing competition within Moldova's air industry and opening the markets to foreign airlines and joint ventures. With the establishment of bilateral and/or multilateral agreement, priority should be given to avoid capacity restrictions in order to promote international trade. Although Moldova is a member of ICAO since July 1992, it has only signed five bilateral air agreements with Austria, Romania, Russia, Ukraine, and Turkey. 7.7 Airports and Airlines. Air Moldova owns and operates all three civil airports in Moldova (see para. 7.18) as well as most of the airline activity in the country: in 1994, about 80% of all landings at Chisinau airport will be by Air Moldova aircraft. The principle of the separation of the airports from Air Moldova is currently being discussed within the airline, and a final decision has yet to be reached. A national commission was expected to address this issue beginning November 1994. 7.8 Besides the flag carrier, there are six more airlines registered in Moldova. These companies are private and operate or commercialize freight charter flights with rented aircraft, which, in some cases, may belong to Air Moldova. 7.9 Air Traffic Control (ATC). ATC activities have been separated from the Air Moldova group (Government Resolution N.3 of January 13, 1994) with the creation of MOLDATSA (Moldovan Air Traffic Services Authority). Consisting of the former ATC Department of Air Moldova, MOLDATSA started operations very recently (15 June 1994) and is responsible for all ATC activities, overflight, approach, and landing. It is a State Enterprise and is supposed to be financially self-sustainable, although its chart allows national budget support "in exceptional cases". Yet, the terminology "enterprise" is misleading since it is still run as a state department rather than as an enterprise per se. For instance, its director reports to the General Director of Civil Aviation Administration as any other sub-division of this authority. C. Airline Operations Air Moldova 7.10 Traffic and Network. In 1991, Air Moldova carried more than 850,000 passengers to 62 FSU destinations. Its traffic went down to 161,400 in 1993 and is expected to remain below 100,000 in 1994 (see Figure VII. 1 below for historic and prospected traffic). Today, its network is limited to six lines to CIS countries, while four lines have been opened to Frankfurt, Vienna, Bucharest, and Athens, at less than two flights a week. Yet, Air Moldova has benefitted from a quasi-monopolistic position at Chisinau competing with only TAROM-Romanian Airlines on its Bucharest line (see Tables 7.1 and 7.2, Statistical Appendix). It is only recently, in September 1994, that the private Moldovan Airlines was allowed to open a scheduled flight to Moscow. Part of the traffic decrease can also be explained by the fuel shortage which affected the airline at the beginning of 1994 leading to the cancellation of some of its flights. 7.11 Air Moldova is still sized very much according to the former level of traffic with 2,000 employees (see Table 7.3, Statistical Appendix). Some staff adjustment has already been undertaken, but further staff reduction to about 1,000 employees for both the airport and the airline (see para. 7.37) is needed.  56 VII Civil Aviation Air Moldova Traff ilc, 1989 - 2002 4~~~~~~~ r~~~~~~- 4 r ~~~~~~" IW I ~ XO ,C D_, 1999 1990 1991 1992 3194 MFrht(19,0 9 Pong) Figure VII. (See para. 7.33 for details on traffic projections) 7.12 Fleet. Air Moldova's public transport fleet consists of only medium-range narrow-body Soviet- manufactured aircraft (see Table 7.4, Statistical Appendix). It includes 6 Tupolev Tu-154 (160 seats), 8 Tu-134A (76 seats), 5 Antonov An-24 (50 seats). This fleet of 19 aircraft flies less than 7,000 hours per year which means 370 hours per aircraft, to be compared to an average of at least 2,000 hours per year in the FSU period, and to about 2,500 to 3,000 hours per year for Western airlines. The current network could be easily flown by seven aircraft, including using one of each tvpe as a back-up. 7.13 Air Moldova also owns a significant fleet of aircraft (10 An-2) and helicopters (45 Ka-26 and 20 Mi-2) dedicated for aerial work operations (agriculture and sanitary flights). Within the restructuring framework (see section F below), these operations should no longer be the responsibility of the public transport enterprise but of a separate entity. 