Moldova - Private Sector Development II

Report No. PIC4886 Project Name Moldova-Private Sector Development II Region Europe and Central Asia Sector Private Sector Development Project ID MDPA35811 Borrower Republic of Moldova Implementing Agency MoF, MoI Environment Category C Date Initial PID March 13, 1996 Prepared by Vladimir-Goran Kreacic Appraisal Date February 1997 Projected Board Date May/June 1997 Peer Reviewers Ira Lieberman, Saha Meyanathan Background Of The Project 1. Moldova, a member of the World Bank since August 1992, has been one of the most active FSU republics in implementing macro economic stabilization measures. As a result, inflation has been reduced from 1,276 percent in 1992 to 26 percent in 1996, the budget deficit has been reduced to 5 percent of GDP, budget transfers to enterprises were radically cut and the vast majority of consumer subsidies--including those on bread and milk--were eliminated. Structural reforms have moved ahead particularly in price and trade liberalization and privatization. All price and margin controls were removed by the end of 1995 and the maximum tariff was reduced to 20 percent with very few exceptions. The recently completed mass privatization program has transferred most of the enterprises into private hands. 2. The supply response to stabilization and structural reforms remains constrained in a number of ways. The collapse of FSU markets, decline of domestic purchasing power, outdated production systems and lack of medium and long-term financing to replace them, all contribute to a heavily depressed situation in the enterprise sector. Moldovan enterprises are required now to purchase energy and raw materials at world prices and are facing growing competition in all of their traditional markets. 3. The Private Sector Development Loan (PSD I) started to address these issues through the initiation of the transfer of restructuring skills and provision of medium-term financing through participating banks. Experience with PSD I shows that establishment of the Enterprise Restructuring Agency (ARIA) as a non- governmental, non-profit organization is an effective way (a) to bring to Moldova good practices of enterprise turnaround techniques; and (b) to strengthen the country's capacity for  economic adjustment. This Project will continue to build on these achievements by augmenting institutional capacity for enterprise restructuring and providing benchmark information on Moldova's main competitors and intensified on-the-job training of its managers. Objectives 4. The Project will assist the Government's efforts to facilitate transfer of know-how in the areas related to improvement of competitiveness of Moldovan enterprises and the Moldovan economy as a whole. The Project will have two components: (i) creation of a Competitiveness and Productivity Center to (a) build capacity to deal with internal and external opportunities and requirements for increased competitiveness of products produced by Moldovan enterprises; and (b) provide information and develop the capacity to formulate micro- and macro-economic policy and strategy among private enterprise managers, policy-makers, and other key actors in the economy; and (ii) on-the-job training for industrial managers through 3-6 month secondments to leading industrial counterparts in Central, Eastern and Western Europe or East Asia. The Center will be an independent, non-governmental and non-profit organization. Description 5. The first component--creation of the Competitiveness and Productivity Center (the Center)--will supply information and in- depth analysis to policy makers and companies' managers about internal and external opportunities to increase the competitiveness of Moldovan products. It will also provide the necessary tools for programming and decision making, both on strategic and enterprise levels. 6. "Competitiveness" is used to refer to a complex of characteristics of products which makes them able to compete in domestic as well as international markets. Competitiveness is a result of, among other things, attractive design, excellence in engineering, high quality, low costs and prices, on-time delivery and after-sales service, and adherence to international standards such as the IS09000 family of standards. During the last two decades changes in management (including total quality control, just-in-time techniques, and computerized design and manufacturing) have created new industrial leaders--including a growing number in Asian NICs--able to deliver highly competitive products with the above characteristics, and, at the same time, has dramatically reduced the market share of traditional manufacturers. Producers from former socialists economies are, with very few exceptions, in the second group. 7. Thus, the Center will: (i) provide managers with international products' benchmarks and a current analysis of market opportunities and competitors, and (ii) analyze the establishment of cross-national production networks to facilitate contacts with potential cooperators from abroad. The Center will also assist enterprises with the transfer of advanced managerial techniques, initiate a range of activities aimed at productivity restructuring - 2-  and establish links with Productivity and/or Competitiveness Centers in other countries. As the demand for some of these specialized services increases, the Center will transfer selected activities to organizations supported by private industries. The work of the Center will be focused on industries with the biggest competitive potential, such as agroprocessors, wood processors, textiles and producers of electronic components, to ensure increasing support by the private sector. 