the world bank · es environmental specialist ... pfi participating financial intermediary ......

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: PAD749

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVLOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$30 MILLION

AND A PROPOSED CREDIT

IN THE AMOUNT OF SDR 9.7 MILLION (US$15 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MOLDOVA

FOR A

SECOND COMPETITIVENESS ENHANCEMENT PROJECT

June 12, 2014

Financial and Private Sector Development Department Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 30, 2014)

Currency Unit = MDL MDL 13.41 = US$1

US$1.55 = SDR 1

FISCAL YEAR July 1 – June 30

ABBREVIATIONS AND ACRONYMS

BDS Business Development Services BIP Business Improvement Project BSPs Business Service Providers CEM Country Economic Memorandum CEP I Competitiveness Enhancement Project CEP II Second Competitiveness Enhancement Project CIS Commonwealth of Independent States CLD Credit Line Directorate CPS Country Partnership Strategy CODB Cost of Doing Business DA Designated Account DCFTA Deep and Comprehensive Free Trade Area DLI Disbursement Linked Indicator DLR Disbursement Linked Result EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia Region EEP Eligible Expenditure Program EMF Environmental Management Framework EMP Environmental Management Plan EMS Environmental Management System ES Environmental Specialist EU European Union FA Financing Agreement FM Financial Management FSAP Financial Sector Assessment Program GDP Gross Domestic Product GoM Government of the Republic of Moldova HACCP Hazard Analysis and Critical Control Points IA Implementing Agency IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association IFRS International Financial Reporting Standards IPM Integrated Pest Management ISO International Organization for Standardization IT Information Technology LA Loan Agreement

ii

LOC Line of Credit M&E Monitoring and Evaluation MBSG Mobias Bank - Societe Generale Group MDL Moldovan Leu MGF Matching Grant Facility MIEPO Moldovan Investment and Export Promotion Agency MoE Ministry of Economy MoF Ministry of Finance MIS Management Information Systems MOU Memorandum of Understanding NBM National Bank of Moldova NCFM National Commission of Financial Markets NPL Nonperforming Loan OECD Organisation for Economic Co-operation and Development ODIMM Organization for the Development of Small and Medium Enterprises OM Operations Manual ORAF Operational Risk Assessment Framework PBL Performance-Based Lending PCB ProCredit Bank PCG ProCredit Group PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PFI Participating Financial Intermediary PFM Public Financial Management PIU Project Implementation Unit POM Project Operations Manual PPP Purchasing Power Parity PSD Private Sector Development QCBS Quality and Cost Based Selection RBF Results-Based Financing RIA Regulatory Impact Assessment ROA Return on Assets ROE Return on Equity RSF Risk Sharing Facility SCA Saving and Credit Association SCM Standard Cost Model SFAs Subsidiary Financing Agreement SG Societe Generale SIDA Swiss International Development Agency SME Small and Medium Enterprise SOE Statement of Expenditures TA Technical Assistance USAID U.S. Agency for International Development US$ United States Dollar

Regional Vice President: Laura Tuck Country Director: Qimiao Fan

Sector Director: Gerardo Corrochano Sector Manager: Paloma Anos Casero

Task Team Leaders: Melissa A. Rekas and Uzma Khalil

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MOLDOVA Second Competitiveness Enhancement Project

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT .................................................................................................1

A. Country Context ............................................................................................................ 1

B. Sectoral and Institutional Context ................................................................................. 2

C. Higher Level Objectives to which the Project Contributes .......................................... 4

II. PROJECT DEVELOPMENT OBJECTIVE ..................................................................4

A. PDO............................................................................................................................... 4

B. Project Beneficiaries ..................................................................................................... 4

C. PDO Level Results Indicators ....................................................................................... 5

III. PROJECT DESCRIPTION ..............................................................................................5

A. Project Components ...................................................................................................... 5

B. Project Financing ........................................................................................................ 11

C. Project Cost and Financing ......................................................................................... 11

D. Lessons Learned and Reflected in the Project Design ................................................ 12

IV. IMPLEMENTATION .....................................................................................................12

A. Institutional and Implementation Arrangements ........................................................ 12

B. Results Monitoring and Evaluation ............................................................................ 13

C. Sustainability............................................................................................................... 14

V. KEY RISKS AND MITIGATION MEASURES ..........................................................15

A. Risk Ratings Summary Table ..................................................................................... 15

B. Overall Risk Rating Explanation ................................................................................ 16

VI. APPRAISAL SUMMARY ..............................................................................................16

A. Economic and Financial Analysis ............................................................................... 16

B. Technical ..................................................................................................................... 16

C. Financial Management ................................................................................................ 17

D. Procurement ................................................................................................................ 17

E. Social (including Safeguards) ..................................................................................... 18

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F. Environment (including Safeguards) .......................................................................... 19

Annex 1: Results Framework and Monitoring .........................................................................20

Annex 2: Detailed Project Description .......................................................................................30

Annex 3: Results Based Financing .............................................................................................56

Annex 4: Implementation Arrangements ..................................................................................68

Annex 5: Operational Risk Assessment Framework (ORAF) .................................................94

Annex 6: Economic and Financial Analysis ............................................................................103

Annex 7: Implementation Support Plan ..................................................................................111

Annex 8: Appraisal of PFI Eligibility.......................................................................................117

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.

PAD DATA SHEET

Moldova

MD Second Competitiveness Enhancement Project (P144103) PROJECT APPRAISAL DOCUMENT

.

EUROPE AND CENTRAL ASIA

ECSPF

Report No.: PAD749 .

Basic Information

Project ID EA Category Team Leaders

P144103 F - Financial Intermediary Assessment

Melissa Rekas and Uzma Khalil

Lending Instrument Fragile and/or Capacity Constraints [ ]

Investment Project Financing Financial Intermediaries [ X ]

Series of Projects [ ]

Project Implementation Start Date Project Implementation End Date

12-Jul-2014 30-Sep-2019

Expected Effectiveness Date Expected Closing Date

30-Sep-2014 31-Jan-2020

Joint IFC

No

Sector Manager Sector Director Country Director Regional Vice President

Paloma Anos Casero Gerardo M. Corrochano Qimiao Fan Laura Tuck .

Borrower: Republic of Moldova

Responsible Agency: PIU under Ministry of Economy

Contact: Aureliu Casian Title: Executive Director

Telephone No.: 373-22-296723 Email: [email protected]

Responsible Agency: Credit Line Directorate under Ministry of Finance

Contact: Raisa Cantemir Title: Head of the Credit Line Directorate

Telephone No.: 373-22-232963 Email: [email protected] .

Project Financing Data(in USD Million)

[ X ] Loan [ ] Grant [ ] Guarantee

[ X ] Credit [ ] IDA Grant [ ] Other

Total Project Cost: 45.00 Total Bank Financing: 45.00

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Financing Gap: 0.00 .

Financing Source Amount

BORROWER/RECIPIENT 0.00

International Bank for Reconstruction and Development 30.00

International Development Association (IDA) 15.00

Total 45.00 .

Expected Disbursements (in USD Million)

Fiscal Year 2014 2015 2016 2017 2018 2019 2020

Annual 0.00 7.09 11.36 12.67 8.42 5.46 0

Cumulative 0.00 7.09 18.45 31.12 39.54 45.00 45.00 .

Proposed Development Objective(s)

The project's development objective is to increase the export competitiveness of Moldovan enterprises and decrease the regulatory burden they face. This PDO will be achieved through a set of measures that aim to: (i) improve the business environment through regulatory reforms that reduce the cost of doing business; (ii) help SMEs and exporters to get access to business development services; and (iii) improve access to medium and long term finance for export oriented enterprises. .

Components

Component Name Cost (USD Millions)

1. Regulatory Reform 6.24

2. SME Development 8.04

3. Access to Finance 30.00

Project Management 0.72

Institutional Data

Sector Board

Investment Climate Practice .

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co-benefits %

Mitigation Co-benefits %

Public Administration, Law, and Justice

Public administration- Industry and trade

17

Finance SME Finance 33

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Industry and trade General industry and trade sector

50

Total 100

I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. .

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

Financial and private sector development

Regulation and competition policy 34


Other Financial Sector Development 33


Micro, Small and Medium Enterprise support

33

Total 100 .

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects?

Yes [ ] No [ X ]

.

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ X ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation?

Yes [ X ] No [ ]

.

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

viii

.

Legal Covenants

Name Recurrent Due Date Frequency

MOE (FA and LA) X CONTINUOUS

Description of Covenant

For the purposes of the Project, the Recipient/Borrower, through the MOE, shall be responsible for the overall implementation (including the financial management and procurement aspects) of the Project.


PIU (FA and LA) X CONTINUOUS


The Recipient/Borrower, through the MOE, shall maintain the PIU until completion of the Project with staff, resources and terms of reference acceptable to the Association/Bank and in accordance with the Operational Manual and shall assign to it responsibility for overall daily management of the Project.


Action Plan (FA) X CONTINUOUS


The Recipient, through the MOE, shall: (a) based on the result of activities under Parts 1(a)(iii) and 1(b) of the Project, prepare and furnish to the Association no later than January 31, 2015, or such later date as the Association shall agree, an Action Plan satisfactory to the Association (including a timetable); and (c) implement said Action Plan in accordance with its terms.


Matching Grant Manual (FA) X CONTINUOUS


The Recipient shall: (a) prepare and adopt a Matching Grant Manual under terms and conditions acceptable to the Association, and (b) thereafter, carry out Part 2(b)(ii) of the Project in accordance with the requirements set forth in the Matching Grant Manual, including eligibility criteria, selection procedures and implementation conditions.


Matching Grant Facility (FA) X CONTINUOUS


The Recipient, through the MOE, shall retain staff to administer the Matching Grant Facility (MGF) in numbers, with qualifications, experience and responsibilities acceptable to the Association and set forth in the Operational Manual.


Matching Grant Agreement (FA) X CONTINUOUS


The Recipient, through the MOE, shall provide financing, on a grant basis, to Matching Grant Beneficiaries pursuant to a standard agreement, in a format and substance acceptable to the Association, to be entered into between the Recipient and a Matching Grant Beneficiary.


ix

Selection of Matching Grant Beneficiaries (FA)

X CONTINUOUS


Prior to the provision of the first two Matching Grants, the Recipient shall obtain the Association's approval of the selection of the respective Matching Grant Beneficiaries.


Operational Manual (FA and LA) X CONTINUOUS


The Recipient/Borrower shall carry out the Project in accordance with the requirements set forth in the Operational Manual and this Agreement and shall not assign, amend, abrogate or waive any provision of the Operational Manual without prior approval of the Association.


Environmental Management Framework (FA)

X CONTINUOUS


The Recipient shall, and shall cause the Matching Grant Beneficiaries to, carry out Part 2(b)(ii) of the Project in accordance with the EMF.


Environmental Management Plan (FA) X CONTINUOUS


The Recipient shall, and shall cause each Matching Grant Beneficiary to, prior to carrying out any activities under Part 2(b) (ii) of the Project, prepare EMPs in accordance with the EMF, in form and substance satisfactory to the Association, and to implement said activities in accordance with the relevant EMP.


Procurement Report (FA and LA) X Yearly


The Recipient/Borrower shall, no later than September 30 of every year during the implementation of the Project, beginning on September 30, 2015, prepare and furnish to the Association a procurement progress report (Procurement Report), in form and substance acceptable to the Association/Bank.


Procurement Information (FA and LA) X Yearly


The Recipient/Borrower shall no later than October 31 of every year during the implementation of the Project, beginning on October 31, 2015 exchange views with the Association/Bank on the results of the Procurement Progress Report completed for the Recipient/Borrower's previous calendar year and thereafter implement such recommended measures, as agreed with the Association/Bank.


Credit Line Directorate (LA) X CONTINUOUS

x


The Borrower, through the MOF, shall maintain, throughout the Project implementation, the Credit Line Directorate (CLD), which shall be responsible for the day to day management and implementation of Part 3(a) of the Project. The CLD shall be provided with adequate staff, funding, facilities and other resources satisfactory to the Bank and required for implementation of Part 3(a) of the Project.


Line of Credit Operational Manual (LA) X CONTINUOUS


The Borrower shall: (a) prepare and adopt a LOC Operational Manual under terms and conditions acceptable to the Bank, and (b) thereafter, carry out Part 3(a) of the Project in accordance with the requirements set forth in the LOC Operational Manual, including eligibility criteria for Eligible PFIs and Beneficiary Enterprises, selection procedures and implementation conditions.


Subsidiary Financing Agreement (LA) X CONTINUOUS


Prior to the implementation of any activity under Part 3(a) of the Project, the Borrower shall make part of the proceeds of the Loan available to each Eligible PFI under a Subsidiary Financing Agreement between the Borrower and the Eligible PFI, under terms and conditions acceptable to the Bank and set forth in the LOC Operational Manual.


Environmental Management Framework (LA)

X CONTINUOUS


The Borrower shall, and shall cause the Eligible PFIs to carry out part 3(a) of the Project in accordance with the EMF.


Environmental Management Plan (LA) X CONTINUOUS


The Borrower shall, and shall cause the Eligible PFIs to cause the Beneficiary Enterprises to, when applicable, prior to carrying out any Subproject under Part 3(a) of the Project, prepare EMPs in accordance with the EMF, in form and substance satisfactory to the Bank, and to implement said Subproject in accordance with the relevant EMP.


Safeguards (LA) X CONTINUOUS


Under Part 3(a) of the Project, the Borrower shall ensure that no investments involving the involuntary acquisition of land or the displacement of persons, or investments that involve the use or potential pollution of international waterways or any other investment included in the negative list of investments included in the EMF, are financed with the proceeds of the Loan. .

Conditions

xi

Source Of Fund Name Type

IBRD Operational Manual (FA and LA) Effectiveness

Description of Condition

The Operational Manual has been adopted by the Recipient/Borrower.


IDA Operational Manual (FA and LA) Effectiveness


The Operational Manual has been adopted by the Recipient/Borrower.


IBRD Cross-Effectiveness (FA and LA) Effectiveness


The LA/FA has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of the FA/LA) have been fulfilled.


IDA Cross-Effectiveness (FA and LA) Effectiveness


The LA/FA has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of the FA/LA) have been fulfilled.


IDA Matching Grant Manual and Matching Grant Facility (FA)

Disbursement


No withdrawal shall be made for payments under Category (2) unless the Recipient has: (i) adopted the Matching Grant Manual with terms and conditions acceptable to the Association; and (ii) retained staff to administer the MGF in accordance with section I.B.2 of Schedule 2 to this Agreement.


IDA EEPs and DLRs (FA) Disbursement


No withdrawal shall be made for payments under Category (3) unless evidence has been furnished: (i) that payments under the EEPs have been made in accordance with the Recipient's legislation; (ii) of the Recipient's achievement of the respective DLR under the DLI for the respective time period as referred to in Schedule 4 to this Agreement and satisfactory to the Association.


IBRD Subsidiary Financing Agreement and Line of Credit Operational Manual (LA)

Disbursement


No withdrawal shall be made for payments under Category (1) unless: (i) at least one Subsidiary

xii

Financing Agreement has been executed on behalf of the Borrower and an Eligible PFI; and (ii) the LOC Operational Manual has been adopted by the Borrower .

Team Composition

Bank Staff

Name Title Specialization Unit

Melissa Rekas Private Sector Development Specialist

Task Team Leader ECSF1

Uzma Khalil Senior Financial Sector Specialist

Task Team Leader ECSF2

Alina Tourkova Consultant Private Sector Development ECSF1

Ghenadie Cotelnic Consultant Financial and Private Sector Development

ECSF1

Daniel Ortiz del Salto E T Consultant Matching Grants LCSPF

Massimiliano Santini Economist Regulatory Reform CICBR

Georgiana Pop Economist Competition CICIS

Eugeniu Osmochescu Operations Officer Investment Climate Specialist CEUIC

John Daniel Pollner Lead Financial Officer Access to Finance (Advisor) ECSF1

S. Brajovic-Bratanovic Consultant Bank Due Diligence FFIMS

Viorica Dumitri Strah Program Assistant Moldova Country Office Program Assistant

ECCMD

Anne Muuna Kisumo Program Assistant Program Assistant ECSPF

Aida Japarova Senior Program Assistant Operations Assistant

Elena Segura Senior Counsel Senior Counsel LEGLE

Gabriela Grinsteins ET Consultant Associate Counsel LEGLE

Elena Corman Procurement Analyst Procurement Analyst ECSO2

Arcadii Capcelea Senior Environmental Specialist

Senior Environmental Specialist

ECSEN

Tural Jamalov Financial Management Specialist

Financial Management Specialist

ECSO3

Oxana Druta Financial Management Specialist

Financial Management Specialist

ECSO3

Klavdiya Maksymenko Social Development Specialist

Social Development Specialist

ECSSO

Jasna Mestnik Finance Officer Finance Officer CTRLA

Maiada Mahmoud Abdel Fattah Kassem

Finance Officer Finance Officer CTRLA

Hiroshi Tsubota Lead Financial Officer/Debt Capital Markets & CBP

Lead Financial Officer/Debt Capital Markets & CBP

FABBK

xiii

Ekaterina M. Gratcheva Lead Financial Officer/ Reserve Advisory Mgmt

Lead Financial Officer/Debt Capital Markets & CBP

FABBK

Tapiwa Sikipa Senior Financial Officer Senior Financial Officer DFIRM

Gael J. R. F. Raballand Senior Public Sector Specialist

Senior Public Sector Specialist

MNSPS

Edgardo Mosqueira Medina

Lead Public Sector Development Spec.

Lead Public Sector Development Spec.

LCSPS

William John Gain Senior Private Sector International Trade Specialist FPD

Claudia Ruiz Ortega Economist Impact Evaluation Economist DECFP

Ruslan Piontkivsky Senior Economist Country Economist ECSP3

Thomas Kenyon Senior Private Sector Development Specialist

Peer Reviewer LCSPF

Irina Astrakhan Sector Manager Peer Reviewer AFTFE

Sylvia Solf Senior Private Sector Development Specialist

Peer Reviewer CICBR

Najy Benhassine Sector Manager Peer Reviewer CICBR

Jose Guilherme Reis Sector Leader Peer Reviewer ECSPF

Ganesh Rasagam Lead Private Sector Development Specialist

Peer Reviewer AFTFE

Steen Byskov Senior Financial Sector Specialist

Peer Reviewer LCSPF

Douglas Pearce Practice Manager Peer Reviewer FFIDR

Leyla V. Castillo Financial Sector Specialist OP 10 Reviewer FFIMS

Paloma Anos Casero Sector Manager Sector Manager ECSF1

Alexander Pankov Country Sector Coordinator Country Sector Coordinator ECSPF

Abdoulaye Seck Country Manager Country Manager ECCMD

Alejandro Cedeno Country Program Coordinator Country Program Coordinator ECCU2

Non Bank Staff

Name Title Office Phone City

Stephen Silcox Consultant SME Development ECSF1

John P. Khoury Consultant Access to Finance ECSF1

Chris Parel Consultant Results-Based Lending Advisor

ECSF1

.

Locations

Country First Administrative Division

Location Planned Actual Comments

xiv

I. STRATEGIC CONTEXT

1. The Government of the Republic of Moldova (GoM) is pursuing a policy agenda to support export-led economic growth. To achieve this goal, the Moldova 2020 national development strategy focuses on improving the business enabling environment and promoting better access to finance for enterprises, as two of its top priorities. The 2014 Roadmap for Increasing Competitiveness also focuses on the need to improve competitiveness at the enterprise level. Therefore, the Second Competitiveness Enhancement Project (CEP II) will help the Ministry of Economy achieve its reform objectives by supporting implementation of: GoM’s regulatory reform strategies, programs to support export growth and small and medium enterprise (SME) development, and initiatives to improve access to medium to long-term finance for export-oriented enterprises. In this way, the project will increase the export competitiveness of Moldovan enterprises and decrease the regulatory burden they face.

A. Country Context

2. Economic growth in Moldova from 2000-2008 was driven by a boom in domestic demand funded by remittances, while agriculture and manufacturing struggled. In the early 2000s, Moldova began to recover some of the economic losses suffered after the disintegration of the Soviet Union in the 1990s, though there was also substantial migration abroad. From 2000 to 2008, Moldova became one of the world’s most remittance-dependent countries, with remittances growing from 11.5 percent of GDP in 2000 to 30 percent by 2008. Remittance-fueled consumption, services, and housing were the drivers of growth in the period leading up to the global financial crisis.

3. In more recent years, macroeconomic performance has been volatile, reflecting vulnerability of Moldovan exports to global economic and climatic conditions. After a 6-percent contraction in 2009, real GDP grew at an average rate of 6 percent in 2010-11, driven by a recovery in remittances and exports. GDP contracted again slightly (by 0.7 percent) in 2012, as a result of the Eurozone crisis and a severe drought that affected the agriculture sector. In 2013, GDP growth recovered significantly to 8.9 percent, with half of the growth coming from a strong recovery and expansion in the agriculture sector. In spite of strong growth in total exports (10.7 percent), the Russian ban on wine imports from Moldova dampened exports in that sector.

4. Since the mid-2000s, Moldova has reduced poverty and improved shared prosperity. The national poverty rate fell from 30.2 percent in 2006 to 17.5 percent in 2011. Over the same period, extreme poverty fell from 4.5 percent to 0.9 percent. Much of the reduction in poverty was driven by economic growth and remittances. Also over the same period, growth in the consumption of the bottom 40 percent of the population (5.8 percent per year) outpaced average total growth in consumption (2.9 percent per year).1 However, despite this progress, Moldova remains the poorest country in Europe, with a per-capita income of US$2,070 in 2012.

1 World Bank Group. Country Partnership Strategy for the Republic of Moldova for the Period FY14-17. 2013. (CPS FY14-17).

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B. Sectoral and Institutional Context

5. Moldova’s economy has gone through significant sectoral changes, but there has been little net job creation. The contribution of the service sector to economic growth has increased, while agriculture and manufacturing have stagnated. Moldova’s GDP growth has not been accompanied by job creation. In from 2000 to 2012, Moldova's employment to population ratio decreased from 58 percent to only 38 percent.