7.14 Besides being old and obsolete, the operating costs of the fleet are higher than in Western airlines. Fuel consumption is at least 50% higher than that of Western aircraft of the same generation, and twice as high as aircraft of the new generation. Operating such aircraft require cockpit crews of three to four people when only two is now common for Western aircraft. Maintenance costs are also higher: even though spare parts can be obtained at low prices, insufficient supply and improper maintenance procedures cause longer ground time. Furthermore, engine maintenance design is not modularized, which leads to full engine replacements at a much higher frequency than that of Western engines. 7.15 Finally, most of the aircraft are reaching the end of their life cycle. Tu-134's are more than 14 years old and An-24's between 20 and 25. The problem of their replacement is all the more pressing, as these aircraft belong to Chapter 2 of ICAO classification and therefore do not comply with the forthcoming US and EU noise reduction regulations, which will gradually ban such aircraft from access to airports (Chapter 2 aircraft older than 25 years will not be allowed to operate to Europe after 1995, and all of them, whatever their age, will be banned after 2002). Consequently, Air Moldova 's priority is to acquire sufficientfinancing capacity (see section F below) to purchase or lease new generation aircraft in order to have access to and to be competitive in Western markets.  VII Civil Aviation 57 7.16 Investment Needs. Air Moldova must dispose of its unproductive assets. As stated before, a fleet of seven aircraft (2 Tu-154, 2 Tu-134, and 3 An-24) should suffice in serving its current network, including the re-opening of some former routes if needed. One or two acquisition of new generation 100 seater aircraft to serve western market is necessary by the end of this century plus the need to replace the An-24. Technical assistance in the commercial field, the development of management information system, including cost accounting, would be needed. This would represent an investment of about $50 million to $70 million by the end of the decade, to be refined in the light of its business plan. Without financial adjustment, such an investment program is out of reach (see section F). Other Airlines 7.17 Besides Air Moldova, six more airlines are registered in Moldova (see para. 7.8). Among these, VALAN is the most important freight charter company with 48 employees --mainly pilots-- operating a fleet of 6 aircraft (An-72/74 and An-32). The case of MOLDOVAN AIRLINES is also note worthy. Created in March 1994, the airline started a daily scheduled service to Moscow in September. Flying a jet Yak-42, it offers 104 seats (of which 8 are business class) at a fare of US$125, providing a test of the Moldovan market to service quality and price elasticity. D. Airports 7.18 Moldova is equipped with three civil airports: Chisinau, Balti, and Cahul. Currently, only Chisinau airport has scheduled service. Services to Balti have been stopped due to the drop in traffic but Air Moldova plans to resume service in conjunction with one of its flights to Moscow. Traffic at Cahul has always been of charter flights. Runways are generally in good condition and only Chisinau is equipped with instrument landing system (see section E on ATC). 7.19 The main issue at Chisinau lies in its lack of independence from the airline, not only institutionally, but also budget-wise. Its accounts are consolidated with those of the airline and the airports' investment needs are not considered as a priority. 7.20 This situation has led to deficiency in ground facilities. The air terminal building (ATB) which was built in 1983 is still in good condition, although its structure shows some signs of deterioration. It was designed for domestic traffic (intra USSR), and it would need a complete refurbishment in order to allow a smooth flow of international passenger traffic. Currently, departure facilities are sized for one Tu-154 at a time (160 passengers). In particular, passenger baggage processing in the terminal is completely outdated. Yet, the terminal structure design should allow improvements at a low cost. 7.21 Equipment handling is also insufficient for both passenger and freight. Cargo airplanes have to be loaded and unloaded manually. This is a significant constraint for trade development. The airport needs to provide some basic services and facilities which, due to current traffic levels, would not be cost- effective if acquired separately by individual carriers. 7.22 Because of the role the airport may play for the national economy, it should be established as a separate entity. As a first step, it could report directly to CAA, as long as it can have its own budget, on the same model as the one being currently implemented for air navigation services, but its board of directors could also include representatives from local entrepreneurs, local or governmental authorities  58 VII Civil Aviation involved in the development of trade. Landing charges should be computed to reflect costs while revenues from concessions should be sought (such as duty-free, car rental, parking etc). A business plan aiming at providing the airport with commercial management, even if it remains as a public enterprise, should also be implemented. 