8. On the strategic level, the Center will provide policy makers with information, independent analysis, and advice needed for medium and long term economic policy in support of Moldova's transition to a market economy. The Center will also help to formulate strategies for the promotion and enhancement of the Moldovan economy. It will establish contacts with similar think- tanks, such as the Institute for Strategic and International Studies in Malaysia and the Korea Development Institute. The Center will also provide assistance to the Government in reviewing and drafting necessary legislation. Finally, the Center will advise the Government and corporate managers on social impediments to increased competitiveness and methods to alleviate them. In particular, it will advise on training and retraining of the workforce, necessary to cope with the new challenges. 9. Through provision of competitive salaries the Center will play a major role in stemming the loss of highly qualified Moldovans from the Government and Academia-- due to very low remuneration--by providing the best with an opportunity to continue to develop their skills in competitiveness and policy areas, albeit in a non-governmental, grant-supported institution. Thus, the Center will strengthen local capacity for provision of high quality analysis and advice. The Center will be able to focus on mid-term and longer-term competitiveness issues and offer a vision-- currently missing due to the need to focus on day to day problems of early transition. 10. The second component, on-the-job training for managers and policy makers, is essential for a vast majority of Moldovan enterprises to survive and to find new, more permanent niches in highly competitive internal and external markets. Moldova was historically isolated from the pressures of global and regional markets. Managers were not exposed to a competitive environment and were deprived of learning opportunities. To fill this gap, the Project provides for widespread exposure of managers, government officials and the public to new concepts of management, marketing, sales and export oriented production. The project will offer managers of companies with a proven record of restructuring efforts, 3 to 6 months secondments in leading firms with the same profile of production. Shorter study tours of up to six weeks will be organized for union leaders, supervisors and government officials. Upon return, the Center will publish technical reports of in-company visits and organize discussions to maximize dissemination. Successful Central European firms will be targeted as the first option, as they have recently had to deal with the same types of problems. Also, firms from recently developed EU - 3 -  countries (Ireland, Spain) and from the Far East will be approached. 11. The in-company training referred to above is to be targeted primarily to private and privatized enterprises that have successfully emerged from a restructuring/turnaround program. Enterprises which have passed a "market test"--have received a loan from one of the private banks intermediating World Bank or EBRD credit lines--will have an advantage. Participating enterprises will pay fees covering a part of the total cost to test their commitment to the process and help defray costs. In case the demand among qualifying enterprises is greater than the available funds these may be auctioned - to enterprises prepared to make the largest contribution towards the overall costs of in-company training. Cost And Financing 12. The Project Costs are provisionally estimated at US$15 million from which US$9 million is anticipated to come from the IBRD, US$3 million from bilateral and multilateral donors and US$3 million from participating enterprises. The loan preparation costs are partially covered by a grant of approximately US$760,000 (to be decided) equivalent, administered by the Government of Moldova, from the Japanese Government. Preliminary grant financing for various project components has already been identified. Sustainability 13. The Project would enable access to information and improvement of managerial skills which will lead to increases enterprise revenues. Enterprises are expected to recognize the value of investment into such information and new management techniques, and are likely to pay for these services on increasingly commercial basis, contributing to the sustainability of the Project. Lessons Learned From Past Operations In The Country/Sector 14. FSU countries, isolated from the Western markets, lack of basic management skills, lack of knowledge of "best global" practice and almost non-existent information about new markets are- -at the firm level--the main obstacles to rapid turnaround in the enterprise sector. Technical assistance for transfer of restructuring techniques provided in PSD I has already shown positive results: over 100 Moldovan consultants and managers have been trained and are involved in active restructuring of pilot enterprises. The Government is fully committed to this process and has requested this TA loan to accelerate the process of making Moldovan enterprises more competitive internationally. Project Benefits And Risks 15. The Project will speed-up the supply response to stabilization and liberalization. It will lead to increased - 4 -  quality, lower costs and to generally more efficient production by Moldovan enterprises, thus enhancing their ability to export. The project will also strengthen the overall competitive environment in the country. 16. The principal risks to the enterprise restructuring process in Moldova and this Project remain weakening of the hard budget constraint and possible policy backsliding of the Government that could lead to a general reverse of reform measures. Environmental Aspects 17. This project is classified as a category "C" project. As a technical assistance project, no environmental issues are involved. Implementation 18. It is expected that the appraisal of the proposed World Bank Loan will take place in January 1997; Board presentation is scheduled for April 1997. Contact Point: Vladimir-Goran Kreacic, Task Manager The World Bank 1818 H Street N.W. Washington, D.C. 20433 Tel: (202) 473 6374 Fax: (202) 522 0005 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending March 28, 1997 - 5 -