6. There has been little dynamism in exporting sectors. Between 2004 and 2008, Moldova’s exports of goods and services grew at less than 5 percent annually (in real terms): at a pace slower than overall GDP, and slower than exports in many other CIS countries.2 Much of the export growth that Moldova experienced was driven by re-exports – additional processing of goods using raw materials and design specifications produced elsewhere. Analysis presented in the 2011 CEM showed that re-exports do not contribute substantially to job creation, but direct exports do. There has been little expansion of direct exports from Moldova to non-CIS countries in the past several years, while exports have also remained relatively concentrated in a few traditional industries – mainly fresh fruit and nuts, wine, and textiles.3

7. The Government of the Republic of Moldova has decided to pursue a reform strategy to support export-oriented economic growth. The national development strategy, Moldova 2020, is centered around the need to transition to a dynamic economic model based on increased investment and exports of goods and services. The Moldova 2020 strategy is built around seven priorities: the business environment, access to finance, education, and infrastructure, which are defined as critical areas; the judicial sector as an issue area that underpins all others; and energy pensions, which disproportionately affect the poor.

8. Moldova aims to increase exports to the EU and other markets. The recently initialed Deep and Comprehensive Free Trade Area (DCFTA) with the European Union presents a major and historic opportunity to boost private sector growth and economic development. Furthermore, in addition to targeting the EU as a priority export market, the Government of Moldova is also interested in expanding its exports outside of the EU. This is consistent with the EU framework, which contemplates that 50 percent of a country’s exports should go outside of the EU region.

9. To successfully compete in higher-quality and higher value-added product markets in the EU and elsewhere, Moldovan enterprises need to further develop their capacity. Improvements in firms’ strategic management, financial management, product quality, production processes, and other areas are needed in order to increase competitiveness.4 However, information asymmetries about the quality of business services that could help exporters make these improvements reduce companies’ willingness to pay for them.

2 World Bank Group. Moldova - After the Global Crisis: Promoting Competitiveness and Shared Growth. Country Economic Memorandum. 2011. (2011 CEM) 3 It is relevant to note that some textile enterprises are successfully operating in the higher value end of the market. 4 Analysis conducted for the 2013 World Bank study “Policy Priorities for Private Sector Development in Moldova” showed that firms tend to have low and variable profitability, and identified enterprise-level weaknesses that hinder access to finance and overall competitiveness. See PAD Memo 4 in the project files or https://openknowledge.worldbank.org/handle/10986/16026.

2

10. The business enabling environment is also a crucial area that needs attention for Moldova to successfully pursue its export-based growth strategy. Although there has been some reform progress, the business environment in Moldova remains characterized by uncertainty and high costs in firms’ interactions with government. The 2013 World Bank study “Policy Priorities for Private Sector Development in Moldova” highlights the main constraints to private sector growth, stemming from difficulties posed by business regulation (licenses, authorizations, and inspections), the framework for competition, international trade administration, and tax administration. Work performed under the IFC Investment Climate project further highlights weaknesses in the regulatory framework.

11. The competitiveness of Moldovan enterprises, particularly the SME segment, is also affected by challenges in financial sector development. Moldova’s core financial depth indicators have improved markedly over the years. Credit to the private sector as a share of GDP increased between 2005 and 2012, from 24 percent to 38 percent, and deposits increased from 30 percent of GDP in 2005 to 41 percent in 2012.5 Both ratios are roughly in line with average ratios for countries at similar level of development, but continue to lag behind a number of countries in Central and Eastern Europe. Additionally, banks have limited access to medium- to long-term funding, tend to lack suitable products and credit evaluation techniques for loans to smaller companies, and face general deficiencies in risk management.6

12. Moldova’s financial sector has generally recovered well in the aftermath of the global financial crisis. The banking sector in aggregate seems to be well capitalized, liquid and profitable; however, significant vulnerabilities persist in some specific segments. This includes a systemically important domestic bank that is partially owned by the state (Banca de Economii din Moldova, BEM), which is experiencing serious capital and asset quality problems. In addition, weak governance in financial institutions, as shown by a lack of shareholder transparency and weak protection of property rights, restrain further growth and competition in the financial sector. Importantly, the ability of financial sector regulators to enforce regulations has been seriously hampered by a series of court challenges. These include Constitutional Court rulings that curbed supervisory power, although amendments were subsequently adopted by Parliament to mitigate the impact of the ruling, and further amendments are being considered. (See PAD Memo 4 in the project file for more detail.)

13. The World Bank has been supporting the government in its competitiveness and reform efforts through the 2006-13 Competitiveness Enhancement Project (CEP I), which closed successfully and focused on: (i) regulatory reform; (ii) SMEs’ access to business development services and quality certifications, through a matching grant facility (MGF); (iii) access to finance, through a line of credit (LoC) for exporters; and (iv) quality infrastructure, including equipment and institutional reform in metrology, standards, testing, and quality.7

14. However, to meet the GoM’s objective of re-orienting the economy to export-led growth, additional efforts are needed to address enterprise competitiveness in a more comprehensive way and to build capacity in relevant public institutions.

5 Based on IMF data. 6 See the “Policy Priorities” study, its Enterprise Access to Finance background note, and PAD Memo 5 in the project file. 7 CEP I provided matching grants to 414 enterprises, loans to 59 enterprises, and training on RIA to 1120 officials and experts.

3

15. MoE has expressed its strong desire for a project that builds on the successes of the previous project, addresses institutional capacity challenges, and takes a more comprehensive approach to enterprise competitiveness. Recent analytical work, including the June 2013 “Policy Priorities” study, its Enterprise Access to Finance chapter and Note, and the September 2013 OECD study on business support infrastructure, has underscored these needs.

C. Higher Level Objectives to which the Project Contributes

16. The Second Competitiveness Enhancement Project is consistent with the World Bank Group’s global and regional (ECA) strategy, and is directly linked to the FY14-17 Country Partnership Strategy (CPS). The project will contribute to shared prosperity and poverty reduction by supporting government reforms and programs that enable Moldovan businesses to invest more and become more productive and competitive in global markets. The private sector is the main engine of growth and jobs, and both labor income and entrepreneurship are critical sources of livelihoods for Moldovan households. SMEs represent nearly 98 percent of companies in Moldova and nearly 60 percent of employment. By impacting firm owners, entrepreneurs and self-employed, the project will positively affect the livelihoods for both the poor and the bottom 40 percent. In addition, the project’s focus on competitiveness is fully aligned with the World Bank ECA regional strategy and the FY14-17 Moldova CPS.

17. This project is closely aligned with GoM’s policy priorities as identified in the Moldova 2020 strategy, the Roadmap for Increasing Competitiveness, the Business Roadmap, the Regulatory Reform Strategy 2013-2020, and SME Development Strategy 2012-2015. These strategies highlight the priorities of improving the business enabling environment, enterprise competitiveness, and access to finance, which the CEP II project will address directly.

II. PROJECT DEVELOPMENT OBJECTIVE

A. PDO

18. The project’s development objective is to increase the export competitiveness of Moldovan enterprises and decrease the regulatory burden they face.

19. This PDO will be achieved through a set of measures that aim to: (i) improve the business environment through regulatory reforms that reduce the cost of doing business; (ii) help SMEs and exporters to get access to business development services; and (iii) improve access to medium and long term finance for export-oriented enterprises.

B. Project Beneficiaries

20. This project will directly benefit a wide range of enterprises in Moldova. It is expected that approximately 250 direct exporters, indirect exporters (firms selling to exporters), and enterprises that wish to export will receive matching grants under the project, to enhance their export competitiveness. It is expected that approximately 85 export-oriented enterprises will receive financing at longer tenors than is currently available in the domestic market through the

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line of credit (LOC).8 In addition, business service providers and participating financial intermediaries (PFIs) will also benefit from these instruments. The project will also impact the many SMEs and exporters that receive (or will receive) assistance from the government institutions tasked with advancing export promotion (Moldovan Investment and Export Promotion Organization, MIEPO) and SME development (Organization for the Development of Small and Medium Enterprises, ODIMM). The project will help these institutions to serve their client segments more effectively. All Moldovan SMEs will also benefit from improved methodologies for SME financing. Finally, all enterprises operating in Moldova – both domestic and foreign – will benefit from the improvements in the business enabling environment.

21. Government institutions tasked with implementing regulatory reforms will also directly benefit from this operation. The project will increase the capacity of MoE and other relevant authorities to implement regulatory reforms and identify areas for further reform. It will also strengthen accountability for public authorities to improve their interactions with businesses (for instance, by making these interactions more transparent and predictable, and less costly).

C. PDO Level Results Indicators

22. This project will support the following key results: (i) reduction in management time spent meeting regulatory requirements; (ii) increase in new export-oriented activities9 by matching grant recipients; (iii) increase in lending to export-oriented enterprises by PFIs; and (iv) medium and long term lending by PFIs under the LOC.

III. PROJECT DESCRIPTION

A. Project Components

Component 1: Regulatory Reform (estimated total cost of US$6.24 million)

23. The objective of the Regulatory Reform component is to support GoM in improving the business enabling environment in Moldova, and specifically in implementing its regulatory reform strategies over the next five years. These strategies include the Roadmap for the government’s Actions to Remove Critical Barriers in the Business Environment for 2013-2014 (Business Roadmap), approved by the government in September 2013; the Regulatory Reform Strategy and its Action Plan 2013-2020, approved by the government in December 2013; and the Roadmap for Increasing Competitiveness, approved by the government in January 2014.

24. To achieve this objective, the project will provide technical assistance for the following:

(a) Reform governance and capacity building, to improve the timely delivery of reforms and quality of the business enabling environment;

8 The actual number of MGF beneficiaries will be determined based on the maximum size of the matching grant, to be determined in Year 1 of project implementation. The expected number of beneficiaries of the LOC is based on the results of CEP I, in which 53 firms directly benefited from a USD 22.5 million LOC. The average firm size was approximately 50 employees, and some beneficiaries had close to 100 employees. 9 Defined as: exporting existing products to new markets or new customers, exporting for the first time, exporting new products to existing or new markets, or selling new products into export-oriented value chains.

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(b) Reform implementation support, to provide direct assistance for implementing priority reforms.

These activities directly address a major role that government plays facilitating in private sector development: providing a transparent, predictable, and low-cost business enabling environment.

25. Sub-component 1A on reform governance and capacity building aims improve the timely delivery of reforms and support improvements in the business enabling environment. MoE has the mandate to design, update, and implement the regulatory reforms strategies, but it has shown weak coordinating power to fully advance the strategies. In addition, the commitment by public authorities to ensuring a sound business enabling environment has varied greatly by authority. Therefore, the sub-component on reform governance will implement activities in the following areas. Where possible, these activities draw on existing mechanisms that are working well:

(a) Strengthen oversight of reform strategies implementation: The project will support MoE in monitoring the implementation of and updating the government’s regulatory reform strategies.10

(b) Increase accountability of public authorities’ impacts on the business community: The project will help the government establish and implement a system that strengthens accountability and incentives for public authorities that regulate business activities (e.g., to reduce cost, time, and procedures, and increase transparency and predictability). It will include reporting and monitoring on performance indicators and carrying out the annual Cost of Doing Business survey.

(c) Ensure that laws and regulations do not impose unjustified costs on businesses: The project will support and improve the existing mechanisms for: (i) assessing the impact of proposed laws and regulations on the business community; (ii) reviewing and publicly discussing these through the Regulatory Impact Assessment Secretariat and the Working Group of the State Commission for Entrepreneurial Activity, respectively; and (iii) reducing the regulatory burden placed on businesses in high-priority areas identified through the project activities.

(d) Strengthen awareness: The project will contribute creating a more “business-friendly” culture by supporting events and communication campaigns that will help public officials better understand the importance of a transparent, predictable, and low-cost business enabling environment.

26. Sub-component 1B on reform implementation support will assist the government in implementing reforms that could greatly benefit export competitiveness. The project has identified two areas that are considered critical and require funding: permissive documents, including licenses, permits and authorizations, and competition advocacy and implementation capacity building. The support will include:

10 The project’s mid-term review will determine whether such structures should stay at this level (linked to MoE) or be elevated to the highest level of government (e.g. Prime Minister). The project team will also examine whether there is an opportunity to consider this option before the mid-term review.

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(a) Permissive documents: Permissive documents are defined as permits, authorizations, licenses, and other documents required by Moldovan authorities for an enterprise to do business. The project will: (i) target the elimination of overlaps and duplications in the requirements for such documents, focusing on the documents whose issuance and requirements are most cumbersome for businesses and that affect enterprises in export-oriented value chains;11 and (ii) increase transparency and predictability in their issuance, and reduce the cost and time required to obtain them, by improving information systems and introducing one-stop shops12 that use electronic platforms.

(b) Competition advocacy and implementation capacity building: To enhance incentives for firms to become more productive in the domestic market and therefore boost their export competitiveness, a framework to ensure competition between firms is critical. The Competition Council has the responsibility of tackling anti-competitive market conduct and proactively advocating for fair competition in the economy, but lacks capacity and resources to conduct these tasks effectively. The project will support the Competition Council to: (i) identify barriers to competition in sectors or markets that have an impact on competitiveness; (ii) work with the MoE and other public authorities, in its advocacy role, to amend laws and regulations that create barriers to competition; and (iii) implement its competition policy with economy-wide effects through better tools and processes.

27. Results-Based Financing (RBF): Component 1 also includes RBF – US$1.5 million that has been set aside for compliance with Disbursement Linked Indicators (DLI) that reflect the government’s own objectives and are deemed highly relevant to the success of regulatory reform. This is one of the innovative features of this operation. It is intended to raise the profile of targets, encourage accountability, and improve results. Three times over the course of the project, the following specific DLIs will be publicly reported on, and achievement of the target results will trigger disbursement of set amounts:

(a) Establish and apply performance indicators for government agencies that have a regulatory function related to business

(b) Number of reforms enacted to reduce regulatory barriers and remove anti-competitive elements of legislation (laws, regulations, or other legal provisions).

More detail on the mechanics of RBF is provided in Section B below and in Annex 3.

Component 2: Small and Medium Enterprise Development (estimated total cost of US$8.04 million)

28. The objective of the SME Development component is to strengthen Moldovan SMEs’ linkages to markets and ability to compete in those markets through two closely related aspects:

(a) Strengthening the institutional capacity of ODIMM and MIEPO, so that they can play a more effective role in facilitating market-based SME growth

11 The problems with overlaps and duplications are documented in the 2013 World Bank report “Policy Priorities for Private Sector Development in Moldova” and in inventories of regulatory requirements compiled by IFC. 12 The project will help the Government establish one one-stop shop for permissive documents, if this approach is found to be feasible, or more than one one-stop shop, if the approach of establishing only one is not found to be feasible (see Annex 2).

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(b) Providing matching grants to SMEs to implement business improvement projects focused on export competitiveness.

29. This component aims to enable ODIMM and MIEPO to provide more effective programs and assistance that have positive spillovers for growth of SMEs and export-oriented sectors, and to address the existing information asymmetries13 in the market for business development and other related services.

Component 2A: Institutional Strengthening

30. The project will strengthen the capacity of ODIMM and MIEPO to facilitate business sophistication and integration into global supply chains for SMEs and exporters. This will contribute to the development of a vibrant and economically sustainable SME sector. As the DCFTA with the EU has made enterprise competitiveness even more crucial, MoE has requested that the project strengthen these institutions as one of its main priorities.

31. The project will help ODIMM and MIEPO to understand where and how their assistance can be most effective by understanding growth dynamics by type and subsector of SMEs and exporters. Based on assessments of these dynamics, the project will help ODIMM and MIEPO develop and implement strategies for effective assistance to SMEs and exporters, in a facilitating role (helping companies to access services provided by the private sector). ODIMM and MIEPO will restructure, develop, and broaden their services through new programs and delivery mechanisms to meet the needs of their client companies (see Annex 2). Analytical work to support these activities is currently being done through a project preparation grant that GoM has received from the World Bank-administered ECA Capacity Development Trust Fund.

Component 2B: Matching Grant Facility

32. The project will provide a Matching Grant Facility (MGF) to help SMEs implement a set of activities that seek to improve their export competitiveness.

33. MGF Preparation: The project will provide technical assistance to the Matching Grant Administrator for, inter alia: (i) finalizing the matching grant manual; (ii) designing the communication strategy; and (iii) defining the monitoring and evaluation strategy. The project will also provide TA to the MGF Administrator to strengthen its capacity to implement the MGF.

34. MGF Implementation: The facility will be US$3.0 million and is expected to benefit approximately 250 enterprises. The enterprises that apply must present a “business improvement project” (BIP) to be funded by the matching grant, and make a business case for how the activities in the BIP will improve their export competitiveness. Through the provision of matching grants, the project will help Moldovan SMEs to get access to business development services (BDS) and other relevant business services. Service providers will support SMEs to, inter alia: (i) improve existing products and services; (ii) create new products and services; (iii) improve production processes; (iv) improve business management; (v) improve business image;

13 Firms are not aware of or do not understand business development services and their ability to help firms increase know-how, skills, productivity, efficiency, market share, and profitability. See also http://go.worldbank.org/OVDGTHSWY0.

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http://go.worldbank.org/OVDGTHSWY0

(vi) find new customers and markets; and, (vii) create and strengthen partnerships within the value chain. The project will help increase the number of SMEs developing new export-oriented activities (such as exporting to new markets or new customers, exporting for the first time, exporting new products, or selling new products into export-oriented value chains).

35. Results-Based Financing: Component 2 will also benefit from a US$1.5 million RBF intervention to set and publicly report reform results, encourage accountability and improve performance. The relevant DLIs are the following:

(a) Strategy of ODIMM promotes organizational effectiveness and reflects segmentation of delivery assistance mechanisms and enterprise needs

(b) Strategy of MIEPO promotes organizational effectiveness and reflects market segmentation and improved export promotion delivery assistance mechanisms.

More detail on the mechanics of RBF is provided in Section B below and in Annex 3.

Component 3: Access to Finance (estimated total cost of US$30.00 million)

36. The objectives of the Access to Finance component are to improve access to medium- to long-term finance for export-oriented enterprises, reduce barriers to finance due to perceived high credit risk in SME finance and high collateral requirements, and promote suitable models for value chain financing, particularly in the agriculture sector. To achieve the above objective, this component will have three sub-components:

(a) Line of credit to provide medium to long term financing for working capital and investment purposes, to export-oriented enterprises.

(b) Technical assistance on Risk Sharing Facility (RSF) to revamp the existing credit guarantee scheme undertaken by ODIMM.

(c) Technical assistance to relevant government authorities on developing value chain financing models, which will also be coordinated with relevant financial institutions.

37. The Line of Credit will be US$29.4 million and is expected to benefit approximately 85 enterprises.14 The LOC will be extended through eligible PFIs to private exporters15 and indirect exporters for working capital and investment projects, based on specific eligibility criteria. The main beneficiaries are export oriented enterprises in agriculture, agro-processing, manufacturing or other economic sectors that provide goods or services directly related to generation of foreign exchange export revenues. In addition, up to 30 percent of funds under the line of credit can be lent to indirect exporters (enterprises providing inputs/services to exporters) to help meet the financing needs of enterprises supporting export sector value chains. Detailed eligibility criteria for beneficiaries are provided in Annex 2.

38. The interest rates to enterprises under the LOC will be market-based, and the PFIs will on-lend the funds to exporters and indirect exporters based on their own credit assessment and risk of the borrower. To participate as a PFI, the interested bank should be able to meet the

14 Based on an expected average loan size of US$350,000 15 A private company is defined as that having more than 75 percent private ownership.

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established eligibility criteria (presented in Annex 2).16 Once qualified, a PFI will be expected to continue to meet the eligibility criteria at all times.

39. All large banks licensed in Moldova that have actively participated in the World Bank’s earlier credit line projects in Moldova have been invited to express interest for participation in the project. As of May 2014, seven banks have confirmed their interest for participation, including Moldova AgroInd Bank, Victoria Bank, MoldIndCon Bank, Mobias Bank, ProCredit Bank, FinCom Bank and Comert Bank.

40. While all interested banks will ultimately be appraised by the World Bank, the due diligence review began with three banks: ProCredit Bank, Mobias Bank and Victoria Bank. Based on the assessment, ProCredit Bank fully meets the eligibility criteria. Mobias Bank meets the eligibility criteria, except for credit concentration that is somewhat higher than the maximum set by the National Bank of Moldova (NBM) prudential regulations. The bank is expected to reduce concentration and bring the credit portfolio structure to full compliance by mid-2014. Victoria Bank (VB) generally meets eligibility criteria related to capital adequacy and financial condition. However, there are some concerns raised by NBM in its on-site supervision report that need to be addressed before confirming the bank’s eligibility as PFI. (See Annex 8 for a PFI appraisal summary.) Additional banks will be assessed during project implementation.

41. The TA on Risk Sharing Facility will support ODIMM in implementing a time-bound action plan to restructure its existing loan guarantee mechanism, improve its governance, and strengthen institutional capacity for its implementation. A fully-functional credit guarantee scheme will facilitate greater SME lending by reducing the credit risks that commercial banks face in expanding in this segment and by providing a new type of collateral (i.e. guarantees to address SME financing constraints resulting from insufficient or unacceptable collateral). MoE and banks have expressed strong interest in a RSF. The TA will particularly focus on redesigning the processes, methodologies, products and current operations of ODIMM’s credit guarantee fund, and will be coordinated with activities under sub-component 2A above.

42. The TA on value chain financing will help identify: (i) types of financial products that would satisfy lending requirements of key players in value chains (i.e. producers, processors, marketing intermediaries, service providers); (ii) lending models suitable to support value chain activities; (iii) the role of government authorities in successful introduction of value chain financing products; and (iv) opportunities for pilot implementation of appropriate value chain financing models.