7.23 Investments needs. Urgent investments should include: (a) terminal refurbishing and acquisition of handling equipment; and (b) technical assistance to help the airport management in introducing commercial practices. About US$3 million should be sufficient to cover the refurbishing, equipment and technical assistance. E. Air Traffic Control 7.24 Since June 1994, Air Traffic Control is operated by a separate entity, MOLDATSA (see para. 7.9). MOLDATSA is still sized for traffic levels of the early decade when it was controlling about 70,000 flights per year. Equipment is obsolete and not fully compatible with Western (ICAO) standards. Its staff of about 235 people including 98 controllers for a current yearly traffic of about 25,000 flights (or less than 100 flights per day on peak months) would need to be reduced (see Table 7.5, Statistical Appendix, and Table VII.1 below). Table VII.1 ATC Personnel Per Category and Per Airport Staff categories/Airports Controllers Technicians Administration Total Chisinau 80 90 15 185 Balti 14 24 2 40 Cahul 4 5 1 10 Total 98 119 18 235 Source: MOLDTSA _____________ 7.25 Similarly, the replacement of equipment would have to be sized to current traffic, subject to a costs-and-benefits analysis. As a first step, the implementation of VOR/DME is necessary to allow for current overflight traffic. If properly situated at the airport, this equipment could also be used as a landing approach aid, through new landing procedures. In that case, the replacement of the existing secondary approach radar, which is seen as a priority investment by MOLDATSA officials, would not be necessary in the short term. Low traffic levels and the fact that secondary radars can only be used by aircraft equipped with compatible transponders also justify the postponement of this investment. 7.26 Main Issues. MOLDATSA's scope of activities since its separation from Air Moldova is still being debated. MOLDATSA should remain responsible for en-route as well as for approach control in order to ensure consistency in equipment choices and efficient use of human resources. Additionally, it needs to implement urgent actions aiming at acquiring basic equipment as well as training staff: English proficiency is of utmost importance for controllers, as is the training of administrative staff in commercial accounting and management information systems. Acquisition of a VORIDME along with some other basic equipment, technical assistance and training could be achieved with a self contained project of about US$2 million.  VII Civil Aviation 59 F. Financial Issues and the Need to Restructure Air Moldova 7.27 Air Moldova is free to set its tariffs, and does not receive any subsidies from the State budget to cover its operating expenses. Air Moldova's accounting system currently includes all airport operations. It also included Air Traffic Control until July, 1994. Air Moldova income statements show profits for 1991 and 1992, and a small loss for 1993. However, the airline's assets (see Tables 7.6 and 7.7, Statistical Appendix) are underestimated and provisions for depreciation are too low. If these were taken into account, operating results would indicate significant losses. 7.28 Revenues. Air Moldova's fares depend on whether the passenger is a Moldovan citizen or a foreigner. Overall, fares remain too low to meet costs and sales to foreigners cross-subsidize Moldovan citizen's fares. For instance, a one way ticket from Chisinau to Moscow (1,223 km) is sold at US$ 60 to Moldovan citizens. This represents less than 5 UScents/km as compared to the average 15 to 20 cents worldwide for similar distances and traffic flows. On the other hand, tariffs applied to foreigners on western destinations are beyond common standards: to Frankfurt, the fare of US$ 599 for 1,698 km is comparatively ten times higher (47 UScents/km -- See Table 7.1, Statistical Appendix). The current situation may last only as long as Air Moldova does not face any competition on its routes and as long as price discrepancies between FSU and western countries can be exploited. Furthermore, fare differentiation based upon nationality is contrary to international agreements and practices. 