Project Management (estimated total cost of US$0.72 million)

43. The project will be implemented by the PIU under MoE, and by the CLD under MoF, as described in Section IV of this PAD. The Project Management component will cover the PIU’s cost of managing Component 1 and Component 2 of the project, as well as activities that overlap with Component 3 (e.g. accountant, procurement specialist, etc.). The funding for the PIU’s activities is listed separately in the financing table in section B below.

16 The eligibility criteria for PFIs follow principles recommended by the Bank’s Operational Policy for Financial Intermediary Operations OP10 (including financial indicators and corporate governance).

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B. Project Financing

Sources of Financing

44. The project will be financed as follows: US$15 million IDA credit for the Regulatory Reform and SME Development components (total), and US$30 million IBRD loan for the Access to Finance component. The choice of funding corresponds to Moldova’s recent graduation from IDA-only to “blend” status and the more commercial nature of the Access to Finance component – the large majority of which will be used as a line of credit for SMEs.

Results-Based Financing

45. The RBF elements of the loan will disburse against Eligible Expenditure Programs (EEPs) linked to project objectives and Disbursement Linked Indicators. The EEPs for the purposes of this Project are compensation expenses of the MoE. These have been selected as EEPs because the project supports achievement of MoE’s reform objectives and the mandate that it has been given by the government: to advance regulatory reform, SME development, exports, access to finance, and ensuring a sound enabling environment for business operations.

46. The government’s expenditures under the EEPs in a period must be greater than the amount of RBF that the loan will disburse over the same period, because RBF reimburses expenditures. Prior to each disbursement period, the government will aggregate and present to the Bank the information set out in the protocols and other required documentation (see Annex 3). Disbursements will go directly to Treasury without any conditionality or encumbrance. RBF disbursements should pose no difficulties. The EEP expenditures are recorded by the financial management system that has been vetted by the World Bank. Since the timely allocation of EEP budgets to MoE is essential for meeting EEP and DLI conditions, it is expected that the use of RBF will prove mutually beneficial to MoE and MoF, and will promote closer collaboration.

C. Project Cost and Financing

47. The breakdown of costs per component is presented below.

Table 1. Project costs

Project Components Project cost (US$

million) IBRD or IDA

Financing % Financing

1. Regulatory Reform 1a. Reform Governance 1b. Reform Implementation Support

2. SME Development 2a. Institutional Strengthening 2b. Matching Grant Facility17

3. Access to Finance Project Management Total Costs

6.3 3.5 2.7 8.0 4.9 3.1 30.0 0.7 45.0

IDA IDA IDA IDA IDA IDA IBRD IDA

IDA/IBRD

100% 100% 100% 100% 100% 100% 100% 100% 100%

17 In addition to the resources shown here, MGF beneficiaries will be required to pay approximately 50 percent of the cost of the activities that will be funded through the matching grants.

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Total Project Costs Front-End Fees

Total Financing Required

45.0 0.075 45.0

IDA/IBRD Recipient IDA/IBRD

100% 0% 100%

D. Lessons Learned and Reflected in the Project Design

48. The project design of CEP II is significantly informed by the lessons learned under the implementation of CEP I, which concluded implementation in June 2013. Additional lessons learned from international experience have also been incorporated. The relevant lessons are summarized below and presented in more detail in Annex 2.

(a) Focus on implementation of reforms, using institutionalized structures, is key. (b) Reform governance structures should have a clear mandate and be empowered by the

highest level of government possible. (c) In activities related to SME development, governments and donors need to facilitate

market transactions and address market failures. (d) A clear strategy and financial flows are required for effective agency reform. (e) Matching grant facilities should have appropriate incentives and procedures to ensure

success. (f) Use flexible models for lines of credit that stimulate competition among banks. (g) Results Based Financing improves results. (h) Complex projects take time to implement. (i) A well-functioning project implementation unit is essential for success.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

49. MoE has been a counterpart of the World Bank investment loans focusing on private sector development, on more or less on an ongoing basis, for over a decade. This includes the 2006-2013 Competitiveness Enhancement Project as well as prior private sector development projects. A PIU was established as a dedicated legal entity reporting to MoE to implement CEP I (Government Decision No. 895 of August 25, 2005). This PIU worked well during the implementation of CEP I. The Implementation Completion Report confirms that this project, including its administrative and fiduciary arrangements, was successful.

50. CEP II includes activities similar to those implemented under CEP I, and this reduces its implementation complexity. CEP I included a Matching Grant Facility, Line of Credit, and a Regulatory Reform component. The implementation arrangements for the LOC and for the project’s overall fiduciary and safeguards aspects remain the same as under CEP I. The Regulatory Reform component will work closely with some of the same counterparts as under CEP I: MoE and the RIA Secretariat under the Working Group. The aspects that are different between CEP I and CEP II are as follows: the Regulatory Reform component will work on additional areas of reform governance and reform implementation support; the project will work on institutional strengthening of the SME development and export promotion agencies; and the MGF will have an improved design and the PIU will be its interface with companies.

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51. MoE’s PIU will also manage implementation of CEP II. The PIU is currently administering a project preparation grant for preparation of CEP II. It currently has a Director (who has been with the PIU since 2006), Financial Management Specialist, Accountant, and part-time Procurement Specialist and Environmental Specialist. Once CEP II begins implementation, this PIU will be scaled up as necessary to implement project activities.

52. The PIU will be the main interface with companies for the MGF, starting at the beginning of the project. The PIU will recruit a dedicated team to manage the MGF. During the first year of project implementation, the project will support this team to be prepared for this task through the provision of the technical assistance described in paragraph 33 above. Before or during the mid-term review, the option of transferring this “front office” of the MGF to ODIMM or MIEPO will be evaluated, considering their roles in promoting SME and export growth.18

53. The implementation arrangements for the LOC will remain same as under CEP I. The LOC will be administered through an apex arrangement. The apex is placed with the Credit Line Directorate, a specialized entity operating under MoF that will be maintained in its current form and structure. The CLD will be responsible for the implementation of the Line of Credit sub component (approximately 60 percent of total loan amount) through: (i) sub-loans to PFIs; (ii) principal and interest collection from PFIs; and (iii) administration of revolving funds flow. The CLD has ample experience with World Bank-financed lines of credit, and has also administered credit lines of a number of other international institutions. The CLD also has extensive experience applying World Bank Safeguard policies outside of CEP I, as it has managed several other lines of credit financed under World Bank’s Rural Investment and Services Project, and has received adequate training to conduct screening of sub-loan applications for compliance with safeguards procedures.

B. Results Monitoring and Evaluation

54. Monitoring and evaluation of outcomes and results during implementation will follow standard World Bank practice. The PIU will prepare quarterly reports with data for the Results Framework (see Annex 1), to be reviewed and discussed with the World Bank Task Team and other project counterparts as applicable. The CLD will provide data on elements related to the LOC, to be included in the PIU’s reports. Both institutions performed this role effectively during CEP I. ODIMM, MIEPO, authorities involved in regulatory reform, and other beneficiaries will report on their results to the PIU. The Results Framework data will be captured in Implementation Status and Results reports that the World Bank will prepare semi-annually.

55. In addition to the Results Framework, the PIU and World Bank team will agree on additional indicators to monitor in order to track the project’s progress and activities (“monitoring indicators”).19 These will be mostly focused on the specific outputs provided

18 If the interface with companies (“front office”) of the MGF is transferred to ODIMM or MIEPO, the PIU will still retain responsibility for financial management, procurement, and safeguards aspects. 19 Potential monitoring indicators include: number of trainings and events held (disaggregated by topic), and participants in them; number of recommended laws/regulations/amendments/codes enacted or government policies adopted; number of legal amendments to remove anti-competitive elements of legislation adopted; number of new programs developed by ODIMM and by MIEPO, and participants in them; reduction in the number of days to get a permissive document; and others along these lines.

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through the project, and will be a very useful complement to the indicators in the Results Framework, which aim to capture the project’s outcomes at a more aggregated level.

56. To monitor the achievement of targets for disbursement-linked indicators (DLIs), the World Bank team and MoE have developed protocols (see Annex 3). DLIs and EEPs will be carefully tracked throughout the year to verify progress towards achieving targets, identify and resolve problems, and ensure the required evidence of achievement is available and presented.

57. For the MGF, a quantitative impact evaluation will be conducted to assess the effects of the grants on SMEs’ outcomes. The project will conduct a randomized control trial in which a subset of all eligible SMEs (defined as those applicants that obtain final approval of their business improvement projects, through the technical review and validation process outlined in Annex 2) will randomly be assigned to receive the matching grants. The impact evaluation will measure whether or not SME competitiveness can be enhanced by matching grants, and whether combining matching grants with close monitoring and frequent site visits has a significant effect.

58. Implementation support provided by the World Bank team will also enhance results monitoring and evaluation. Thus, progress against objectives will be assessed on an ongoing basis. In addition, a midterm review will be held approximately 2.5 years into the project. More detail on M&E is provided in Annex 4.

C. Sustainability

59. The project has incorporated elements to build sustainability through the activities that the project will fund, as well as through the use of results-based financing.

60. Regulatory Reform: After the mid-term review, the Bank will work with the government to design a way for the RIA Secretariat and other reform governance structures to be effective without the donor funding that has given the RIA Secretariat its required objectivity since its creation. Its reliance on donor funding stems more from this need for objectivity, given Moldova’s political economy, than from lack of willingness to allocate government funds.

61. For the reform implementation support sub-component, sustainability mechanisms will be built into each separate activity – for instance, by using existing institutions and tools to establish the one-stop shops for issuance of permissive documents (e-Government Center, and possibly the Licensing Chamber if appropriate), and by providing support to the Competition Council as “learning-by-doing”, to increase the organization’s capacity.

62. SME Development: The strategies that will be developed for ODIMM and MIEPO will include updating their organizational and governance structures to allow the organizations to more effectively perform their mandates. The project will also provide tools that will allow ODIMM and MIEPO to enhance their effectiveness and broaden their activities over the longer term (see Annex 2). The organizational strategies for ODIMM and MIEPO will include the corresponding budgets and staff positions that would be required to sustain the organizations’ activities. This is a key issue in assuring their effectiveness in supporting SME and export growth, and consequently, government adoption of these strategies and appropriate budgeting of them are included as DLIs.

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63. In the case of the MGF, sustainability is not expected. A matching grant is a temporary, short-term, and usually, one-time only instrument (subsidy) designed to overcome market failures that hinder SME development.20

64. Access to Finance: The access to medium- to long-term funding by PFIs will enable them to develop new products to meet the financing needs of export-oriented enterprises. These products will enable them to meet financing needs after the project. The PFIs’ on-lending terms to final borrowers under LOC are market-based, which avoids any interest rate distortion in the market. In addition, PFIs will be encouraged to improve their credit risk assessment techniques during project, which will help leverage PFI own sources of funding for export financing. The TA on RSF is aimed at improving the current credit guarantee scheme of ODIMM. This will enable ODIMM to utilize its current and future capital to provide guarantees to banks to cover credit risks in SME loans. This will encourage banks to utilize their own funding for SME financing and also enable effective utilization of ODIMM guarantee scheme in future.

65. Results-Based Financing: The use of RBF also supports sustainability. Once regulatory reforms are undertaken and organizations like MIEPO and ODIMM are well structured and adequately budgeted, it is much less likely that gains will be rolled back. Establishing DLI targets also forces implementing agencies to adopt processes and systems that set benchmarks. RBF rewards compliance and publishes results which, over a five year period, go far in making them sustainable. Of equal importance is the culture of results-based management inculcated through this operation, the Bank-financed RBF in the social safety nets and education projects, and the Bank-financed Program for Results (PforR) health transformation project.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Risk Category Rating

Stakeholder Risk Moderate

Implementing Agency Risk

- Capacity Moderate

- Governance Substantial

Project Risk

- Design Substantial

- Social and Environmental Low

- Program and Donor Moderate

- Delivery Monitoring and Sustainability Moderate

Overall Implementation Risk Substantial

20 Long-term donor subsidies to the demand or supply of BDS are likely to distort BDS markets and crowd out the commercial provision of services, thus undermining the objectives of impact, outreach, cost effectiveness, and sustainability that are the pillars of the BDS market development paradigm. (Committee of Donor Agencies for Small Enterprise Development (2001), Business Development Services for Small Enterprises: Guiding Principles for Donor Intervention. Washington, DC, USA)

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B. Overall Risk Rating Explanation

66. The overall implementation risk of this project is substantial. The major risks of this operation are related to governance, project design, implementation capacity, and coordination. To minimize these risks, the key mitigating measures include: (i) ongoing consultation with stakeholders to ensure the project responds to their objectives; (ii) a strong focus on institutional strengthening; (iii) use of results-based financing with disbursement-linked indicators to reinforce consensus among government authorities around achieving key project results; (iv) due diligence of PFIs based on well-developed eligibility criteria, including a strong focus on good governance; (v) use of implementing agencies that successfully implemented CEP I; and (vi) introduction of component coordinators for the Regulatory Reform and SME Components to ensure effective coordination of activities with all stakeholders. The World Bank team will continue to coordinate with other government authorities, private sector associations, donors, and other stakeholders as necessary to support successful project implementation. More detail is provided in Annex 5: Operational Risk Assessment Framework (ORAF).

VI. APPRAISAL SUMMARY

A. Economic and Financial Analysis

67. The project is expected to have significant positive benefits for the implementing agencies and beneficiary enterprises, contributing to private sector growth and export competitiveness in Moldova. The scope and nature of the investments envisioned under this project justify public financing. The project seeks to address key market failures (information asymmetries, lack of access to finance by export oriented firms and SMEs) and government failures (lack of intergovernmental coordination and bureaucratic red tape) that hinder competitiveness and export-based growth in Moldova. The regulatory reform component will improve the efficiency of government processes and reduce the cost of doing business. This component is expected to reduce the time spent by managers of Moldovan enterprises to deal with regulatory requirements by 20 percent. The SME development component’s activities on institutional strengthening of ODIMM and MIEPO seek to remove market failures related to information asymmetries and spillovers in the business services market. The access to finance component will provide direct and indirect benefits to Moldovan export-oriented enterprises that lack access to medium- to long-term financing. The component will also help PFIs in diversifying their funding base. Thus the expected economic benefits of the project to Moldovan society significantly exceed the costs of its public financing (see Annex 6 for more detail).

B. Technical

68. The technical design of the project is based on GoM’s national development strategy on export-oriented economic growth, World Bank technical expertise, and international good practices for enhancing export competitiveness. The project design is based on extensive consultations with stakeholders, including government agencies, private sector and donors. The project builds on lesson learned from the successful implementation of CEP I.

69. The project design is based on sound analytical underpinnings. The June 2013 World Bank study “Policy Priorities for Private Sector Development in Moldova” highlights the key

16

constraints to private sector growth. The report provides a detailed roadmap for reforms, which subsequently informed GoM’s reform strategies. The recently undertaken joint WB/IMF FSAP Update in March 2014 provides a detailed assessment of financial sector stability and development issues, which have also informed the project design and risk mitigation measures. The project’s design has benefitted from inputs provided by a team of experts on SME development, regulatory reform, competition, results based financing, fiduciary and financial intermediation requirements, risk sharing facilities, and monitoring and evaluation.

C. Financial Management

70. The findings of the financial management (FM) assessment conclude that the proposed project FM systems and framework are adequate to support the implementation of the project. The PIU within the Ministry of Economy will be responsible for financial management of the project funds. The PIU’s systems as well as those existing at MoE for EEP (planning, budgeting, accounting, internal controls, funds flow, financial reporting, and auditing arrangements) satisfy the World Bank’s requirements. The current system can provide, with reasonable assurance, accurate and timely information on the status of the project. The Inherent FM Risk, Control Risk, and Overall FM Risk are all rated as Moderate. To ensure that FM arrangements are up to date, the PIU will use the current accounting system to accommodate the Project’s requirements, and FM policies and procedures have been revised for this Project.

71. The PIU implemented CEP I, and its FM arrangements were assessed as satisfactory. Accounting and Internal Control system of the PIU were reliable and effective. FM staffing arrangements of the PIU were also assessed as adequate.

72. For EEPs, the project will rely on the current financing scheme and flow of funds existent at MoE, which is straightforward and fairly well managed. This was also confirmed by the audit conducted by the Court of Accounts (Supreme Audit Institution) for FY2012. The project will use government reports as the basis of disbursement (reimbursement of a portion of executed expenditures under the EEP) upon achievement of results for RBF elements, and a Statement of Expenditures methodology (traditional disbursement mechanism) for other elements of the project (see Annex 4 for more detail).

D. Procurement

73. Procurement under the proposed project will be carried out in accordance with the World Bank “Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” published in January 2011 (Procurement Guidelines) and “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” published in January 2011 (Consultant Guidelines) and with the latest Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits.

74. An assessment of the capacity and the adequacy of the procurement and related systems in place, and the capability of the Implementing Agencies (IAs) to conduct procurement under the project, were carried out in March 2014. The assessment reviewed the organizational structure for implementing the project and the interaction between the project

17

staff responsible for procurement and relevant units in IAs. The assessment concluded that most of the agencies involved in project implementation, including the PFIs, have extensive experience in implementing World Bank-funded projects. No major issues have been identified. However, one of the proposed PFIs, namely ProCreditBank, is new to the LOC requirements and has no experience with Bank procurement. To address this capacity issue, CLD with the support of the World Bank procurement team will organize a training course for Credit Officers of all the PFIs on World Bank procurement and CLD reporting requirements before the loan effectiveness.

75. Given the complexity of the project and the risks identified during the assessment, the overall project risk for procurement is Moderate. Details on procurement arrangements, procurement/selection methods thresholds, supervision arrangements and major procurement packages under the TA sub-components are provided in Annex 4.

E. Social (including Safeguards)

76. Land Acquisition/Resettlement: The Environmental Management Framework (EMF) prepared by the Borrower specifies that private businesses will be eligible to become project beneficiaries under the condition that they have not acquired and/or would not acquire land for the needs of activities to be supported with the project proceeds through a process which involved and/or would involve land expropriation. Additionally, project funds will not support any sub-loans used to invest in a business, which would require the involuntary displacement of existing occupants or economic users of any plot of land, regardless of its current ownership, or loss of or damage to assets including standing crops, kiosks, fences and other. The LoC operations manual will define a screening procedure to be followed by PFIs, and the implementing agency will closely monitor the screening procedure with the support of the Bank. With these restrictions, the project does not trigger OP/BP 4.12 “Involuntary Resettlement”.

77. Gender Impact: This project will facilitate export growth in several sectors but in particularly in agriculture, a sector that has a high share of women’s employment (accounting for 23.2 percent of total women’s employment in 2012). Improvements in the business environment will also facilitate growth in the services sector, where the largest share of employed women works. The project will track MGF beneficiaries based on gender of the firms’ owner and CEO.

78. Social Accountability: In 2010, the government streamlined the role of the National Council for Participation, members of which include civil society organizations. The Council is consulted on government regulations before being adopted. Moreover, all legislative measures and reforms are subject to a consultation process with social partners, civil society and groups likely to be impacted. During the preparation of the National Development Strategy for 2012-20, the government introduced an interactive web site (http://particip.gov.md/) to solicit comments and suggestions. In 2012, the government joined the Open Government Partnership.21 An Action Plan setting the commitments to increase government openness and strengthen public participation (OGAP) was adopted in consultation with civil society. The latest OGAP Implementation Report, however, states that the level of achievement of the activities planned for 2012 averaged about 55 percent.

21A group of over 50 governments who champion the principles of transparency, accountability, and public participation in governmental processes.

18

F. Environment (including Safeguards)

79. The project will support matching grants to enterprises and subprojects,22 including in the areas of industrial and agricultural production and agro-processing. The grants and subprojects might cause some environmental and social impacts such as, for instance: (a) agricultural production: soil erosion, loss of soil productive capacity, soil compaction, soil pollution, surface and underground water pollution, health and environmental risks associated with agro-chemicals use, loss of biodiversity; (b) agro-processing: contribution to surface water pollution, wastes generation, odor; (c) manufacturing: air pollution, waste waters, hazardous wastes and solid waste generation, labor safety; (d) construction: soil and air pollution; acoustic, aesthetics impacts, etc. Overall, all these impacts will be site-specific and mostly temporary, and can be easily mitigated through good projects design and implementation practices.

80. All grants and subprojects to be supported under the CEP II project will be subject to environmental screening per the criteria set out in the CEP II EMF. In cases where grants and subprojects may cause significant impacts, which require a full EIA (Category A projects23), such subprojects will not be financed under the project. Also the subprojects located in protected areas, critical habitats or culturally or socially sensitive areas, along with subprojects which might have impacts on international waterways, will be excluded from the project financing. Most of the subprojects will fall under Category B projects, which will require a simple Environmental Assessment and/or preparation of a simple Environmental Management Plan. It is also expected that many grants and subprojects will have insignificant environmental impacts and will fall under Category C projects (requiring only environmental due diligence procedure).

81. In order to address safeguards issues, the borrower updated the EMF prepared for CEP I. The EMF outlines the environmental assessment procedure, including criteria and responsibilities for environmental screening, assessment, designing Environmental Management Plans (EMPs), EMPs implementation and monitoring of matching grants and subprojects. The document also includes Environmental Guidelines for different types of proposed subprojects. These guidelines provide guidance on potential impacts and generic mitigation measures to be undertaken for subprojects in agricultural production, agro-processing, and manufacturing sectors at all stages – from identification and selection, through the design and implementation phase, to the monitoring and evaluation of results. Furthermore, the EMF provides a monitoring plan format that includes monitoring indicators, timing, methods, and institutional responsibilities. The EMF also specifies EA capacity building activities for institutions involved, and especially for PFIs. Lastly, the EMF includes a section describing measures to ensure compliance with national laws and World Bank requirements relating to pesticide purchase and use, and measures to promote Integrated Pest Management (IPM) approaches and safe pesticide handling and disposal practices to reduce human and environmental exposure.

22 Subprojects are defined as projects implemented by enterprises that will be supported through on-lending from the LOC 23 As per WB environmental guidelines, projects which may have significant impacts on the environment correspond to Category A; projects which may have less significant impact on the environment correspond to Category B; and projects which are expected to have minor impacts on the environment correspond to Category C. The CEP II EMF provides more details.

19

Annex 1: Results Framework and Monitoring

Country: Moldova

Project Name: MD Second Competitiveness Enhancement Project (P144103) .

Results Framework

Notes: Disbursement-linked indicators are shown in bold

The Results Framework indicators for the Access to Finance component include the World Bank core micro, small and medium enterprise (MSME) access to finance indicators that are relevant to this project.

.

Project Development Objectives .

PDO Statement

The project's development objective is to increase the export competitiveness of Moldovan enterprises and decrease the regulatory burden they face. This PDO will be achieved through a set of measures that aim to: (i) improve the business environment through regulatory reforms that reduce the cost of doing business; (ii) help SMEs and exporters to get access to business development services; and (iii) improve access to medium and long term finance for export oriented enterprises.

These results are at Project Level .

Project Development Objective Indicators

Cumulative Target Values Data Source/

Responsibility for

Indicator Name Core Unit of Measure

Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data

Collection

Reduction in management time spent meeting regulatory requirements

Percent 10.70 10.00 9.50 9.00 9.00 8.50 12 months

Annual domestic Cost of Doing Business survey

PIU

20

Percentage of matching grant recipients that are engaged in a new export-oriented activity

Percent 0.00 0.00 15.00 20.00 50.00 6 mos.

MGF Administrator M&E system (see definition in indicator description)

PIU

Average annual percentage increase in lending to export oriented enterprises by participating financial institutions

Percent 5.00 5.00 5.00 5.00 5.00 12 mos.

PFI internal management information systems

CLD

Cumulative amount of medium and long term lending by participating financial institutions under the line of credit (>24 months)

Amount (USD)

0.00 4.00 9.60 16.00 20.00 23.40 12 mos. PFI reports to CLD

CLD

.

Intermediate Results Indicators

Cumulative Target Values Data Source/

Responsibility for

Indicator Name Core Unit of Measure

Baseline YR1

(December 2015)

YR2 (December

2016)

YR3 (December

2017)

YR4 (December

2018)

End Target (December

2019) Frequency

Methodology Data Collection

Establish and apply performance indicators for Government authorities with a business regulatory function24

Text System does not exist

Performance indicators and their baselines are established for selected Recipient’s authorities, acceptable to the World Bank; and

Performance indicators monitored and publicly reported Targets revised/ validated

Performance indicators and their baselines are established for selected Recipient’s authorities, in addition to those selected for

Performance indicators monitored and publicly reported

Performance indicators established for all the Recipient’s authorities with a business regulatory function that are included

6 mos.

Authorities to provide data; MoE to provide published reports

PIU

24 Please see the detailed protocol for this Disbursement-Linked Indicator in Annex 3, Table 3.

21

A system is in place for monitoring and publicly reporting these performance indicators, consistent with the action plan agreed on with the World Bank

the period ending on 12/31/2015 and consistent with the action plan agreed on with the World Bank; The performance indicators are monitored publicly reported in 2016 and 2017 per the action plan agreed on with the World Bank; and The targets for each performance indicator are revised and validated for 2018 and 2019

in the action plan agreed on with the World Bank; The performance indicators are monitored and publicly reported in 2018 and 2019 per the action plan agreed on with the World Bank; and The targets for each performance indicator are revised and validated for 2020 and the following years, per the action plan agreed upon with the World Bank

Cumulative number of reforms enacted according to the Action Plan to reduce regulatory barriers and remove anti-competitive elements of legislation and

Text 0

2 cumulative actions of the Action Plan implemented




6 cumulative actions of the Action Plan implemented, including actions to remove anti-competitive elements of

6 mos.

MoE and other relevant authorities to provide the required information throughout the reform process

PIU

22

regulation25 legislation and reduce other regulatory barriers

Percentage of laws and sub-laws affecting businesses that are assessed by the RIA Secretariat and discussed at Working Group of the State Commission on Regulation before approval by Parliament

Percent 80.00 80.00 85.00 90.00 95.00 98.00 6 mos. Report from RIA Secretariat

PIU

Percentage of event participants reporting satisfied or very satisfied with workshops, training, seminars, conferences, study tours, etc.

Percent 0.00 80.00 80.00 80.00 80.00 80.00 6 mos.

Data collected during workshops, training, seminars, conferences, etc.

PIU

Adoption and implementation of a Strategy for ODIMM that promotes organizational effectiveness and reflects segmentation of delivery assistance mechanisms and enterprise needs26

Text

ODIMM strategy, acceptable to the World Bank, is adopted by the government27; and The government

ODIMM strategy is implemented and monitored and evaluated effectively

ODIMM strategy is implemented, budgeted, and monitored and evaluated effectively in 2016 and 2017

ODIMM strategy is implemented and monitored and evaluated effectively

ODIMM strategy is implemented, budgeted, and monitored and evaluated effectively in 2018 and 2019

12 mos.

Expert Assessment; For adoption and updates of strategy, a Decision at the appropriate level of government (MoE or Government) is approved and published

PIU

25 Please see the detailed protocol for this Disbursement-Linked Indicator in Annex 3, Table 3 26 Please see the detailed protocol for this Disbursement-Linked Indicator in Annex 3, Table 3

23

allocated adequate budget to ODIMM based on its strategy

ODIMM strategy is updated and adopted by the appropriate government authority 28; and Government allocates adequate budget based on the updated strategy

Segmentation of delivery assistance mechanisms reflects different focus on high growth potential enterprises and other enterprises, as well as on size and -sophistication of enterprises

Adoption and implementation of a Strategy for MIEPO that promotes organizational effectiveness and reflects market segmentation and improved export promotion delivery assistance mechanisms29

Text

MIEPO strategy, acceptable to the World Bank, is adopted by the government30; and The government allocated adequate budget to MIEPO based on

MIEPO strategy is implemented and monitored and evaluated effectively

MIEPO strategy is implemented budgeted, and monitored and evaluated effectively in 2016 and 2017

MIEPO strategy is implemented and monitored and evaluated effectively

MIEPO strategy is implemented budgeted, and monitored and evaluated effectively in 2018 and 2019; Strategy is updated and adopted by the appropriate

6 mos.

Expert Assessment; For adoption and updates of strategy, a Decision at the appropriate level of government (MoE or Government) is approved and published

PIU

27 According to the current applicable legislation, the Government entity to adopt the ODIMM strategy is MoE. If the applicable legislation changes, then the strategy must be adopted by whichever Government entity has the mandate to do so. 28 See previous footnote. 29 Please see the detailed protocol for this Disbursement-Linked Indicator in Annex 3, Table 3. 30 According to the current applicable legislation, the Government entity to adopt the MIEPO strategy is MoE. If the applicable legislation changes, then the strategy must be adopted by whichever Government entity has the mandate to do so.

24

said strategy

government authority31; and Government allocates adequate budget based on the strategy

Increased outreach of ODIMM

Text

No system in place for aggregating data on the number of companies assisted and with which tools

Baseline for 2013 established and monitoring system in place. 5% increase over baseline

15% increase over baseline




12 mos.

Survey of enterprises which ODIMM reports are assisted by them each year

PIU

Increased effectiveness of ODIMM

Text

No system in place for measuring program effectiveness






12 mos.

Survey of enterprises assisted by ODIMM

PIU

Increased outreach of MIEPO

Text

No system in place for aggregating data on the number of companies assisted and with which tools

Baseline for 2013 established and monitoring system in place. 10% increase





12 mos.

Survey of enterprises which MIEPO claims are assisted by them each year

PIU

31 See previous footnote.

25

over baseline

Increased effectiveness of MIEPO

Text

No system in place for measuring program effectiveness






12 mos.

Survey of enterprises assisted by MIEPO

PIU

Cumulative number of SMEs receiving Matching Grants32

Number 0.00 0.00 60.00 120.00 200.00 250.00 6 mos.

MGF monitoring and evaluation system (verified by PIU)

PIU

Cumulative number of business development services provided to SMEs

Number 0.00 0.00 120.00 240.00 400.00 500.00 6 mos.


PIU

Number of MGF beneficiaries creating or improving products

Number 0.00 0.00 36.00 72.00 120.00 150.00 6 mos.


PIU

Number of MGF beneficiaries improving production processes

Number 0.00 0.00 36.00 72.00 120.00 150.00 6 mos.


PIU

Number of MGF beneficiaries improving business management

Number 0.00 0.00 36.00 72.00 120.00 150.00 6 mos.


PIU

Percent of MGF beneficiaries that are woman-owned or have a female

Text n/a n/a n/a n/a n/a n/a 6 mos.

This indicator will be tracked but will not be used to measure project

PIU

32 This is a proxy for the core indicator related to the number of project beneficiaries.

26

CEO performance

Number of sub-loans disbursed from the Line of Credit33 (cumulative)

Number 0.00 15.00 34.00 57.00 71.00 83.00 6 mos. PFI CLD

Volume of PFI funding for exporters through the Line of Credit

Amount (USD)

0.00 5.00 12.00 20.00 25.00 29.40 6 mos. FPI CLD

Portfolio at risk (NPLs) under the Line of Credit

Text N/A <5% <5% <5% <5% <5% 6 mos. PFI CLD

.

33 Number of sub-loans approved is based on an estimated average sub-loan amount of US$350,000.

27

Annex 1: Results Framework and Monitoring

.

Country: Moldova

Project Name: MD Second Competitiveness Enhancement Project (P144103)

.

Results Framework

.

Project Development Objective Indicators

Indicator Name Description (indicator definition etc.)

Reduction in management time spent meeting regulatory requirements Reduction in management time spent meeting regulatory requirements as measured by the annual domestic Cost of Doing Business survey

Percentage of matching grant recipients that are engaged in a new export-oriented activity

MGF beneficiaries exporting existing products to new markets or new customers, exporting for the first time, exporting new productsto existing or new markets, or selling new products into export-oriented value chains

Average annual percentage increase in lending to export oriented enterprises by participating financial institutions

As reported by PFIs' internal management information systems

Cummulative amount of medium and long term lending by participating financial institutions under the line of credit (>24 months)

As reported by PFIs to the CLD

.

Intermediate Results Indicators

Indicator Name Description (indicator definition etc.)

Establish and apply performance indicators for Government authorities with a business regulatory function

In accordance with the Action Plan agreed upon between the World Bank and the Government in Year 1 of the project. This is a DLI inyears 1 (December 2015), 3 (December 2017), and 5 (December 2019).

Cumulative number of reforms enacted according to the Action Plan to reduce regulatory barriers and remove anti-competitive elements of legislation and regulation

In accordance with the Action Plan agreed upon between the World Bank and the Government in Year 1 of the project, and updated in subsequent years. This is a DLI in years 1 (December 2015), 3 (December 2017), and 5 (December 2019).

Percentage of laws and sub-laws affecting businesses that are assessed by the RIA Secretariat and discussed at Working Group of the State Commission on Regulation before approval by Parliament

As reported by the RIA Secretariat

Percentage of event participants reporting satisfied or very satisfied with workshops, training, seminars, conferences, study tours, etc.

As reported by participants in surveys at each event. This applies to events held under the Regulatory Reform component.

Adoption and implementation of a Strategy for ODIMM that promotes organizational effectiveness and reflects segmentation of

Segmentation of delivery assistance mechanisms reflects appropriate focus on high growth potential enterprises and other enterprises, as well as on size and sophistication of enterprises

28

delivery assistance mechanisms and enterprise needs

Adoption and implementation of a Strategy for MIEPO that promotes organizational effectiveness and reflects market segmentation and improved export promotion delivery assistance mechanisms

Segmentation of delivery assistance mechanisms reflects appropriate focus on enterprises with different needs, as well as on size and sophistication of enterprises

Increased outreach of ODIMM Percent increase in number of enterprises that have been assisted

Increased effectiveness of ODIMM Percent increase in enterprises reporting they have received effective services

Increased outreach of MIEPO Percent increase in number of enterprises that have been assisted

Increased effectiveness of MIEPO Percent increase in enterprises reporting they have received effective services

Cumulative number of SMEs receiving Matching Grants As reported in the MGF monitoring and evaluation system

Cumulative number of business development services provided to SMEs

As reported in the MGF monitoring and evaluation system

Number of MGF beneficiaries creating or improving products As reported in the MGF monitoring and evaluation system

Number of MGF beneficiaries improving production processes As reported in the MGF monitoring and evaluation system

Number of MGF beneficiaries improving business management As reported in the MGF monitoring and evaluation system

Percent of MGF beneficiaries that are woman-owned or have a female CEO

This indicator will be tracked but will not be used to measure project performance

Number of sub-loans disbursed from the Line of Credit (cumulative) As reported by PFIs to the CLD

Volume of PFI funding for exporters through the Line of Credit As reported by PFIs to the CLD

Portfolio at risk (NPLs) under the Line of Credit As reported by PFIs to the CLD

29

Annex 2: Detailed Project Description

MOLDOVA: Second Competitiveness Enhancement Project

Project Development Objective and Lessons Learned

1. The project's development objective is to increase the export competitiveness of Moldovan enterprises and decrease the regulatory burden they face. This PDO will be achieved through a set of measures that aim to: (i) strengthen firm competitiveness and market linkages; (ii) improve access to medium and long term finance; and (iii) improve the business enabling environment to reduce costs.

2. The following key lessons learned have informed the design of the project:

(a) Focus on implementation of reforms, using institutionalized structures, is key: Building on the findings from the 2013 “Policy Priorities” report and international experience, the project will have a strong focus on effective implementation of reforms rather than just focusing on drafting of laws or assistance from expert consultants that is disconnected from institutional structures.

(b) Reform governance structures should have a clear mandate and be empowered by the highest level of government possible. Based on experience around the world, having a structure that is explicitly empowered to move business environment reform forward can be critical when traditional government structures have not had the desired results. Such a structure tends to be most effective when it is empowered by the highest level of government. Considering recent experience in Moldova, it is clear that such a reform governance structure may be very useful. Because it is not currently feasible to establish a new structure, an existing unit at MoE, whose Minister also holds the post of Deputy Prime Minister, will be strengthened to play this role. At or before the mid-term review, the appropriateness and feasibility of moving the structure to the Office of the Prime Minister or to another high-level authority will be considered (for more information, see the description of component 2 further on in this annex and PAD Memo 1 in the project file).

(c) In activities related to SME development, governments and donors need to facilitate market transactions and address market failures: Incorporating the recommendations of the OECD report on the business development infrastructure in Moldova, as well as the Guiding Principles for Donor Interventions on Business Development Services for Small Enterprises, the project aims to foster a more commercial market for business services. CEP II will focus on improving the quality of business services available to SMEs that have potential for higher growth and exports. This will be achieved through the design of the MGF and the programs and assistance to be provided by ODIMM and MIEPO.

(d) A clear strategy and financial flows are a pre-requisite for effective agency reform: Absorbing the lessons from past attempts to strengthen public agencies, and especially MIEPO, success is highly dependent on a clear organizational mandate and a guaranteed source of funding. Thus, the SME Development component will help ODIMM and MIEPO each define their own organizational strategy that will endorsed by the GoM, and uses RBF to strengthen the commitment of authorities to providing sustainable funding flows to both organizations.

30

(e) Matching grant facilities should have appropriate incentives and procedures to ensure success: The design of the subcomponent on matching grants for SMEs incorporates lessons learned from CEP I (see PAD Memo 2 in the project file), analytical work such as the World Bank Policy Research Working Paper No.6296, ongoing and completed operations, a review of 60 World Bank projects with matching grant programs promoting private sector development, and other international good practices. Based on these lessons, the MGF design includes, among other things: (i) clearly defined eligibility criteria to ensure transparency and avoid favoritism, (ii) adequate amounts and percentages in order to attract firms to apply and, at the same time, to generate their ownership on the financed activities; (iii) simple application and approval procedures to help firms receive support when they need it; (iv) a clearly defined monitoring and evaluation strategy to ensure the expected outputs and outcomes are achieved and measured in a way that can be attributable to the project; and (v) a broad communication strategy to make information available to all potential beneficiaries and to disseminate the results of the project to the stakeholders.

(f) Use flexible models for lines of credit that stimulate competition among banks: The model to be used is an open-door, first-come-first-served access to funding for interested banks. Any interested bank able to satisfy the eligibility criteria will be able to join the project at any time. Since PFIs know that the available funding would be provided on a first-come-first-served basis, they are encouraged not to wait. Funding terms by the PFIs will be available on CLD website, so potential clients will be able to compare lending terms across PFIs This will encourage competition among PFIs and is expected to yield favorable pricing for final borrowers.

(g) Results Based Financing improves results: Experience with RBF demonstrates that when the government negotiates internally and sets performance target reinforced by RBF loan disbursements and DLIs, results improve. RBF loans have disbursed well because the DLIs become very high profile, thereby increasing accountability, collaboration and ensuring timely flow of government budget to EEPs. RBF also facilitates supervision and presentation of results defined in protocols, which benefits both the client and the World Bank. Finally, successful RBF has also lead to changes in budgeting and adoption of results based management.

(h) Complex projects take time to implement: This project is fairly complex and involves institutional reform of several agencies. Adequate time needs to be built in for implementation of such operations, so the project will be implemented over five years.

(i) A well-functioning project implementation unit is essential for success: A PIU, staffed with competent, committed, and fairly-remunerated professionals, is essential for a successful implementation of a complex project such as this. Under the CEP I, such a unit was established under, and fully supported by, MoE. This was one of the keys to its success. For this reason, MoE will maintain the same PIU arrangements for implementation of CEP II.

3. The remainder of this annex presents the project design in more detail, per component.

A. Component1: Regulatory Reform (estimated total cost of US$6.24 million)

31

4. This component intends to support the Government of Moldova in improving the business enabling environment, and specifically in implementing its regulatory reform strategies, over the next five years. This component will: (i) strengthen regulatory reform governance and increase capacity, and (ii) provide direct support for the implementation of specific reforms. The Ministry of Economy will be responsible for overall implementation of this component, through the PIU’s role as implementing agency and the Division for Business Development’s role as the primary beneficiary. For the work on competition under the reform implementation support sub-component, the Competition Council will be the principal beneficiary. In addition, MoE will liaise with other public institutions as required.

5. MoE has the mandate to design, update, and implement the regulatory reforms strategies, but it has shown weak coordinating power to fully advance the strategies. In addition, the commitment by public authorities to ensuring a sound business enabling environment has varied greatly by authority. However, some structures for supporting improvements in the business enabling environment have worked well: (i) the Working Group of the State Commission for Entrepreneurial Activity (“Working Group”), which discusses proposed legislation affecting businesses and reviews Regulatory Impact Assessments (RIAs), and the RIA Secretariat that supports it; and (ii) the annual, domestic Cost of Doing Business survey, which has been a useful tool for monitoring the business enabling environment.

6. The figure below illustrates the various activities under this component, under sub-components 1A and 1B, and the major beneficiaries of those activities.

Figure 1. Activities and beneficiaries of Component 1

Note: MoE and related entities are shown in blue and with solid lines linking them to component activities. The Competition Council is in green with a dashed background and dashed lines. Other public authorities are in gray with a dotted background and dotted lines.

Strengthen oversight of reform strategy implementation

Increase accountability of public authorities

Build awareness of business enabling environment among public authorities

Ensure that laws and regulations do not impose unjustified costs on businesses

Improve the business enabling environment

1A: Strengthen regulatory reform governance and increase

Government’s capacity

1B: Support implementation of reforms

Implement reforms related to permissive documents

Implement reforms related to competition

MoE(Directorate of

Business Development)

RIA Secretariat (linked to MoE)

MoE(Directorate of

Business Development)

Competition Council

Other public authorities with

regulatory functions

32

Subcomponent 1A: Strengthen Reform Strategy Governance and Capacity Building

7. This subcomponent will strengthen accountability mechanisms for regulatory reform and offer capacity building. The Ministry of Economy has shown adequate technical capacity to define the regulatory areas in need of reforms and establish detailed reform plans. However, the delivery and implementation of reforms has lagged, partially due to an uneven commitment among public authorities, which has at times been driven by the political dynamics of the coalition government. Some other structures for supporting improvements in the business enabling environment have worked well and need further support: i) the use of Regulatory Impact Assessments, (ii) the RIA Secretariat reviewing them, (iii) the public-private Working Group of the State Commission for Entrepreneurial Activity publicly discussing them, and (iv) the annual, domestic Cost of Doing Business survey.

8. Therefore, in order to improve the timely delivery of reforms and support improvements in the business enabling environment, as stated in section III.A. of the main text of the PAD, the sub-component on reform governance will implement activities in the following areas:

(a) Strengthen oversight of reform strategies implementation: The project will support MoE’s Division for Business Development in monitoring the implementation of and updating the government’s regulatory reform strategies.

(b) Increase accountability of public authorities’ impacts on the business community: The project will help MoE establish and implement a system that strengthens accountability and incentives for public authorities that regulate business activities (for instance, to reduce the burden of these activities in terms of cost, time, procedures, transparency, and predictability). It will include reporting and monitoring on, for example, performance indicators and the annual Cost of Doing Business survey.

(c) Ensure that laws and regulations do not impose unjustified costs on businesses: The project will support and improve the existing mechanisms for i) assessing the impact of proposed laws and regulations on the business community; ii) reviewing and publicly discussing these through the RIA Secretariat and the Working Group, respectively; and iii) reducing the regulatory burden placed on businesses in high-priority areas identified through the project activities.

(d) Strengthen awareness: The project will contribute creating a more “business-friendly” culture by supporting events and communication campaigns that will help public officials better understand the importance of a transparent, predictable, and low-cost business enabling environment.

9. Detailed activities in each of the areas highlighted above are described below.

(a) Strengthen oversight of reform strategy implementation

10. As the Ministry of Economy is in charge of ensuring that the regulatory reform strategies are implemented effectively, it needs a monitoring system that collects information on how regulatory authorities perform in introducing planned reforms. The project will support the MoE’s Division for Business Development in its activities of monitoring the implementation of,

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and update, the government’s regulatory reform strategies. It will fund two consultants to be tasked with the day-to-day implementation of the strategies. Their work will include:

(a) Creating and implementing protocols for gathering information from the public authorities tasked with implementing the activities in the reform strategies. The project will support assigning deadlines and responsibilities in the thematic working groups tasked with discussing and implementing specific reforms.