7his discriminatory fare structure has an adverse effect on Moldova's interests in developing new Western markets, and needs to be phased out. 7.29 Costs. Air Moldova's fleet has a poor cost efficiency (see para. 7.14), representing a heavy burden on the airline's finances. These costs are likely to increase further since aircraft maintenance costs will be greater for ageing aircraft. The airline is also over-staffed (see para. 7.11) and supports non- transport related activities such as maintaining a township for its employees and other social infrastructure expenses. 7.30 Adding to this framnework, the lack of working capital, which affects the whole economy, worsens the overall financial picture of Air Moldova. Current arrears amount to around 5.5 mln Lei, whereas receivables represent around 6 mln Lei. Since only limited short-term loans with interest rates above 90% are available at present, the piling up of debts to and from Air Moldova is likely to continue unless restructuring is quickly enforced. Clearing of accumulated arrears is a priority and the first step towards the establishment of debt reimbursement capacity. 7.31 Outlook. Currently, there is no debt or investment capacity and fleet renewal seems impossible unless a consistent financial adjustment and restructuring is implemented with urgency. Failing to do so would put the airline in a very difficult position. It would be able, through cannibalization of unused aircraft, to maintain its current operating levels for another 4 or 5 years with no significant losses other than non-compensated depreciation of assets. After this period of time, there would be no funds for fleet renewal and Air Moldova would be forced to progressively decrease the numbers and frequency of flights and eventually shut down.  60 VII Civil Aviation 7.32 Financial Adjustment and Restructuring Plan. An indicative financial adjustment and restructuring plan (see Tables 7.8 to 7. 11, Statistical Appendix) has been elaborated on the basis of Air Moldova's current financial information. This plan, building projections for the 1994-2002 time period, provides an outline of the actions needed for Air Moldova to: In the short-term: (a) Pay back all accumulated arrears over the next 2 years, and collect accumulated receivables over 3 years; and (b) Generate enough cashflow to lease a Western 100 seater aircraft in 1997, for 8 years. The yearly lease value would be of 12% of the purchase value of such an aircraft (around 80 mln Lei). By 1997, the investment capacity of Air Moldova would not be enough to consider a plane purchase. In the medium-term: (c) Acquire investment capacity to purchase in 1999 a similar aircraft to the one leased in 1997. 7.33 This plan includes demand projections for both passenger traffic and freight for the next 8 years. These projections are in line with projections of the economic recovery of Moldova: 2% yearly increase for 1994-1997; 5.5 % thereafter. 7.34 The plan is contingent to the effective separation of the airport from the airline in 1995. It includes four major elements: * asset restructuring; * tariff adjustment and rationalization; * staff reduction and salary increases; and * a cost-reduction program. 7.35 Asset Restructuring. In July 1994, Air Moldova's fixed assets were evaluated at around 20 mln Lei (see Tables 7.6 and 7.7), far below the actual value of the current operational fleet. A revaluation of these assets to a preliminary estimate of 40 mln Lei, as well as the writing-off and/or the auctioning of unnecessary or non-transport related assets should be realized as soon as possible. The revalued assets should be fully depreciated in 10 years, which is their remaining life. The assets that were written off the account tables could be used as spare parts sources at the beginning. The prolonged use of older equipment, however, does not make operations profitable nor efficient. 7.36 Tariff Adjustment and Rationalization. In order to reach cost-recovery, average passenger and freight tariffs need to be doubled in real terms over the next five years. This must be achieved simultaneously with the elimination of tariff discrimination between Moldovan and foreign citizens. 7.37 Staff Reduction and Salary Increases. Current number of employees is at 78% of 1991 levels, when traffic was 8.5 times higher than today. In order to cover costs, the airline will have to considerably reduce its staff. Separation of the airport from the airline will reduce total staff by about 300. An additional cut of about 1,400 employees would need to be realized by 1998. Staff reduction would be compensated by severance payments. These are financially feasible, even at levels in excess of current  VII Civil Aviation 61 legal prescriptions. This would make it more attractive for employees to consider leaving the entity, and would increase the numbers of voluntary departures. In addition, contingent on an increase in labor productivity (see Figure VII.2 below), salaries should increase in real terms up to 300% of 1994 levels over the next 5 years. These increases are in line with the country's policy towards a market economy and in emphasizing work remuneration rather than social contribution. In the case of aviation, it will be further geared by the need to retain qualified human resources which could be attracted by other airlines, either from Western or CIS countries. The salary increase would also compensate the airline employees for the diminishing role of the company in their social benefits package. Air Moldova Labor Productivity * 1991 - 2002 300 250 200_ .'' - C 150, 100 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Defined as the Ratio of passengers transported to the number of employees Figure VII.2 7.38 Cost Reduction Program. Air Moldova should divest all non-transport related activities, including the airline township, resort centers on the Black Sea and other social infrastructure activities. Air Moldova's losses (in 1994 Lei) on the latter were of 363,895 lei in 1991, and of 257,193 lei in 1992. Other cost-reductions would include selling and/or auctioning of assets, enabling private companies to operate activities which are not directly linked with air transportation, and divestiture of agricultural and sanitary aviation. Figures VII.3 and VII.4 below picture how the cost-reduction program would affect Air Moldova's cost structure.  62 VII Civil Aviation Air Moldova Cost Structure, 1994 Total Expense: 35 min Lel Others Salaries 3Y% 10% Social Benefits 4% Airport Charges 37% Fuel and Lubrifiants 36% Maintenance Depreciation 8% 2% Before separatlon of the Airport from the Airline Figure VH.3 Air Moldova Cost Structure, 1999 Total Expense (in 1994 Lei): 60 min Lel Aircratt Lease Sa5%riess 1ai ,,i 16%~~5 Others X l k [ . l l _ Fuel and Lubrifiants )t2% rl25% Airport Charges 28% -- Depreciation Maintenance 18% 5% Airport and Airline become Separate Entities in 1995 Figure VII.4 7.39 Figures VII.5, VII.6 and VII.7 below summarize the evolution of the rate of return, of the liquidity ratio and of the physical productivity of Air Moldova. The recommended investment plan (aircraft lease in 1997 and aircraft purchase by year 2000) can be achieved along with a reasonable liquidity ratio and a temporary decline in the rate of return on net assets.  VII Civil Aviation 63 Air Moldova Rate of Return * 1991 - 2002 40% 35 X 30%~ 25%~ 20%~ -10% 1991 1992 1993 1994 1995 1996 1997- 1998 1999 2000 2001 2002 Defined as the Rato of Profit to Net Assets 1997: Aircraft Lase; 2000: Aircraft Purchase Figure VII.5 Air Moldova Liquidity Ratio* 1991 - 2002 1991 1992 1993 1994 1995 1998 1997 1998 -1999 20 01 20 Defiried as the Ratio of Reseves to Total Expenses Aircraft Purchase Figure VII.6  64 VIl Civil Aviation Air Moldova Physical Productivity * 1994- 2002 5.00' 4.80 4.60 4.401 4.201 4.00 3. 3. 3. 1994 1996 1996 1997 198 1999 2000 2001 2002 Defined as the Ratio of Passenger and Frelght Turnover (in min pass.km) to the number of penea Figure VII.7 7.40 This plan implies financial and managerial independence for the airline industry as well as more financial transparency between the different departments of Air Moldova. Each department of the airline should operate as a cost and profit center. 7.41 Last but not least, this financial adjustment and restructuring plan should be implemented along with a commercial development plan. Particular consideration should be given to potential benefits from alliances with foreign carriers as well as to commercial agreements, such as access to international computerized reservation systems and joint ventures. Chisinau Airport 7.42 Chisinau airport's current revenues are impossible to estimate since it is part of the Air Moldova group, which is its main customer. Once separated from the airline, Chisinau airport should be set on a commercial basis, its cost structure analyzed and rationalized, and revenue objectives defined. These would include (i) the creation of services to be offered on an equal basis to all carriers and other potential customers, special attention being given to handling equipment for passenger and for cargo traffic; and (ii) training programs for upper management on Western marketing and business practices. 