(b) Establishing time-bound indicators that will be used to measure these authorities’ implementation progress.

(c) Updating the reform strategies based on feedback gathered during this process and through other feedback loops, including the performance indicators described below, Cost of Doing Business survey, public-private dialogue mechanisms, information sharing with the Economic Council Secretariat.

(d) Overseeing the implementation of reforms in the areas to be supported by the project under sub-component 1B – permissive documents and competition policy – and liaise with other public institutions as required.

11. Based on the results of the mid-term review, or earlier if the political dynamic will permit, the project will consider supporting the creation of a task force with the exclusive mandate to drive regulatory reforms, under the office of the Prime Minister, in close coordination with the Economic Council. Another option could be to support the Economic Council Secretariat, which has recently started to push for the implementation of specific regulatory reforms, in loose coordination with the Ministry of Economy. The Economic Council Secretariat is under the Office of the Prime Minister. Both options are being considered because: i) international experience shows that entities that drive reform should be established at the highest level of government and should have the convening and coordinating power over all line ministries and agencies involved in the reform process; ii) establishing such a task force under the Prime Minister’s office is not politically feasible at the time of project preparation, due to the election cycle; and, iii) given that the Minister of Economy is also Deputy Prime Minister and does have the mandate to oversee implementation of reform strategies, support is being provided at the level of MoE first, to test whether this is enough to overcome the hindrances to reform implementation. If a task force linked to the office of the Prime Minister were to be established, the technical design and update of regulatory reform strategies could remain with the Ministry of Economy.

(b) Increase accountability of public authorities’ impacts on the business community

12. The project will support the government in introducing mechanisms to increase accountability, in order to provide incentives for public authorities to implement reforms timely and monitor the impact of regulatory reform on businesses. They will include:

(a) A system for monitoring and reporting on performance indicators for public authorities that have a regulatory function affecting businesses.

(b) The annual, domestic Cost of Doing Business survey, including an expanded mechanism to gather perceptions of businesses on the degree to which public authorities are “business-friendly”.

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(c) The application of the principle of “more for more” in regulatory reform (i.e., government authorities that are more business-friendly receive more resources or other benefits), based on the indicators and information gathered above.

13. The performance indicators will measure targets such as cost, time, number of procedures, and business perceptions of the degree of transparency and predictability in business interaction with public authorities. Performance indicators will be tracked over time and publicly disclosed, and will be as simple and concrete as possible, drawing on existing methodologies such as the annual domestic Cost of Doing Business (CODB) survey and the World Bank Group’s Doing Business survey. Indicators will be developed for 15-20 authorities that interact most with businesses.34 They will be piloted with a few authorities (without full public disclosure) before they are fully launched.

14. The domestic Cost of Doing Business Survey has been carried out annually since 2002, and it monitors how the regulatory environment affects companies. It uses a similar approach to the global Doing Business survey, but covers a broader range of areas (permits, authorizations, inspections, etc.). Since it has been instrumental in measuring progress on improving the business enabling environment in Moldova, the project will continue to support the implementation of this survey, and may expand it to include information-gathering for the other accountability mechanisms discussed here.

15. A system of monitoring by the private sector of the degree to which public authorities are “business-friendly” could be included in the annual Cost of Doing Business survey, for instance. Alternatively, this may come in the form of setting up feedback mechanisms for businesses’ specific interactions with public authorities – for instance, using ICT solutions such as mobile phone-based feedback loops when a company is applying for a permit or other permissive document. Another possibility is to revamp the website set up by the Ministry of Economy (but not active), where businesses would be encouraged to report on their perception of the efficacy of public authorities.

16. The project will also help the government, through the Ministry of Economy, examine how to implement the principle of “more for more” in regulatory reform (i.e., government authorities that are more business-friendly receive more resources, for instance from donors). This principle will draw on public authorities’ performance on the performance and perception indicators discussed above. The mechanisms for implementing this principle will be designed once the systems described above are functioning well, and will also draw on these systems.

(c) Ensure that laws and regulations do not impose unjustified costs on businesses or affect their creation or expansion

17. The project will support MoE in promoting reforms to remove or amend regulatory acts that place a disproportionate burden on businesses. This critical activity will include the reduction of the regulatory burden to businesses assessed through ex-post analysis (see below the application of the standard cost model); the elimination or reduction of requirements for

34 Defined as those authorities that are required to submit Regulatory Impact Assessments to the Working Group of the State Commission for Regulation of Entrepreneurial Activity.

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permissive documents that pose problems to businesses (see description of sub-component 1B); and the amendment of anticompetitive laws and regulations that affect firm creation or expansion and create an uneven level playing field (see description of sub-component 1B). This last activity would be done in conjunction with the Competition Council.

18. The project will also support and improve the existing tools and the process of conducting, reviewing, and publicly discussing Regulatory Impact Assessments for draft laws, regulations, and amendments thereto, affecting businesses. Currently, a RIA is required for any new legislation or regulation (or amendments to existing legislation or regulation) affecting businesses. RIAs are prepared by the public authorities that propose the legislation or regulations (and in the future, by Parliamentarians), are reviewed by the RIA Secretariat, and are discussed at the Working Group of the State Commission for Regulation of Entrepreneurial Activity (“Working Group”). The Working Group, which meets weekly and includes 11 private sector representatives and 11 public sector representatives, makes a recommendation to the government regarding the adequacy of the RIA and the expected impact of the law or regulation. Changes to the current RIA system will be four-fold. First, the project will revise the current RIA methodology used by the public authorities that draft the laws and regulations, building on the principles set out in Law 235, and introduce a sliding scale of the type of regulatory impact assessment required (from a checklist, to a full-scale cost-benefit analysis) and the criteria for determining which type of assessment is required for different types of regulatory changes. The revision of the RIA methodology will build upon the changes being proposed under the USAID-funded BRITE project as well.

19. Second, the project will fund the consultants that staff the RIA Secretariat and develop ways to make the RIA Secretariat sustainable beyond the end of the project. To date, donor funding of the RIA Secretariat has given it the political independence it needs to be seen as a technical, impartial body. This political independence is key, given the tendency for disagreements and deadlock between political parties that control different ministries and agencies. To date, it has been achieved through donor funding; the project will recommend alternative ways to achieve the required independence.

20. Third, the project will support the government to introduce application of the Standard Cost Model (SCM) as a tool in analyzing the impact of laws and regulations on businesses. This may be incorporated into the RIA process. In addition, based on the results of the SCM, public authorities will also submit proposals to the Working Group on reducing the burden of problematic regulations. The public authorities will be responsible for implementing the SCM, and the RIA Secretariat will review the outcomes and proposals.

21. And fourth, the project will support the provision of training on RIA and the SCM to public authorities and Parliament through the Public Administration Academy and other appropriate channels (for instance, workshops specifically for Members of Parliament). Another donor (USAID, through its BRITE project) is committed to working with the Public Administration Academy to update the RIA curriculum and generate more participation by public authorities in the courses. This project will support the provision of training after the other donor’s work is complete. Public officials that could require more training include the Customs Service, State Tax Service, and Parliamentarians. Recent (late 2013) legal amendments have now

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made legal and regulatory initiatives coming from these authorities subject to RIA. The project will also support the development of curricula and delivery of courses on the SCM.

(d) Strengthen awareness

22. Currently, there is a lack of understanding of the importance of a sound business environment for growth across the public administration, and there are few champions for reform in the government beyond the Ministry of Economy. Some ministries, agencies, and other public officials do not fully understand how an improved business environment will help achieve the country’s overall goals (for example, those outlined in the recent Roadmap for increasing the Competitiveness of the Republic of Moldova), and their attitude towards businesses is more one of control than of facilitation.

23. Based on the capacity gaps emerging during the previous activities, the project will work to build more awareness among the public sector of the importance of a transparent, predictable, and relatively low-cost business enabling environment. This will be done through workshops that will target multiple levels of the public sector, including Ministers, Deputy Ministers, technical staff, and Members of Parliament. Some of these workshops will also include private sector participation. These awareness-building activities will create more broad-based support for reform implementation, and will be targeted to key agencies in charge of the implementation of top priority reforms.

24. In addition, several well-targeted study tours will be conducted over the life of the project to help public authorities understand how to deal with specific issues they are facing in improving the business environment. The topics will be chosen based on the most pressing issues that come out of the monitoring, accountability, and dialogue mechanisms listed above, including regulatory governance structures, application of RIA, and regulatory reform in specific areas.

Subcomponent 1B: Reform Implementation Support

25. The overarching goal of the project is to support activities that strengthen export competitiveness of Moldovan firms. Within the sub-component on reform implementation support, the project will target two areas: permissive documents (i.e. licenses, permits and authorizations), and competition advocacy and implementation capacity building. Export-oriented value chains will be natural candidates when analyzing sectors and making priorities for streamlining the issuance of permissive documents and removing barriers to competition. During the mid-term review, other areas in which reform implementation will be supported may be identified, based on developments during the first 2-2.5 years of the project.

(a) Permissive Documents35

26. The project will review and prioritize permissive documents whose issuance and requirements are cumbersome for businesses, focusing especially on those that impact export-

35 Permissive documents are defined as permits, authorizations, licenses, and other documents required by Moldovan authorities for an enterprise to do business.

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oriented value chains. To introduce greater transparency and predictability into the issuance of permissive documents, and reduce the cost and time to obtain them, the project will support: (i) improvements in the information systems at the Licensing Chamber and their inter-operability with other authorities that issue permissive documents, and (ii) the introduction of one-stop shops and electronic platforms for the issuance of other, priority permissive documents. The project will also support activities to remove those documents that are redundant and prevent businesses’ efficient operations.

27. The review and identification of the priority permissive documents to target will draw on: (i) several inventories that are currently being conducted by donors (IFC and USAID), including an inventory that specifically focuses on permissive documents required for export; (ii) feedback from the business community; and (iii) the activities to identify barriers to competition (see below the section on Competition).

28. A one-stop shop for the issuance of licenses was introduced through the Licensing Chamber in 2012. Although this one-stop shop is working well from the point of view of enterprises obtaining licenses, its IT infrastructure is not adequate for other authorities to access the information it has – for instance, to verify that an enterprise has a license, or to access other documents that the enterprise submitted in its application to receive a license. The project will thus improve the IT infrastructure at the Licensing Chamber, to implement a single registry of licenses and offer interfaces for other authorities to extract information from this system electronically.

29. The project will also explore the feasibility of extending the same single-chamber principle to other permissive documents that currently require cumbersome interactions of businesses with several agencies. Implementing such a one-stop shop for other permissive documents has been included as a reform in the government’s plan of activities. The work on this will include: (i) conducting a study of the feasibility of introducing this, either at the Licensing Chamber or at another public authority; (ii) if the one-stop shop is found to be feasible, draft legal documents and amendments required to implement it; (iii) assist the relevant authorities (including the Licensing Chamber and others) with business process reengineering to implement it; (iv) provide the required IT infrastructure, in partnership with the e-Government Center and the World Bank-funded Governance e-Transformation Project, as appropriate; and (v) provide training to the staff that will work at the one-stop. If establishing one one-stop shop for the issuance of permissive documents is not found to be feasible, the project will help the Government establish one-stop shops that would be feasible, including all steps listed here (legal documents and amendments, business process reengineering, IT infrastructure, and training).

30. If a one-stop shop for other permissive documents is not found to be feasible, the project will support improvements in the issuance of priority permissive documents. Depending on the issues faced by enterprises with each type of permissive document, this could include introducing electronic systems for their issuance, business process re-engineering, and other activities that will increase transparency and predictability and reduce costs and time required for enterprises to obtain them. This would also use the systems and platforms provided by the e-Government Center.

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(b) Competition

31. Implementation of regulatory reforms to reduce the unjustified costs for businesses (such as those supported via Component 1A) are expected to facilitate new private sector firm creation and expansion, and stimulate increased SMEs’ participation in exports with support via Component 2. Firms competing in open, contestable markets are more productive and therefore more likely to export. Anti-competitive practices and restrictive product market regulations increase the cost of intermediate services and products (e.g. financial services, energy, transport, agriculture inputs), decreasing country competitiveness in global markets. For the process of private sector growth to lead to sustained productivity and export competitiveness in the economy, it is critical that a framework is in place to ensure competition between firms. The Competition Council has the responsibility to both react to allegations of an uneven playing field in specific markets (enforcing the Competition Law of July 11, 2012) as well as proactively advocate for fair competition in the economy. However, the Competition Council requires resources and capacity building support to be able to optimally conduct these tasks, to thereby decrease the possibility that uncompetitive practices stymie the productive potential, especially that of SMEs.

32. Therefore, to support the Competition Council in ensuring market competition, the project will finance the following priority capacity constraints:

(a) Market assessments to help resolve key barriers to competition. The Competition Council requires analytical support to best advocate for competition at the industry level. The project will finance: (i) prioritization of key sectors/markets to review competition constraints that induce distortions in markets and affect firms’ performance and ability to compete domestically and internationally; and (ii) identification of competition issues in selected sectors/markets through a review the state of competition (structural and behavioral aspects) and existing regulations affecting competition conditions. Input markets that affect firms operations may also be candidates for such market assessments.

(b) Guidelines on market definition. The Competition Council requires a systematic methodology to strengthen implementation of its competition policy and law. This would help the Council determine the boundaries of the markets that are subject to its scrutiny, either as part of an antitrust case or as part of market inquiries. The project will finance the development of such a methodology to determine product and geographical markets where firms typically compete. The methodology will draw on the methodology used under the former legal framework on competition and update it in the context of the new (2012) Law on Competition.

(c) Expert advisors to promote legal/regulatory amendments and promote competition in the selected sectors or markets. The Competition Council’s current advocacy activities to remove anticompetitive regulations are limited. The project will provide support to the Competition Council and other relevant public authorities, as required per the scope of the reform, in the form of: (i) expert advisors to propose and draft legal/regulatory amendments to remove the aspects of laws and/or regulations that are limiting competition together with line ministries/agencies; and (ii) advocacy workshops to promote regulatory changes identified within market assessments.

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(d) Other activities to support effective implementation of competition policy and law with economy-wide effects. The Competition Council requires an adequate IT infrastructure to be able to detect harmful anticompetitive practices among firms – for instance, to analyze evidence collected during its investigations that would help the detection of cartel agreements among competing firms. In addition, strengthening the Council’s outreach efforts with the judiciary is key to promote a competition culture and strengthen competition law enforcement at all institutional levels. The project will finance: (i) the purchase of needed equipment (IT forensic toolkit/software, servers) and training on its application and use; and (ii) the implementation of a mandatory training program for judges for the application of the Competition Law (including a module on state aid legislation).

Donor Coordination

33. The project is tightly coordinating the support of these reforms internally with IFC, and externally with other donors such as USAID and Sweden. In particular, IFC has worked over the past three years on the improvement of the construction permitting process. BRITE, a program funded by USAID and implemented by Chemonics, has been supporting the areas of tax administration and trade across borders reforms. Since all donors have a long history of involvement on regulatory reforms, donor coordination will be an important part of the successful implementation of the reforms.

B. Component 2: SME Development (estimated total cost of US$8.04 million)

Context and Problems to be Addressed

34. Given the economic landscape of Moldova, and the government’s strong commitment to competitiveness and export growth, there is a clear need to promote SME development. SMEs comprise 98 percent of Moldova’s private sector, while accounting for 58 percent of the national employment and 28 percent of GDP. However, SMEs’ participation in exports is hampered by excessive regulation, restrictive business practices, and lack of capacity. The market of business services for SMEs is fragmented and lacks adequate quality controls and trust of market participants. The interaction of state agencies (such as ODIMM and MIEPO) with SMEs has been of varying quality, and a considerable effort is needed to support these agencies in delivering services that are relevant and effective for SME development and export promotion. MoE, interested in improving the capacity of ODIMM and MIEPO, has taken the first steps towards restructuring MIEPO and has stated its interest in reforming ODIMM so that it can serve the needs of a broader range of companies. (See PAD Memo 2 in the project file for a more detailed assessment of ODIMM and MIEPO.)

35. ODIMM and MIEPO suffer from both a lack of focus and a shortage of targeted programs and funds from the GoM to adequately address SME growth and export development. ODIMM implements some programs and training focused on start-ups and investment of remittances. While the government and donors (primarily EU) have been satisfied with the individual programs, ODIMM’s role has been quite limited in the overall SME sector. Most companies have not heard of ODIMM or its services. ODIMM does not have an overall view of the segments of SMEs present in Moldova, their growth and export performance, or a distinction

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between “subsistence” SMEs (which primarily meet a social objective of job creation) and “transformative” SMEs (which can contribute substantially to growth). Without this understanding, ODIMM cannot develop programs or services to meet the varied needs of these segments. In addition, while ODIMM monitors program/project performance indicators as requested by its donors, it does not have a full monitoring and evaluation framework for understanding the impact of its activities and making improvements. ODIMM is also not playing as active of a role as it could in facilitating the development of a more commercial market for business services. ODIMM’s management is enthusiastic and dedicated. Along with MoE, they are very interested in adapting international good practices to this organization, and expanding ODIMM’s role to facilitate the growth and productivity of SMEs from start-up until they are export-ready.

36. MIEPO has very limited professional staff and, subsequent to its early years when it was funded by the EU Technical Assistance to the Commonwealth of Independent States (TACIS) program and received technical assistance from Ireland and Germany, it became an institution without effective leadership and without sufficient funds to conduct even the most minimal of export and investment promotion functions. MIEPO has been primarily tasked with managing a general GoM fund for export and investment promotion that provides resources primarily for companies to attend trade shows/fairs. It is not providing any elements of the typology of export promotion and development functions in a comprehensive way (business development, country/sector branding, market information, training, exporter finance, and sector upgrading). Linkages with international markets are important for Moldovan SMEs not only to increase and diversify their sources of revenue, but also in order to learn from industry participants in target markets about technological innovations, production techniques, and market trends that can help them increase their product quality and competitiveness. Consequently, MIEPO’s export promotion activities are complementary to ODIMM’s activities and directly related to improving the competitiveness of Moldovan SMEs in external markets. In October 2013, a new Director with a proven track record of effective management and experience in the private sector was appointed. The Director’s approach is strategic and practical, and MoE has also signaled that this is a priority area. There are expectations that with additional capacity-building for the institution, based on international good practice, the Director can lead a strong transformation.

37. While both ODIMM and MIEPO have qualified directors and MoE would like to upgrade their capabilities and programs, they are constrained by limited funds and require assistance in developing a strategic focus and programs to meet the needs of their potential constituency, that is, Moldovan SMEs that have high growth and export development potential. An additional weakness of MIEPO is that it is housed in a building owned by the state that gives a negative impression to a potential exporter/investor and is constrained from rehabilitation for effective office operations by the fact that the building has historical significance and therefore cannot be altered without major waivers and exceptions to regulations regarding such buildings.

38. A recent OECD-funded report on business support infrastructure36 concluded that the supply of business development service providers in Moldova is fairly sufficient. It shows that: i)

36 OECD Investment Compact for South East Europe. Fostering SME Development in the Republic Of Moldova: Business Development Services. September 2013.

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BDS providers in Moldova provide a large and increasingly active foundation for a business support infrastructure, with the potential for further development; ii) there is a range of different types of BDS providers, including universities, private firms, freelance trainers and consultants, NGOs, and international firms; and iii) the provision of BDS covers a large range of services including information services, training, and consulting – with local providers offering more on operational BDS such as financial reporting, taxation and accounting, and with international providers offering more strategic and complex BDS such as product design and technology adaption.

39. However, there are important market failures in enterprises’ use of business development services. The OECD report shows that the BDS market is constrained by issues of awareness and lack of information, and clients’ unwillingness or lack of ability to pay. This is a common market failure related to information asymmetries in the market for business services (including BDS). When a firm has not used such services before, it is not fully conscious of the benefit that service could provide to the firm. Therefore, firms’ willingness to pay for BDS, at first, is oftentimes lower than it would be if the firm had complete information about the benefit of the services. In order to improve and stimulate the BDS market and overcome the market failures, several activities are recommended: i) developing publicly supported, targeted co-financing initiatives for business development services; ii) supporting the expansion of BDS outside the capital; and iii) promoting the relevance of BDS for enterprise development and improving the quality of information available on BDS providers. Considering the BDS market conditions in Moldova, the MGF to support SMEs for getting access to BDS,37 combined with close monitoring; a broad dissemination strategy showing success stories; an impact evaluation reflecting the MGF results; and improvements in the quality and availability of information on BDS providers (through tools at ODIMM and MIEPO), are the instruments the CEP II will use to contribute to the development of the BDS market and to addressing the market failures identified.

Key Areas to be Addressed by CEP II

40. The sub-objectives of the SME Component of CEP II are the following:

(a) Strengthen the capacity of ODIMM and MIEPO to effectively address the needs of Moldovan SMEs that exhibit characteristics of companies with high growth and export development potential.

(b) Improve the prospects for long-term sustainability of ODIMM and MIEPO and the programs which they administer through increased effectiveness of their programs and sufficient funding (from the government, donors, and the private sector) to maintain those programs.

(c) Provide funding through a Matching Grant Facility to Moldovan SMEs to address market failures in access to business development services, which will increase their export competitiveness.

37 It is expected that the MGF beneficiaries may include SMEs with high growth potential (firms that could be considered that might grow without support; however, could generate public benefits – technology and knowledge transfer to other firms, better products & services for consumers, environmentally friendly production processes) as well as SMEs that would benefit the most from the grant funding (more additionally – firms that need BDS to improve their businesses, are uncertain about their effectiveness, undervalue their benefit, so they are unwilling to risk their scarce resources to pay the market price of the BDS). SMEs will be able to get access to local and international BDS providers to implement their business improvement project.

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41. The guiding principles for this component of the project include:

(a) The government’s role in promoting SME growth and exports will be in a facilitating capacity, helping to overcome market failures such as information asymmetries or coordination failures, and providing programs and information that have spillover effects. Tools for such facilitating approaches can include: interactive databases of business service providers; matching grant facilities for accessing business services for which companies may have asymmetric information on the benefits; information on priority export markets, requirements to enter those markets, and contacts in those markets; promotion of the “Made in Moldova” brand in export markets; and others.

(b) Institutional strengthening activities will leave the organizations of focus with increased capacity to undertake their work, as opposed to providing consultants that will work in parallel to organization staff and have no lasting impact after they leave. Increased capacity will come in the form of knowledge (e.g. SME segmentation and export opportunities); program offerings to SME and exporter clients; systems (management information systems, monitoring and evaluation tools, communications strategies and tools); updated organizational structures; and financial resources to cover the core operating costs for these organizations, as well as for the programs offered.

(c) The impact of the project activities on Moldovan enterprises will be monitored closely. This will allow the public institutions involved to learn and adapt as required to increase the impact on companies. Through enhanced monitoring and evaluation, ODIMM and MIEPO will understand how the programs and information they provide to enterprises is impacting their target clientele, and what sorts of changes or enhancements they may make. Through site visits and other monitoring and evaluation activities, the MGF Administrator will understand how the matching grants are impacting the companies that receive them, and will be able to provide guidance and assistance to help the companies overcome any obstacles they are facing related to the activities being implemented under the matching grants.

Subcomponent 2A: Institutional Strengthening

42. A key aspect of the CEP II project is to implement an exit strategy for World Bank assistance through support that will provide sufficient funds to increase the capacity of ODIMM and MIEPO, as well as the MGF, but to gradually phase out World Bank funding over the five year term of the project. While the CEP II loan will finance most of the costs in the first three years, half of these costs will be borne by the government, other donors, and the private sector in Year Four and, nearly all of the costs will be funded by the government, other donors, and the private sector in Year Five.

43. Additional information on the context and a brief assessment of each institution is provided in PAD Memo 2 in the project file. These assessments, combined with international good practices, informed the design of this sub-component of the project.

Key CEP II Activities to Address these Areas:

Initial Phase:

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44. Before project implementation, the project preparation grant (which the Government has received from the World Bank-administered ECA Capacity Development Trust Fund) will fund the following activities that will be key inputs to this component:

(a) A consultant to develop a segmentation of the SME market in Moldova, showing areas of growth and stagnation in exports and sales in the domestic market (to the extent possible), examining factors such as industry/sub-sector, location, degree of product sophistication, end markets, and others. This segmentation will be key to inform the design of programs to address SMEs’ needs effectively.

(b) A consulting firm will conduct an assessment of GoM programs under the existing Export Promotion Strategy for the period 2006 to date. The firm will also review existing surveys and market research reports to analyze priority markets for Moldovan sectors and subsectors with good potential. It will also propose instruments that can be utilized by MIEPO to facilitate and promote Moldovan SME exports. This consultancy will be conducted in consultation with the SME segmentation study.

45. The text below sets out the expected activities by year.

46. Year One:

(a) In-depth sector/subsector needs assessments will be undertaken as needed to provide more detailed information for both the GoM and Moldovan SMEs to inform and assist SMEs to enhance their capacity to export to specific markets.

(b) SME needs assessments may be conducted to understand the needs of the SME segments in more detail.

(c) International experts in SME development and export promotion will provide assistance to both ODIMM and MIEPO to design strategies and restructure their agencies to address the needs of their clients. The strategies will be based on the SME market segmentation and other analyses that have been performed to identify enterprises’ needs (for instance, information currently being collected by MIEPO, sectoral studies produced by other donors, etc.). The strategies will include: (i) design of programs and services to serve each organization’s key client segments; (ii) delivery mechanisms for the programs and services; (iii) organizational and governance structures to ensure effective delivery of these programs and services, including position descriptions and qualifications; (iv) description of interactions with other relevant institutions in Moldova (such as sector associations, incubators, business parks, innovation agencies, etc.); (v) short-term and medium-term budgets that will allow the agency to implement the strategy; and (vi) an action plan for implementing the strategy, with milestones, indicators, and monitoring mechanisms.

(d) If necessary, assistance will be provided to update the government’s Small and Medium Enterprise Development Strategy and the relevant export promotion strategy documents, to reflect the new ODIMM and MIEPO strategies.

(e) A few key senior staff of ODIMM, MIEPO and MoE will travel to selected countries on a study tour to become familiar with best practices in SME development agencies and their role in SME growth and exports.

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(f) More effective monitoring and evaluation units will be established in ODIMM and MIEPO. The project will provide technical assistance to enhance these units, as well as equipment, software (management information systems) and staff training.

(g) Baseline surveys will be undertaken to provide the basis for annual surveys of ODIMM and MIEPO clients to measure improved outreach and program effectiveness.

(h) Management information systems will be upgraded as needed, beyond those necessary for monitoring and evaluation.

(i) Assistance will be provided to both agencies by an international expert in communications and outreach in order to ensure that companies are aware of the services of the two agencies and that their programs extend to all regions of Moldova.

(j) Events consistent with the project objectives will be held. This includes: events to “re-launch” ODIMM and MIEPO, per their new strategies; events to promote the DCFTA and its opportunities; possibly lectures/presentations by prominent international businesspeople or other relevant experts; possibly a TED-type event focused on SMEs and exports; and/or others as relevant.

(k) In line with the communications and outreach strategy, and in collaboration with the M&E unit, an expert will provide assistance to both agencies on improving their websites in order to facilitate better communication with potential and existing clients, as well as to provide information to government and other potential funders of SME development programs on the breadth of programs available and their effectiveness.

(l) Additional IT tools (beyond the M&E MIS and website) to support ODIMM’s and MIEPO’s objectives will be designed. For instance: an interactive portal of business service providers, where companies can rate the quality of service received; interactive maps of priority export destinations, with basic information about each market and costs and requirements for entry.

(m) Five local expert consultants in various specialties will be hired by MIEPO to increase its capacity to provide the needed services to clients of MIEPO as determined through the strategy development process with MIEPO.

(n) MIEPO experts and staff of other institutions (as relevant given the Government of Moldova’s export promotion strategy and institutional mandates) will participate in export promotion missions to countries with strong potential as export markets for Moldovan products or services. These missions will involve making linkages with potential importers of Moldova products and services, as well as to develop relationships with Commercial Officers and other relevant staff at Moldovan embassies in those countries.

(o) Minor equipment may also be provided to ODIMM and MIEPO, as required.

(p) Other activities as required in line with the organizations’ strategies.

47. Year Two:

(a) An international expert in Angel Funds and Venture Capital Funds will be provided to investigate and promote the establishment of such funds in Moldova or to encourage regional funds to establish such funds in Moldova. This activity will also

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be coordinated with the World Bank financial sector team working on Moldova. If these activities are found viable, support will be provided to conduct forums and other activities to promote them.

(b) On-going support will be provided for the activities developed in the ODIMM and MIEPO strategies. Support will focus on the areas outlined above:

i. Sector and SME needs assessments (as required); ii. Communications and outreach, including events and website development

and maintenance; iii. Participation in export promotion missions, as described in activity (n) in

year 1 above, to promote linkages in countries with strong potential for Moldovan SME exports.

iv. Others as required

(c) Surveys of ODIMM and MIEPO clients will be conducted to measure improved outreach and program effectiveness.

(d) Support for ODIMM and MIEPO to investigate potential sources of finance for their programs by other donors (e.g. the EU) and the private sector.

48. Year Three:

(a) Continued support for the items listed as on-going in Year Two above as well as potential new activities with good potential for success that arise during project implementation.

(b) Phasing-in of private sector funding sources (including through private sector associations and payment for services by individual enterprises, among other options) will be examined carefully, and designed in order to not compete with or crowd out services provided by the private sector itself.

49. Year Four:

(a) As in year three, but GoM and other donors will provide substantial funding for most ODIMM and MIEPO activities. Government resources will be used primarily for operating budgets. Resources from other donors will be used primarily for programs. Private sector contributions will also be made, per (b) in year 3 above.

50. Year Five:

(a) Almost all project activities will be financed totally by GoM and other donors, with some contribution from private sector sources.

Sub-component 2B: Matching Grant Facility

51. The project will provide a Matching Grant Facility to help SMEs38 implement a set of activities that will have a specific and direct impact on their export competitiveness. The

38 According to Law No. 206-XVI (2006) on Support to Small and Medium Sized Enterprises, SMEs are defined according to three parameters: the number of employees, turnover and balance sheet size. Micro: < 10 employees, < MDL 3 million of average annual revenue from sales, < MDL 3 million of average annual total assets). Small: < 50 employees, < MDL 25 million of average annual revenue from sales, < MDL 25 million of average annual total assets). Medium: < 250 employees, < MDL 50 million of average annual revenue from sales, < MDL 50 million of average annual total assets.

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enterprises that apply must present a “business improvement project” to be funded by the matching grant, and make a business case for how the activities in the BIP will directly increase their export competitiveness. Through the provision of matching grants, the project will help Moldovan SMEs to get access to business development services and other relevant services. Service providers will support SMEs to, inter alia: (i) improve existing products and services; (ii) create new products and services; (iii) improve production processes; (iv) improve business management; (v) improve business image; (vi) find new customers and markets; and, (vii) create and strengthen partnerships within the value chain. The project will help increase the number of SMEs developing new export-oriented activities such as exporting to new markets or new customers, exporting for the first time, exporting new products, or selling new products into export-oriented value chains.

52. The activities to be financed by the project as part of this subcomponent are:

(a) MGF Preparation: Provision of technical assistance to the Matching Grant Administrator for, inter alia: (i) developing the matching grant manual; (ii) designing the communication strategy; and (iii) defining the monitoring and evaluation strategy. The project will also provide TA to the MGF Administrator to strengthen its capacity to implement the MGF.

(b) MGF Implementation: Provision of matching grants to Moldovan SMEs for business services. The list of eligible activities will be broad, including, inter alia: complex consulting services (business process re-engineering); identification and capacity-building for the implementation of new technologies; quality management certifications (ISO, also including HACCP, ISO for environmental management, etc.); market studies, assistance from an industry expert in product development, product packaging, labeling, branding; assistance from a marketing expert; conducting an audit for the first time (for instance, if required in order to secure a loan); among others. The project will also enhance the capacity of the Matching Grant Administrator for the management, implementation, and supervision of the MGF through the provision of goods, consultancy services, training, and operational costs.

53. A matching grant manual will be developed. It will include, inter alia: (i) clearly defined eligibility criteria to ensure transparency and avoid favoritism; (ii) adequate amounts and percentages in order to attract firms to apply, and at the same time, to generate their ownership of the financed activities; (iii) simple application and approval procedures to help firms receive support when they need it, taking advantage of business opportunities and momentum; (iv) a clearly defined monitoring and evaluation strategy to ensure the expected outputs and outcomes are achieved as well as that they can be measured and attributable to the project; and (v) a broad communication strategy to make information available to all potential beneficiaries and to disseminate the results of the project to the stakeholders. (Additional details are provided in Annex 4: Implementation Arrangements).

54. No funds will be disbursed under the MGF until the MGF manual detailing further the rules and the administrative and fiduciary methods to be used is developed in form and substance satisfactory to the Bank and adopted by the PIU.

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55. SMEs that apply for the matching grant facility will complete a detailed application presenting a “business improvement project, BIP” that will directly impact their competitiveness in export-oriented value chains (direct or indirect exports). The project will have goals such as develop a new export product, export existing products to new markets, exporting for the first time, or selling to a new customer in an export-oriented value chain. SMEs will develop the package of services that they require to achieve this objective. The matching grants will be awarded after being appraised by technical experts and validated by an inter-institutional committee based on the matching grants manual. (Additional details are provided in Annex 4.) Matching grants will not support recurrent costs (i.e., salaries, utilities, rent, or maintenance), taxes or any activity not approved in the matching grants manual.

56. Helping SMEs to get access to BDS providers and benefit from their support, firms will increase their understanding of the value of these services in contributing business growth and development. As a result, it is expected that SMEs, after receiving the support from this project, will continue demanding these services willing to pay the total cost. It is expected that the project will contribute to the development of BDS market in Moldova.

C. Component 3: Access to Finance (estimated total cost of US$30 million)

57. The objective of the Access to Finance component is to improve access to medium to long-term finance for export-oriented enterprises, perceived high credit risk in SME finance and high collateral requirements, and promote suitable models for value chain financing, particularly in the agriculture sector. The June 2013 World Bank study “Policy Priorities for Private Sector Development in Moldova” and subsequent discussions with government, financial institutions and enterprises confirmed the existence of market failures of shortage of access to medium to long-term working capital and investment financing, especially for export-oriented enterprises, barriers to finance due to insufficient or unacceptable collateral, and information asymmetry and insufficient techniques for assessing SMEs’ credit risk at banks.

58. To achieve the above objective, this component will have three sub-components:

(a) Line of credit (LOC) to provide medium to long term financing for working capital and investment purposes.

(b) Technical assistance on Risk Sharing Facility to revamp the existing credit guarantee scheme undertaken by ODIMM. A fully functional credit guarantee scheme will facilitate greater SME lending by reducing the credit risks that commercial banks face in expanding in this segment and by providing a new type of collateral, that is, guarantees to address SME financing constraints resulting from insufficient or unacceptable collateral.

(c) Technical assistance to relevant government authorities on developing value chain financing models, which will also be coordinated with relevant financial institutions.

Subcomponent 3A: Line of Credit (LOC)

59. The project includes a LOC to be extended through PFIs to creditworthy exporters for viable projects. The financing will include working capital and investments loans for the export-oriented enterprises.

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60. MoF will borrow from the Bank and on-lend funds to eligible PFIs under the Subsidiary Financing Agreement (SFAs). The LOC will be administered through an apex arrangement. The apex will be placed with the CLD, a specialized entity operating under the MoF. The CLD has ample experience with the Bank’s lines of credit, and has also administered credit lines of a number of other international institutions.

61. PFI Qualification Process. All banks licensed in Moldova will be able to participate in the project, providing that they meet the eligibility criteria. Banks that wish to be considered for participation are requested to confirm that they:

• Allow the CLD and the Bank access (on a need-to-know basis) to privileged information necessary to appraise whether the interested financial institution meets and/or continues to meet the agreed eligibility criteria;

• Agree to follow the rules as prescribed in Operations Manual (OM) for the Credit Line Component and to undertake annual external audits by reputable auditors according to the international accounting and auditing standards; and,

• Agree to devote adequate resources to the project, including appointing specific staff for the Bank project implementation, with all necessary technical profiles and to provide the necessary training.

PFI Eligibility Criteria

62. Interested banks should be able to meet the established eligibility criteria in order to become a participating financial intermediary. Eligibility criteria for PFIs follow principles recommended by the Bank’s Operational Policy OP 10.

63. The eligibility criteria and the due diligence review process follow standards that are typical for the on-site supervision executed by supervisory authorities – the CAMELS system. The full details of the CAMELS system used for the due diligence review is provided as Box 1 at the end of Annex 2.

64. Based on CAMELS methodology, interested banks will be obliged to satisfy the following eligibility criteria:

• Compliance with National Bank of Moldova prudential regulations and other applicable laws and regulations.

• Good governance – “fit and proper” owners; adequate Board composition and practices; adequate organization and institutional capacity for its specific risk profile; existence and effectiveness of business and risk related committees (ALCO-Assets/Liability Management, Risk Committees, Credit Committees, Audit Committee, etc.) operating with adequate policies and procedures; competent management with adequate managerial autonomy; business strategy aligned with bank's size and management experience.

• Capital Adequacy -- good capital structure and compliance with risk-based capital adequacy requirements; positive trend adequate for bank’s growth perspectives and risk characteristics of new business initiatives.

• Adequate Liquidity and Effective Asset/liability Management (ALM) -- liquidity meeting NBM regulations and bank’s needs with effective liquidity management practices. Good funding structure without heavy concentration and capacity to mobilize

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domestic resources. Adequate contingency planning for funding to meet unanticipated events or periods of excess liquidity.

• Adequate Profitability – The bank must have positive profitability with well diversified and stable earnings trend and acceptable risk profile. It must maintain the value of its capital39. Level and growth trends of operating costs and expenses should be well managed.

• Good Asset Structure and Portfolio Quality -- Good asset structure including type, concentration, liquidity and diversification; effectiveness of loan underwriting and the related policies, procedures and practices; lending to connected parties; asset classification and provisioning practices40; level, distribution and severity of classified assets and timely identification and collection of problem assets.

• Adequately Managed Financial and Operational Risks -- Financial and operational risk management functions should be well organized; the bank must have well defined and prudent policies and written procedures for management of all types of financial risks (liquidity, credit, currency, interest rate and market risk, as well as risks associated with balance sheet and income statement structures) and operational risk; exposure to interest rate risk, currency risk and market risk at the instrument, portfolio, and balance sheet levels within risk limits and well managed.

• Adequate Internal Audit Function, including organization of internal audit and NBM compliance functions; internal audit policies, procedures and practices; annual audit planning and execution, ensuring that all risk areas are examined, and that those areas of greatest risk receive priority; reporting requirements to senior management and Board; quality of reporting and responsiveness to audit suggestions, recommendations, or requirements; follow-up on any noted issues.

• Adequate Information Technology (IT) and Management Information Systems (MIS) – Adequate organization of IT functions, including operation and maintenance of hardware and software systems; use of modern IT technology and relational database systems and professionally developed and updated application systems; on-line real time interconnectivity with branch offices; real time support for e-banking (ATMs, internet and mobile phone banking); adequate and effective back-up and support systems.

• Appropriate Capacity, including staffing for carrying out subproject appraisals and for supervising subprojects implementation that would meet the requirements for effective participation in the Credit Line.

65. Interested banks will be appraised by the Bank to confirm that they meet the eligibility criteria. Banks, which meet the eligibility criteria, will be asked to sign the Subsidiary Finance Agreement with the Ministry of Finance, which will allow them the use of LoC funding on as-needed basis.

39 “Maintaining the value” of its capital means that the bank is adequately provisioned for the level of risk it is taking and that the bank’s retained earnings are at least at the level of inflation. 40 The bank must classify its assets and off-balance-sheet credit risk exposures (at least four times per year) and make adequate provisions. It must have adequate portfolio quality. The bank should not have more than 10 percent of criticized assets (i.e., classified as doubtful and loss).

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66. However, given the need to support banks in Moldova to improve governance structure and transparency, as well as credit risk management, a bank that is not fully meeting the eligibility criteria may be accepted as a PFI providing that it is willing to sign the Memorandum of Understanding (MOU) in which it will commit to an agreed Action Plan41 that will bring it in full compliance in an agreed time. The National Bank of Moldova in the process of supervision and the Bank during supervision missions will do regular check-ups to make sure that the PFI is making an expected progress in the agreed timeframe.

67. Once qualified, a PFI should be expected to continue to meet the eligibility criteria at all times. They will be subject to continuous scrutiny by the supervisory authorities, which will share the findings with CLD. The National Bank of Moldova is to a large extent compliant with the BCP principles. This includes the key prudential regulations. Therefore, a “good standing” with the NBM would mean that the bank meets the critical parameters of a stable financial condition. Annual external audits and regular supervisory data submitted to NBM will be reviewed during supervision missions to confirm that a PFI continues to meet the eligibility criteria. PFIs will be asked to authorize the sharing of NBM supervisory reports with the Bank on a quarterly basis.

On-lending Terms from MoF to PFIs

68. Eligible PFIs will sign Subsidiary Financing Agreement (SFA) with the MoF. The SFA will specify terms of access to the Bank’s financing, mutual responsibilities and roles in project implementation. Once signed, it will allow eligible PFIs access to finance on specified terms for eligible final borrowers and eligible projects. The CLD, in coordination with the Bank, may set a limit on the total outstanding loans made available to an individual PFI as a share of its capital.

69. Currency Risk. Subsidiary finance to PFIs would be denominated in Euros, U.S. dollars and Moldovan lei. For sub-loans denominated in Euro and U.S. dollars, the currency risk is borne by PFIs and final borrowers. For sub-loans in Moldovan lei, the currency risk is borne by Ministry of Finance.

70. Interest Rate Risk. Interest rates for on-lending from the MoF to PFIs will be variable, adjusted semiannually to reflect international market terms. The reference rate will be based on 6-month LIBOR plus a margin covering the credit risk, front-end fee (if applicable) and CLD’s operational costs. The margin will be reviewed and may be adjusted from time to time by the Recipient in coordination with the Bank.

71. Credit Risk. PFIs will assume the full credit risk for all final borrowers and sub-loans that they have financed. The credit risk may get higher than initially appraised, due to currency and interest rate risk carried by final borrowers.

41 For example, a bank with capital structure in which equity is less than an agreed minimum share of the total capital, would be asked to commit to improving the capital structure in the agreed time frame. A bank that has high credit concentration will be asked to diversify the credit portfolio in the agreed time frame. A bank with the NPL level which is considered too high will be asked to reduce the level of impaired loans to less than 10 percent in the agreed time frame. Some minor, but important, improvements related to risk management functions could also be subject of MOU.

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72. Subsidiary Finance Service by PFIs. PFI Subsidiary Finance amount will be equivalent to the aggregate amount of principals of all PFI Sub-loans made by the respective PFI. PFIs are required to make payments regardless of whether or not they have received payments from their borrowers. A PFI that is delinquent in its payments may be charged penalty interest on the full outstanding principal balance, until payments are again current. Payment arrears are a ground for suspension of participation. The PFIs will repay interest and principal semi-annually.

73. Suspension. A PFI is expected to continue to meet the eligibility criteria in order to maintain access to Bank funds. A PFI that does not follow the rules or experiences financial problems may be suspended. The PFI may be re-accepted once the problems that have prompted its suspension have been adequately addressed. The reasons to suspend the PFI are as follows:

• A PFI is found to breach the established eligibility criteria or other participation rules; • A PFI is delinquent on its payment of interest and principal due; and, • A PFI utilizes project funds for ineligible expenditures or does not follow Operational

Manual with due regard.