7.43 Today, landing charges are computed at a rate of about $13 per ton which fall within world practices. The charges are equally split between the airport and MOLDATSA which is in charge of approach control. This allocation should be reviewed to reflect the respective costs of both entities. In line with the previously mentioned financial adjustment and restructuring plan of Air Moldova, airport landing charges revenues should increase from current $6.50 to about $10.00 per gross weight ton between 1995 and 1998, and these charges should apply to all users of the airport facilities, without privileges to anyone. The airport should also charge the airline an airport fee of about $11.00 per passenger, starting in 1995. Finally, its staff, which currently is of more than 600, would have to be  VII Civil Aviation 65 reduced by 50%, reflecting low traffic levels. As already discussed for the airline, this staff reduction should be compensated with a severance program and gradual wage increases. 7.45 Table 7.12, Statistical Appendix, summarizes these recommendations and builds income statement projections for the airport as a separate entity. The projections also take into account a rising share of non Air Moldova landings at Chisinau, up from 20% of total landings in 1994 to 35% in 1997. This is contingent on the opening of the Moldovan airline industry to more competition. Air Traffic Control 7.44 MOLDATSA's budget represents about 3.5 million lei per year (see Table 7.5, Statistical Appendix). Overflight charges from foreign air carriers are collected through a service provided to CIS countries by IATA (International Air Transport Association). MOLDATSA's revenues suffer from the arrears on navigation charges that Air Moldova is accumulating since both entities were separated in June.  VIII. TRANSPORT, ENVIRONMENT and RESETTLEMENT A. Background 8.1 Institutional Arrangements for Enviromnental Protection. Environmental management of development in Moldova is the responsibility of the State Department of Environment. This organization is only four years old. It is directly subordinate to the Parliament and has legal responsibility for drafting environmental legislation, assessing environmental impact of development through the "Environmental Impact Assessment" system, and for baseline and compliance environmental monitoring. Authority for these activities is vested in "Agenda 21 of the Republic of Moldova". There are three organizations that are administratively managed by the State Department of Environment. These are "the National Institute of Ecology, the Hydromet Service, and the Ecological Inspectorates at the local government level. 8.2 The National Institute of Ecology is an applied science group mainly involved in environmental protection. Although it is administered by the State Department of Environment (SDE), and draws structural budget from the SDE, it takes technical direction from the Moldova Academy of Sciences and is also free to contract its services to other organizations (approximately 70% of it budget is drawn from sources outside the SDE). It has a key role in the environmental impact assessment of large development projects and is also involved in soil protection and nature conservation. 8.3 The Hydromet Service is responsible for baseline monitoring of air quality and weather forecasting. It maintains observatories at the rayon, municipal and national levels. For example, there are 6 centers in Chisinau that take ambient air samples 3 times daily. These samples are analyzed for 9 different parameters, including SO,x NO., CO., CH, phenols, and particulates. The service works with the city Environmental Inspectorate and the local Department of Health to identify air quality "black spots" caused by motor vehicle transport and traffic bottlenecks. If there are air quality problems identified by the Hydromet, it reports these problems to the SDE which then works through its local Environmental Inspectorates to deal with the problems. 8.4 The En vironmental Inspectorates are the compliance assessment and enforcement arm of the SDE. They operate at the rayon and city level, but tend to be poorly staffed (generally 2 or 3 people in each rayon office) and even more poorly equipped. 8.5 The Ministry of Transport has a "general services group" that provides assistance with social and environmental protection issues in work done by the road, rail and motor vehicle departments. In addition, there is a Division of Mechanical Energetics and Automatic Systems in the Department of Roads that also has responsibility for environmental monitoring and control of transport enterprises. This group is very small and is limited to yearly checks of emissions from these enterprises and ensuring that environmental self-checking is in compliance. Environmental Impact Assessment Process 8.6 The environmental review of large projects or projects having to be constructed in recognized environmentally sensitive areas first starts with a review of the "Preliminary Design" prepared for the  VIII Transport. Environment and Resettlement 67 project by one of the design institutes of the Ministry of Transport'