Sub-Loan Terms and Eligibility

74. Sub-loans will be available for new investment and for working capital finance. The working capital finance excludes financing for salary payments to employees of final borrowers. In addition, investment sub-loans with incremental working capital needs may include a working capital portion of up to 40 percent of the total sub-loan amount.

75. The terms of PFI sub-loans will be the following:

• PFI Sub-Loan Currency. As noted above, the MoF will on-lend the credit line proceeds to PFIs in Euro, US$, and MDL. Sub-loans to final borrowers will also be denominated in US$, MDL or EUR;

• Limits on Sub-Loan Amounts. Working capital sub-loans will have the maximum amount of US$500,000 equivalent. Investment sub-loans will have a maximum amount of US$800,000 equivalent. The aggregate amount of all Sub-loans provided to any one final borrower, or group of connected final borrowers, shall not exceed the equivalent of US$800,000;

• Maturities of investment loans would be up to maximum eight years, with grace period determined by the PFI. Maturities of working capital loans would be up to four years; and,

• Interest rates will be freely determined by the PFIs. The CLD will be informed about the interest to be charged by individual PFIs.

76. PFIs will determine the principal, amortization and interest payment schedules for PFI sub-loans on a case-by-case basis, based on cash-flow projections. Sub-loan service payments by borrowers to PFIs would generally be made monthly, or according to typical repayment schedules used by the respective PFI. There will be no sub-loan prepayment penalties, and interest will be charged on a declining balance formula.

Eligibility of final borrowers

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77. To be eligible for financing under CEP II, a final borrower must present evidence that:

• it has been in existence for at least two years; • it operates in Moldova and is registered with Moldova tax authorities; • it is engaged in exports related to agriculture, agro-processing, manufacturing or other

economic activity that provide goods or services directly related to generation of foreign exchange export revenues;

• it is an indirect exporter (excluding utility, oil, and other energy companies) engaged in providing goods and services to export oriented enterprises;

• it is a private enterprise, with more than 75 percent of the shares and other equity interest thereof held by persons or companies other than the Recipient, any agency or subdivision thereof, or any local governmental authority, or entities controlled by the Recipient or such agencies or subdivisions; and,

• it has a financial position that would allow it to meet all existing and projected financial obligations in a timely manner. The projected financial position should show that the borrower will maintain its profitability and adequate liquidity once the PFI sub-loan is extended, and that its leverage will remain reasonable. Specifically, after receiving the sub-loan, a beneficiary enterprise would be required to maintain a debt/equity ratio of no more than three to one (defined as total debt, including the sub-loan, divided by registered equity); and minimum debt service coverage ratio of 1.2 (defined as cash earnings after all operating expenses before interest and principal due divided by principal and interest payments) until sub-loan maturity.

78. Eligibility of Sub-Projects. Potential sub-projects will be requested to meet the following criteria:

• Sub-projects should be technically feasible and economically, financially and commercially viable.

• Sub-projects should be in compliance with applicable environmental standards and in compliance with all applicable regulations relating to health, safety and environmental protection. Goods and works on the Bank’s negative list will not be eligible for financing. The Bank’s policy on environmental assessment must also be followed.

• Sub-project should not cause any permanent or temporary physical and economic displacement or loss of access to livelihoods or community assets.

79. On-lending Process from PFIs to Final borrowers. Sub-loans will be made based on an application of a PFI, which wishes to extend a loan to a creditworthy exporter for an eligible sub-project. In each case, credit proceeds will be extended to a PFI back-to-back to PFIs’ loans to final borrowers with the same amount, maturity and grace period. The decision to extend a sub-loan will be made by a PFI based on analysis of client’s creditworthiness and project viability. In practical terms, financial risk taken by the PFIs is the credit risk of the final borrower and its sub-project. The credit risk comprises the commercial risk inherent in the enterprise and the project being financed, enlarged by the interest rate and currency risk that are carried by the final borrower. In principle, a final borrower should be in a financial position that would allow him to meet all existing and projected financial obligations in a timely manner. The projected financial position should show that the final borrower will maintain its profitability and adequate liquidity once the PFI sub-loan is extended, and that its leverage will remain reasonable.

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80. The CLD will evaluate each application to ensure that the PFI’s sub-loan appraisal and approval conform with the OM and with principles of sound banking. For the first two sub-loans for each PFI and all sub-loans above an agreed amount specified in the OM, a prior review and a no-objection by the Bank will be required. The Bank may establish, in consultation with the MoF, a free limit for experienced PFIs which: (i) are familiar with Bank procedures; and (ii) have a proven track record of sound credit decisions. The sub-loans below the free limit will not require prior review by the CLD.

81. Each time a principle or interest due on a PFI sub-loan is late, or the PFI has classified the respective sub-loan as substandard, doubtful or loss, the PFI will be required to provide to the CLD a quarterly report on the performance of the sub-loan, the reason for adverse classification and the subsequent developments, and the updated financial condition of the borrower. The PFI would agree to keep the credit history of the borrower on file.

Sub-component 3B: Technical assistance on Risk sharing facility (RSF)

82. The sub component on technical assistance on RSF would support ODIMM in implementing a time-bound action plan aimed at revamping the design of existing guarantee mechanism and strengthening institutional capacity and governance to effectively implement its current guarantee programs. The technical assistance will particularly focus on redesigning the processes, methodologies, products and current operations of ODIMM’s credit guarantee fund.

83. MoE and banks have expressed strong interest in a RSF, as it will help address issues relating to perceived high risks and lack of sufficient collateral in SME financing. Previously two separate initiatives were launched in Moldova to set up such a mechanism, one through ODIMM and another through GuarantInvest (which was launched by banks). However, both initiatives failed to achieve their intended purpose due to issues including significant deficiencies in the design of respective guarantee programs, lack of institutional capacity, and conflicts of interest.

84. Based on preliminary assessment of ODIMM’s existing credit guarantee program, significant institutional reform, capacity building and adjusting the design of the existing credit guarantee program are needed for successful implementation of risk sharing facility under the project. The current guarantee scheme has MDL 40 million in capital, which remains undisbursed. An additional Euro 1 million will be received from the EU by end 2014. Thus, adequate capitalization is not an impediment to the growth or utilization ODIMM’s credit guarantee fund to date. The main problems lie with: i) poor design of existing scheme; ii) inefficient processing; iii) governance structure; and iv) lack of awareness. MoE and ODIMM reiterated strong willingness to revamping the existing credit guarantee program based on successful examples. The technical assistance will help achieve this objective.

Sub-component 3C: Technical Assistance to MoE and banks on developing value chain financing models

85. The business linkages and value chains are not well–developed in Moldova and developing suitable value chain financing models could help in strengthening these linkages and introducing sustainable ways of financing small and medium enterprises. The technical assistance (TA) is expected to play a catalytic role in developing these financing mechanisms.

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86. This TA will focus on strengthening relevant government authorities’ and commercial banks’ understanding of advantages of lending to value chains players and facilitating role relevant government agencies can play in this regard. In particular, the technical assistance will help identify: (i) types of financial products that would satisfy lending requirements of key players in the value chain (i.e. producers, processors, marketing intermediaries, and service providers); (ii) lending models suitable to support value chain activities; (iii) roles of government authorities in the successful introduction of value chain financing products; and (iv) opportunities for pilot implementation of appropriate value chain financing models.

Box 1: Summary of CAMELS Methodology

CAMELS is a bank appraisal and supervisory rating system originally developed by the USA supervisory authorities. Subsequently, the same or similar methodologies started to be used by many other supervisory authorities.

The aspects covered and rated by the CAMELS system include the following:

• C-Capital Adequacy -- capital level and trend analysis; capital structure and compliance with risk-based capital adequacy requirements; bank’s risk profile; growth plans, including volume and risk characteristics of new business initiatives; earnings performance that supports bank’s growth, and allows the bank to remain competitive and maintain a strong capital position; interest and dividend policies and practices.

• A-Assets and Portfolio Quality – asset structure including type, concentration, liquidity and diversification of assets; effectiveness of loan underwriting, and the related policies, procedures and practices; loan concentrations and lending to connected parties; asset classification and provisioning practices; ability of management to properly administer its assets, including the timely identification and collection of problem assets; level, distribution and severity of classified assets; level and composition of nonaccrual and restructured assets; appropriateness of investment policies and practices; and related risk factors when compared to bank’s capital and earnings structure.

• M-Management Capacity and Governance – Bank’s organization in relation to its business profile; competent management with adequate managerial autonomy; appropriateness of the products and services offered in relation to bank's size and management experience; ownership structure, including “fit and proper” owners; stability of bank’s ownership structure; adequate governance, Board composition and Board practices; business strategy and adequacy of the policies and procedures covering each area of the bank’s operations (written, board approved, followed); existence and effectiveness of business and risk related committees (ALCO-Assets/Liability Management, Risk Committees, Credit Committees, Audit Committee, etc.) with adequate policies and procedures.

• E-Earnings and Profitability – Financial performance and profitability, particularly return on average assets and return on equity; net interest margin; net non-operating income and losses and effect on earnings; level, diversity, growth trends and stability of earnings; level and growth trends of operating costs and expenses and bank’s capacity to manage the costs; future earnings given bank’s business plans and prospects under a variety of economic conditions.

• L-Liquidity and Asset/Liability Management -- Balance sheet structure; finding structure and concentration; capacity to mobilize domestic resources; liquidity and liquidity management responsibility and practices; cash flow projections and management; re-pricing and management of maturity mismatch risk - differences in the maturity or timing of adjustments of bank assets, liabilities and off-balance-sheet instruments; contingency planning for funding to meet unanticipated events or periods of excess liquidity.

• S-Sensitivity to Financial Risks and Operational Risks -- Organization of financial and operational risk management functions and qualifications of risk management personnel; prudence of risk management policies and risk limits; integration of risk management with planning and decision-making; effectiveness of systems that measure and monitor risk; risk-taking practices and methods of control to mitigate concerns; quality of oversight by the Board and senior management; exposure to interest rate risk, currency risk and market risk at the instrument, portfolio, and balance sheet levels

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Annex 3: Results Based Financing

Moldova: Second Competitiveness Enhancement Project

Overview and Justification

1. The operation includes an innovative US$3 million (6.67 percent of the total loan) performance-based lending (PBL) funding element, in the reform of results-based financing. This has not been done before by the World Bank. The loan is one of three private sector development (PSD) operations under preparation in the region (the other two are Serbia and Armenia) that is using small PBL sub-components to leverage important reforms. The operations will be closely supervised and results rigorously evaluated and reported to confirm that the prototype meets expectations and is worthy of replicating.

2. Previous regulatory reforms have not moved forward as quickly or comprehensively as reform champions in government would have liked. Problems include differences between ministries exacerbated by underfunding, low capacity and weak institutions, and a lack of direction and accountability for results. PBL can often serve as a powerful incentive to encourage inter-ministerial coordination and give direction to government agencies through the simple expedient of disbursement-linked indicators and eligible expenditure program lending conditionality – in other words, paying for results. DLIs and EEPs are explained below.

3. In addition, the government has been acutely sensitive to the fact that technical assistance operations alone have not generated the expected results and especially in the PSD area where institutional strengthening remains a challenge and performance has lagged. The use of performance-based lending should address this concern.

4. The RBF element of this loan is designed to address these issues. It will support achievement of the government’s own priorities by introducing benchmarking, target setting, institutional accountability for results, and enhanced supervision and fiduciary oversight. The pecuniary incentives and accountability introduced through RBF are expected to build constituencies and forge commitment to reforms that should lead to increased sustainability of the activities funded and results achieved.

5. While the DLI rewards are relatively modest (total of US$3 million), the amounts are disbursed to the Treasury single account hence become highly desirable discretionary funding for the government. The DLI rewards also support the government’s priority objectives. Hence, disbursing to Treasury for meeting DLI results targets and ensuring EEPs are spent should improve inter-agency collaboration and build more cohesion around a core set of results.

6. Improvements in results will also be brought about through reinforcing government accountability. This will be done by reporting on the achievement of DLI results indicators within and between ministries, to the legislature, and to the business community and civil society. Publishing targets and results will demonstrate government commitment and allow stakeholders and citizens to monitor results, increasing accountability.

7. The government already has experience with World Bank-funded RBF operations in the health and education sectors, Development Policy Operations, and has also become familiar with

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this approach in its dealings with the European Union. The government counterparts have enthusiastically endorsed the PBL approach for CEP II. The RBF aspects of this project have been easy to design and should be easy to implement. Eligible expenditure programs (EEPs) are small (requiring only US$1 million to cover loan disbursements every 2 years) and comprised largely of salaries and expenditures that are directly relevant to the Ministry of Economy’s PSD effort. EEPs are also easily tracked and present no procurement or financial management issues, having been vetted by Bank specialists. Hence, additional implementation effort is minimal, and made easier by there being only three PBL disbursements.

Eligible Expenditure Program and Disbursement Linked Indicator Definitions and Considerations

8. The RBF portion of the loan will be disbursed against (and will reimburse) priority Ministry of Economy budget expenditures (EEPs) conditioned upon achievement of Disbursement Linked Indicators (DLIs).

9. Eligible Expenditure Programs are the government budget lines against which the results-based financing portion of the loan disburses. RBF is a traditional World Bank Investment Project Financing lending modality. Thus, it must reimburse expenditures. In RBF, the government’s own expenditures, through its budget lines, are taken as eligible expenditures for disbursement. Government budget line items related to the objectives of the project are selected as EEPs and vetted by the World Bank’s financial management and procurement specialists.

10. Because RBF does reimburse expenditures, the government’s expenditures under the EEPs in a period must be greater than the amount of RBF that the loan will disburse over the same period.

11. EEPs have been identified as staff compensation costs for the institution whose mandate is core to achieving the project’s objectives and results: the Ministry of Economy. The project supports achievement of MoE’s reform objectives and the mandate that it has been given by the government: to advance regulatory reform, SME development, exports, access to finance, and ensuring a sound enabling environment for business operations. All of the departments of MoE contribute to these goals, in various ways. MoE is also tasked with elaborating the strategies that set out the Government’s approach to addressing the objectives of this project: the Regulatory Reform Strategy, SME Development Strategy (which includes access to finance), and the export promotion strategy. ODIMM and MIEPO are semi-autonomous agencies linked to MoE. 42

12. The inclusion of the MoE staff compensation costs (compensation and social insurance contributions) as the proposed EEPs takes into account the strong performance of Moldova in the 2011 PEFA assessment, when it scored a strong (B+) score of the performance indicator PI-18 on effectiveness on payroll controls. This score reflects that there are strong integration mechanisms between personnel and payroll data, changes to the personnel records and payroll

42 Neither salaries nor operating costs for ODIMM and MIEPO have their own budget lines in the Government’s systems because they are funded as a percentage of the programs that they implement – so it is not possible to determine EEPs at the level of these institutions.

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are done on a timely basis, controls over changes to personnel records and payroll are strong, and there are regular payroll audits to identify internal control weaknesses and / or ghost workers.

13. The EEPs which will be reimbursed by this operation are enumerated below. Since rolling budgets are not done by the GoM, the team has conservatively adopted the 2013 actual expenditure for the five years of the loan. This yearly amount which is sufficient to justify the small RBL disbursements. Based on 2013 amounts and prior expenditure history, the World Bank team does not foresee that there would be any problem for the government to exceed the US$1 million per payment period required for RBF disbursement. Based upon past experience and government projections, actual expenditures would be expected to increase at 4 percent to 6 percent annually, and likely much more in the budgets that are directly impacted by the reforms that the operation will support. In addition, given that DLIs will be paid out every two years, the World Bank will be able to count as EEP budget expenditures from the previous year that have not been counted towards a prior DLI period. Thus, up to two years of EEP expenditure is potentially available.

14. DLIs are the conditions for disbursement. The DLIs have been carefully selected and are critical for the institutional improvements that underpin both the government’s export-led growth development agenda and loan objectives in the first two components – Regulatory Reform and SME Development. The DLIs are highlighted in bold in Annex 1: Results framework, and are presented in detail below.

RBF Disbursement Schedule

15. The operation will disburse its RBF funding three times against EEPs, conditioned on achieving the DLI results: at the end of the first, third and fifth years. The disbursement schedule is as follows:

Table 2: Disbursement Matrix*

Date Disbursement Type Amount (USD

million)

# DLIs/ USD/DLI

Conditions

12/31/15 Against EEPs, conditioned on achievement of DLI results targets

1.0 4 DLIs US$250,000

each

Payment will be effected when EEP and DLI results presented and vetted by Bank.** EEP expenditures must exceed disbursement amount. EEP may cover the period from Effectiveness to end December 2016 if needed. EEP must satisfy Bank fiduciary and safeguards requirements. DLI must be met based upon satisfactory presentation of evidence to Bank.***

12/2017 Against EEPs, conditioned on achievement of DLI results targets

1.0 4 DLIs US$250,000

each

Same as above except that the period for counting EEP expenditures may be two years

12/2019 Against EEPs, conditioned on achievement of DLI results targets

1.0 4 DLIs US$250,000

each

Same as above

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Notes: * Assumes 9/2014 Effectiveness Date and 1/2020 Closing date ** It is normal for clients to require 2-3 months to present results and corroborating evidence. **In the event DLI results targets are not met on time or are met early, or if spending on EEPs is below the amount to be disbursed as RBF, the World Bank has discretion to adjust payment amount and/or timing, as described below

16. Cases of under-achievement or over-achievement of DLIs: If DLIs are legitimate, then under-achievement of DLI results within the given time period may occasionally occur (i.e. the DLI result would not be met on time, and/or would be only partially met by the stated deadline). This may happen for a variety of reasons including DLI flaws, extenuating circumstances, and underestimation of efforts required for the DLI results to be achieved. Under-achievement of DLI results may also identify problems that had not been adequately addressed, thereby enhancing the project’s work on reform implementation and institutional strengthening. On the other hand, DLI results could be achieved ahead of schedule. Consequently, the World Bank will maintain total discretion over payment amount and timing in the case of under-achievement or over-achievement of DLI results. This discretion is included in virtually all of the World Bank’s PBL operations, and is intended to maintain client incentives to meet EEPs and especially DLIs. This discretion means that, in the case of under-achievement of results, the World Bank may decide to adjust the amount to be disbursed for partially-achieved results, make a partial payment and pay the rest once DLI result targets are met, fully delay payment until the result targets are achieved, pay at the time of the next payment period, or cancel or reallocate some or all of the payment. The Bank may also decide to adjust the DLI/result itself. The client will be expected to present a rigorous explanation of why the DLI was missed and a time-bound program to meet the results targets in the future. The appropriate course of action is decided by the World Bank at its discretion. In the case of over-achievement of results (meeting the result target before the deadline), the Bank may decide to pay before the deadline established in the DLI.

17. During the mid-term review, DLIs and EEP will be reviewed and may be altered if deemed necessary.

Eligible Expenditure Programs

18. The eligible expenditure programs that will be used in this operation are presented in the table below.

Table 3: Eligible Expenditure Programs for CEP II

Eligible Expenditure Programs 2013 Budget

MDL (thousands)

USD (thousands)

Article 111 Official salary, bonuses 11,761 880

01-Official salary 9,314 697

02-Bonuses to official salary 1,531 115

06-Material aid 916 69

Article 112 Mandatory state social insurance contributions 2,656 199

EEP Total for 2013 14,417 1,079

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19. Evidence of actual spending on EEP expenditures will be generated by client systems, which have been vetted by the Bank team. These will be audited and reported to the Bank according to the country’s normal auditing cycle.

Disbursement Linked Indicators

20. The DLIs have been selected to ensure that critical reform and institutional strengthening targets of the Government of Moldova, which MoE has the mandate to carry out, addressed by the loan are met. Where necessary, the inputs and responsibilities of other donor agencies have been taken into account to promote synergies and avoid overlaps. RBF will also provide an enhanced venue for ongoing discussions between the World Bank and GoM on the PSD reform agenda.

21. There are four DLIs. The DLIs have been determined in light of client and project objectives and the amounts necessary to provide incentives to the government and implementing agencies to respond to project objectives with concrete results. The indicators have also been carefully vetted to ensure the government controls results, they are feasible, and are well-defined by protocols. Following loan design and the areas in which reforms will be undertaken, they address the Regulatory Reform and institutional strengthening sub-component of the SME Development components. They do not address the matching grant or line of credit, given that these sub-components do not entail major reforms.

22. The table below sets out the DLIs. Because all DLIs support important reforms, DLI payments were determined in a straightforward manner by assigning the same amount to each DLI in each disbursement period (US$250,000/DLI/period).

23. Similar to the EEP conditionality, actual disbursement will require the client to provide evidence satisfactory to the Bank that DLI conditions have been met. Otherwise the condition for under-or over-achievement of results may be invoked (see paragraph 14 above). Also, similar to EEPs, DLI conditions and disbursement will apply to 2015, 2017 and 2019, but results will need to be tracked and reported annually to ensure implementation progress and to identify any problems. Table 4 below presents the DLIs and the associated protocols.

Table 4: Disbursement Linked Indicators for CEP I

DLI 2013 Baseline

12/2015 12/2017 12/2019

Regulatory Reform

Establish and apply performance indicators for government authorities with a business regulatory function.

System does not exist

Performance indicators and their baselines are established for selected Recipient’s authorities, acceptable to the World Bank; and

A system is in place for monitoring and publicly reporting these performance indicators, consistent with the action plan agreed on

Performance indicators and their baselines are established for selected Recipient’s authorities, in addition toto those selected for the period ending on 12/31/2015 and consistent with the action plan agreed on with the World Bank;

The performance indicators are

Performance indicators established for all the Recipient’s authorities with a business regulatory function that are included in the action plan agreed on with the World Bank;

The performance indicators are

monitored and publicly

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with the World Bank

monitored publicly reported in 2016 and 2017 per the action plan agreed on with the World Bank; and

The targets for each performance indicator are revised and validated for 2018 and 2019

reported in 2018 and 2019 per the action plan agreed on with the World Bank; and

The targets for each performance indicator are revised and validated for 2020 and the following years, per the action plan agreed upon with the World Bank.

Protocol: The World Bank and government will agree during the first several months of the project on the authorities to be covered by 2015, 2017 and 2019 DLIs. An action plan will be prepared that identifies the authorities with a regulatory function related to enterprises, a prioritization of authorities based on the degree of their impact on enterprises, and a plan for developing and extending performance indicators to priority authorities by each DLI milestone (end of 2015, end of 2017, and end of 2019). The action plan will also describe the methodology and protocols for monitoring and publicly reporting on the performance indicators within government and to the public (including the business community). The action plan will be developed using inputs provided by Consultant(s) hired by the government using project funds, and will be agreed upon between the government (as the Borrower) and the World Bank in an exchange of letters.

Performance indicators will be developed for the authorities according to the timeline and methodology set out in the action plan. Indicator baselines and target values will be established for the five-year period, with especial attention to the next two years. Reports identifying all indicators, progress in implementation of existing indicators, and definition of new indicators and targets will be posted on a website and made public to the enterprise community and civil society.

The indicators and protocols will be agreed on with the authority, the supervising Ministry, and the Ministry of Economy, and approved by government. Through the process of supporting implementation of CEP II, the World Bank will assist where desired by the government, and will also vet the indicators.

Through 2016-2019, the indicators will be monitored and reported for all authorities that were monitored in 2015, and additional authorities will be included. In 2017 and 2019, the targets for the indicators will also be evaluated and updated. All of this work will be performed in accordance with the agreed-upon action plan. The action plan may also be amended by mutual agreement between the World Bank and MoE if these parties agree that such amendments would be required to better assist the government in achieving its objectives and implementing the system of performance indicators. In all years, the government and Bank teams will systematically review progress towards meeting indicators and make any decisions deemed necessary to resolve problems.

For each DLI, the government will prepare a report to be delivered to the World Bank as evidence of achieving the DLI result target. It is expected that by 2019 a sustainable process will be in place that will continue the exercise of annually evaluating, resetting and reporting progress against key indicators.

12/2015 12/2017 12/2019

Cumulative number of reforms enacted according to the Action Plan to reduce regulatory barriers and remove anti-competitive elements of legislation and regulation

0 2 cumulative actions of the Action Plan

implemented

4 cumulative actions of the Action Plan

implemented

6 cumulative actions of the Action Plan

implemented, including actions to

remove anti-competitive elements

of legislation and

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reduce other regulatory barriers

Protocol: The specific laws and regulations to be amended for each reform will be agreed upon between the World Bank and the government in an Action Plan that will be developed as described in the second paragraph below. In each DLI period, there must be one reform to remove barriers to competition, and one additional reform to reduce the regulatory burden. The reforms in the area of competition will be agreed upon based on outputs of project activities that recommend legislative changes to eliminate aspects that create the opportunity for anti-competitive behaviors, as part of the Regulatory Reform sub-component on reform implementation support. The reforms to reduce the regulatory burden through other channels will be agreed on based on the priority reforms that are identified through the project’s support to the government in other activities under the Regulatory Reform component. The following project activities will help identify priority reforms: (i) strengthen oversight of reform strategy implementation; (ii) monitor the impact of public authorities’ impacts on the business community through their regulatory functions; (iii) ensure that laws and regulations do not impose unjustified costs on businesses; and (iv) streamline permissive documents by reducing overlaps/duplications and implementing one-stop shops.

For Year 1 DLIs (December 2015), the World Bank and the government will agree on the required reforms and amendments in an Action Plan to be produced by the end of January 2015 (assuming the outputs described above are available in a timely manner). The World Bank and the government will agree on the Year 3 reforms (DLI in December 2015) in an update to the Action Plan that will be produced by the end of December 2016. The World Bank and the government will agree on the Year 5 reforms (DLI in December 2019) in an update to the Action Plan that will be produced by the end of December 2018. MoE and the Competition Council will use the project activities described in the first paragraph above to identify priority reform areas and associated reforms. In addition to documenting the reforms to be carried out for achieving the DLI result targets, the Action Plan will also include a more comprehensive list of priority reforms that is informed by the outputs and outcomes of project activities as described above. The World Bank and the government will discuss these through the Project’s normal implementation support activities.

In consultation with the Competition Council and other public authorities that are affected by the reforms, MoE will draft the Action Plans for consideration and no-objection by the World Bank. The government and the World Bank will agree on the Action Plan through an exchange of letters by the dates listed for each DLI (January 2015, December 2016, December 2018).

The government’s progress making the legislative changes to address these areas will be actively monitored during the project, through the normal implementation support channels. Reforms for each DLI will be considered to be achieved when the legal amendments have been adopted by whichever authority is charged with approving such changes so that they can become operational, and they are published in the Official Gazette.

SME Development 12/2015 12/2017 12/2019

Adoption and implementation of a Strategy for ODIMM that promotes organizational effectiveness and reflects segmentation of delivery assistance mechanisms and enterprise

ODIMM strategy, acceptable to the World Bank, is adopted by the government43; and

The government

ODIMM strategy is implemented, budgeted, and monitored and evaluated effectively in 2016 and 2017.

ODIMM strategy is implemented, budgeted, and monitored and evaluated effectively in 2018 and 2019;

43 According to the current applicable legislation, the Government entity to adopt the ODIMM strategy is MoE. If the applicable legislation changes, then the strategy must be adopted by whichever Government entity has the mandate to do so.

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needs allocated adequate budget to ODIMM based on its strategy.

the Strategy is updated, in a manner acceptable to the World Bank and adopted by the government;44 and

The government allocated adequate budget to ODIMM based on its strategy.

Protocol: A strategy document for ODIMM will be developed and will include: (i) design of programs and services to serve ODIMM’s key client segments; (ii) delivery mechanisms for the programs and services; (iii) organizational and governance structures to ensure effective delivery of these programs and services, including position descriptions and qualifications; (iv) description of interactions with other relevant institutions in Moldova (such as sector associations, incubators, business parks, innovation agencies, etc.); (v) short-term and medium-term budgets that will allow the agency to implement the strategy; and (vi) an action plan for implementing the strategy, with milestones, indicators, and monitoring mechanisms.45

An important input into the design of the strategy will be the SME market segmentation study to be carried out using project preparation grant funds. This segmentation study will show areas of growth and stagnation in exports and sales in the domestic market (to the extent possible), examining factors such as industry/sub-sector, location, degree of product sophistication, end markets, and others. The segmentation study will also be complemented by needs assessments. These analyses will be key to inform the design of programs to address SMEs’ needs effectively. The project may also support other analyses that will serve to inform the strategy. The strategy will be developed by a Consultant to be hired using project funds.

Per the current relevant legal frameworks, the strategy for ODIMM will be adopted by the Ministry of Economy. If the applicable legislation changes, then the strategy and its updates must be adopted by whichever government entity has the mandate to do so.

As evidence of achieving the DLI result target on strategy approval by December 2015, the government will present to the World Bank: (i) evidence that the work described in the paragraph above has been successfully completed, and ii) evidence of all internal governmental and ministerial actions required for approval and implementation of the ODIMM strategy (publication of a ministerial or government Decision in the Official Gazette and whatever else is required by the applicable legislation), and a document summarizing all steps taken, along with the final, updated strategy.

In addition, and also required for DLI achieving the DLI result target, in 2014 a budget for ODIMM that is adequate for carrying out the work programs outlined in the strategies (per point (v) in the description of the strategy above) will be approved for 2015. This budget may draw on government resources as well as donor resources. In 2015 and every year thereafter, budgets adequate to support the approved work programs at ODIMM will be introduced into the government’s budget exercise and approved.

As evidence of DLI achieving the DLI result target on budgeting for the RBF disbursements in 2015, 2017, and 2019, the government will present to the World Bank the annual budget submissions (including the intervening years of 2016 and 2018) detailing programs and amounts projected, and the annual budgets actually approved. These budgets can come in the form of government budget line items for ODIMM, funding for the programs to be implemented through the SME Development Strategy,

44 See previous footnote 45 Once the strategy has been developed, the technical assistance to be provided through this operation will help support implementation of the strategy by developing tools required for ODIMM to effectively perform its role. These include monitoring and evaluation systems, management information systems (MIS), communication strategies, and others (see Annex 2).

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and/or evidence of adequate and sustainable funding from donor resources.

Should allocated budget not be spent or work program budgets be underfunded or actual budget allocations fall significantly short of the budgets approved, then the World Bank will determine at its discretion whether the DLI requirement of adequate budgeting has been met. Reduction of budgeted amounts from one year to another and/or inadequate interim year budgets will generally be taken as an indication of under-budgeting unless fully justified by specific work programs. The government will be responsible for providing work program budget and actuals to the World Bank.

As evidence of DLI achieving the DLI result target on implementation and monitoring and evaluation for the RBF disbursements in 2017, and 2019, the government will report on strategy implementation against the milestones and targets included in the strategy’s action plan.

As evidence of strategy update and adequate budget allocated for the 2019 DLI, the same procedures will be followed as for the strategy adoption in 2015 and budgeting for prior years, to be applied to the budget in 2020 and budget projections for 2021 and 2022 (per the government’s medium-term budget framework).

Also, over the course of the operation, the government and World Bank teams will monitor and evaluate progress through the technical assistance to be provided through the operation, the Project Implementation Unit’s activities, and implementation support to be provided by the World Bank throughout the process. It is expected that the government will provide reports on progress in meeting indicators during implementation support visits. At the end of each year, the World Bank and the government will review progress and determine if the content, scheduling, and budgeting of ODIMM’s work programs are sufficient to achieve the DLIs.

12/2015 12/2017 12/2019

Adoption and implementation of a Strategy for MIEPO that promotes organizational effectiveness and reflects market segmentation and improved export promotion delivery assistance mechanisms, and adoption of an export promotion strategy and corresponding updates to it

MIEPO strategy, acceptable to the World Bank, is adopted by the government; 46 and

the government allocated adequate budget to MIEPO based on said strategy.

MIEPO strategy is implemented, budgeted, and monitored and evaluated effectively in 2016 and 2017

MIEPO strategy is implemented, budgeted, and monitored and evaluated effectively in 2018 and 2019;

MIEPO strategy is updated, in a manner acceptable to the World Bank and adopted by the government;47 and

Government allocated adequate budget to MIEPO based on its strategy.

Protocol: A strategy document for MIEPO will be developed and will include: (i) design of programs and services to serve MIEPO’s key client segments; (ii) delivery mechanisms for the programs and services; (iii) organizational and governance structures to ensure effective delivery of these programs and services, including position descriptions and qualifications; (iv) description of interactions with other relevant institutions in Moldova (such as sector associations, innovation agencies, etc.); (v) short-term and

46 According to the current applicable legislation, the Government entity to adopt the MIEPO strategy is MoE. If the applicable legislation changes, then the strategy must be adopted by whichever Government entity has the mandate to do so. 47 See previous footnote

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medium-term budgets that will allow the agency to implement the strategy; and (vi) an action plan for implementing the strategy, with milestones, indicators, and monitoring mechanisms.48

Important inputs into the design of the strategy will include: analyses of export opportunities under the upcoming DCFTA with the EU, the export promotion strategy that the Government of Moldova will develop, and the SME market segmentation study to be carried out using project preparation grant funds. These studies will then be complemented by needs assessments to be supported by the project. These analyses will be key to inform the design of programs to address exporters’ needs effectively. The project may also support other analyses that will serve to inform the strategy. The strategy will be developed by a Consultant to be hired using project funds.

Per the current relevant legal frameworks, the strategy for MIEPO will be adopted by the Ministry of Economy. If the applicable legislation changes, then the strategy and its updates must be adopted by whichever government entity has the mandate to do so.

As evidence of achieving the DLI result target on strategy approval by December 2015, the government will present to the World Bank: (i) evidence that the work described in the paragraph above has been successfully completed, and (ii) evidence of all internal governmental and ministerial actions required for approval and implementation of the MIEPO strategy (publication of a ministerial or government Decision in the Official Gazette and whatever else is required by the applicable legislation), and a document summarizing all steps taken, along with the final, updated strategy.

In addition, and also required for achieving the DLI result target, in 2014 a budget for MIEPO that is adequate for carrying out the work programs outlined in the strategies (per point (v) in the description of the strategy above) will be approved for 2015. This budget may draw on government resources as well as donor resources. In 2015 and every year thereafter, budgets adequate to support the approved work programs at MIEPO will be introduced into the government’s budget exercise and approved.

As evidence of achieving the DLI result target on budgeting for the RBF disbursements in 2015, 2017, and 2019, the government will present to the World Bank the annual budget submissions (including the intervening years of 2016 and 2018) detailing programs and amounts projected, and the annual budgets actually approved. These budgets can come in the form of government budget line items for MIEPO, funding for the programs to be implemented through the government’s export promotion strategy documents, and/or evidence of adequate and sustainable funding from donor resources.

Should allocated budget not be spent or work program budgets be underfunded or actual budget allocations fall significantly short of the budgets approved, then the World Bank will determine at its discretion whether the DLI requirement of adequate budgeting has been met. Reduction of budgeted amounts from one year to another and/or inadequate interim year budgets will generally be taken as an indication of under-budgeting unless fully justified by specific work programs. The government will be responsible for providing work program budget and actuals to the World Bank.

As evidence of achieving the DLI result target on implementation and monitoring and evaluation for the RBF disbursements in 2017, and 2019, the government will report on strategy implementation against the milestones and targets included in the strategy’s action plan.

As evidence of strategy updates and adequate budget allocated for the 2019 DLI, the same procedures will be followed as for the strategy adoption in 2015 and budgeting for prior years, to be applied to the budget in 2020 and budget projections for 2021 and 2022 (per the government’s medium-term budget framework).

48 Once the strategy has been developed, the technical assistance to be provided through this operation will help support implementation of the strategy by developing tools required for MIEPO to effectively perform its role. These include monitoring and evaluation systems, management information systems (MIS), communication strategies, and others (see Annex 2).

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Also, over the course of the operation, the government and World Bank teams will monitor and evaluate progress through the technical assistance to be provided through the operation, the Project Implementation Unit’s activities, and implementation support to be provided by the World Bank throughout the process. It is expected that the government will provide reports on progress in meeting indicators during implementation support visits. At the end of each year, the World Bank and the government will review progress and determine if the content, scheduling, and budgeting of MIEPO’s work programs are sufficient to achieve the DLIs.

24. In the event of under-achievement of any DLI or a portion of a DLI, and/or with EEPs, the World Bank, at its discretion, may invoke the condition for under-or over-achievement of results in paragraph 14 above. It is noteworthy that in other RBF operations, under-achievement has occasionally led to the identification and remedying of problems that have contributed importantly to project results.

Financial Management, Procurement, and Safeguards Aspects

25. The financial management and procurement aspects of the operation that are relevant for the EEPs are documented below. This text is also presented under the relevant headings in Annex 4: Implementation Arrangements.

26. The Safeguards Specialist has confirmed that the selected EEPs do not pose any issues related to safeguards.

Financial Management and Procurement

27. Financial Management Assessment Summary: The financial management of the Eligible Expenditure Programs (EEPs) for results-based financing will rely heavily on systems and procedures existing within the Ministry of Economy. Specifically, the operation will rely upon the existing accounting procedures and internal control framework to ensure that all procedures and controls are adequately documented, contract monitoring and invoice payment procedures are consistently adhered to and documented. The approved annual budgets are entered into the accounting system and used for periodic comparison with actual results as part of the interim reporting. The accounting staff within MoE complies with the statutory requirements on qualifications and experience. The Bank team observed a high-level of compliance by MoE’s accounting staff with national budget management and reporting requirements. This is also confirmed by the audit report performed by the Court of Accounts for financial year of 2012.

28. Budgeting: The budgeting of EEP would rely on the established procedure for budget planning at the government’s level. Currently, the MoE budget on EPP are presented in sufficient details to capture MoE expenditures, and its preparation follows the Borrower’s regular budget and fiduciary management processes. The budget execution is monitored through the regular budget reports submitted to the Ministry of Finance.

29. Flow of Funds and Disbursement: Disbursements against EEPs for this operation will be report-based and as such, will utilize the budget reports generated by the Ministry of Economy and reported to the Ministry of Finance. These reports show both the planned expenditures for the year and the actual expenditures executed to-date. Disbursements would be requested in accordance with the Disbursement Matrix included under Table 2. Withdrawal applications

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would be sent by the MoF, for the amounts defined for each disbursement linked indicator, accompanied by the relevant budget and treasury reports and documentation for the achievement of DLIs. Full disbursements under these components would be done if the team certifies the satisfactory achievement of the prescribed DLIs. Otherwise, the condition for under-or over-achievement of results as described above would be applicable.

30. Accounting Policies and Procedures: The record-keeping of EEPs will follow the practice already established at MoE, which is done in accordance with accounting regulations for budgetary institutions in Moldova. The MoE accounting systems are adequate, and the quality and timeliness of key financial reports, record management and reconciliation of accounts are satisfactory. Modified accrual basis is used. According to internal procedures, the actual expenditures are compared to the budget on a monthly basis; explanations for significant budget variations are provided to MOF.

31. Internal Controls: MoE has well performing internal audit unit which covers EEP in their annual work programs.

32. Reporting and Monitoring: The PIU will be responsible for submission of quarterly IFRs covering one calendar quarter, format and content of which have been agreed upon and are attached to the Minutes of Negotiation. The IFRs will consist of two basic parts. One part of the reports will be the MoE budget execution report, which will show details by type of expenditure (compensation costs: compensation and social insurance contributions) in compliance with the national economic budget classification system. This part of the reports will be provided by the Ministry of Economy to the PIU for further consolidation. The disbursement under RBF components will be made against the first part of the reports.

33. Procurement: There will be no procurement under the results-based financing. The EEPs include staff compensation cost and mandatory state social insurance. However, if any procurement is foreseen under the selected budget lines, it will follow the Bank Procurement and Consultants Guidelines.

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Annex 4: Implementation Arrangements


Project Institutional and Implementation Arrangements

A. Overall Arrangements

1. The Ministry of Economy established a Project Implementation Unit (PIU) as a dedicated legal entity, reporting to MoE, to implement CEP I (through Government decision No. 895 of August 25, 2005). This PIU will oversee implementation of the entire CEP II project. The PIU will be the implementing agency for the Regulatory Reform and SME Development components. The Ministry of Finance’s Credit Line Directorate will be the implementing agency for the Line of Credit.

2. The PIU is currently participating in the design of CEP II and administering a recipient-executed project preparation grant. It currently has a Director (who has been with the PIU since 2006), Financial Management Specialist, Accountant, and part-time Procurement Specialist. Once CEP II begins implementation, this “mini”-PIU will be scaled up as necessary to implement project activities. The current Director is a proven manager and has a productive relationship with the Minister.

3. The PIU will have overall responsibility for:

a. Applying the relevant financial management and procurement rules to the project, including preparing financial management reports, ensuring conduct of the annual project audit, procurement documents for clearance by the TTL, and other activities that fall within this responsibility.

b. Following the project management plans (to be prepared), preparing annual procurement plans and discussing them with the TTL, and ensuring that the project moves forward in a timely and efficient way to achieve its objectives.

c. Serving as the principal point of contact between the World Bank and the Government of Moldova.

d. Liaising with MoE and MoF to ensure the project is meeting their expectations.

e. Liaising with the CLD and all project beneficiaries (ODIMM, MIEPO, RIA Secretariat, other regulatory institutions) to ensure smooth implementation of project activities.

f. Monitoring project results indicators, with input from project beneficiaries as required.

g. Other activities that are in line with World Bank guidelines.

4. The PIU will include a component coordinator for the Regulatory Reform Component (1 staff member) and the SME Development Component (1 staff member). The Credit Line Directorate will fund its activities to administer the Line of Credit through the fee that it charges to administer the Line of Credit.

5. Implementation arrangements by component are discussed further below.

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B. Component 1: Regulatory Reform

6. For this component, the PIU will play its traditional role as outlined above. It will develop terms of reference in consultation with the Ministry of Economy and other project beneficiaries and implement them as described in paragraph 3.

7. The Regulatory Reform Component Coordinator at the PIU will also be responsible for:

(a) Coordinating with the beneficiaries and partners in the project component. This includes: the Ministry of Economy’s Department for Business Development, the RIA Secretariat and Working Group of the State Commission on Regulation of Entrepreneurial Activity, public authorities issuing permissive documents, the Licensing Chamber, the e-Government Center, the Competition Council, the Public Administration Academy, and others.

(b) Ensuring that the various elements under the component (for instance, assessment of the cost of regulations on companies using the Standard Cost Model, identification of regulations that hinder competition, and update of the regulatory reform strategies) inform and feed into one another.

(c) Coordinating with other donors active in this area, such as IFC, the World Bank-funded project with the e-Government Center, the EU (especially in the area of competition), the USAID BRITE project, and other relevant projects. The World Bank implementation support team for CEP II will also work to ensure smooth donor coordination.

C. Component 2: SME Development

Sub-component 2A: Institutional Strengthening

8. Most of the SME Component activities will be implemented by consultants or consulting firms (both local and international experts) in coordination with ODIMM or MIEPO and under supervision of the PIU as discussed above. ODIMM will be the primary beneficiary of those activities related to overall SME development and growth of SMEs in Moldova. MIEPO will be the primary beneficiary of those activities related to exports of Moldovan goods and services by SMEs.

9. Project activities will be closely coordinated with other government and donor activities related to SME development and export development. Some existing projects, such as Agricultural Competitiveness and Enterprise Development and Competitiveness Enhancement and Enterprise Development financed by USAID, and others financed by GIZ or the European Union, have already conducted market studies and strategy documents in various areas that are of value to the implementation of CEP II. There may also be potential for financing some of the clients of those and other donor projects from the MGF or other access to finance activities by World Bank projects.

Sub-component 2B: Matching Grant Facility

10. The PIU will be the Matching Grant Administrator responsible for the implementation of the Matching Grants Facility. A team will be recruited and trained to lead the MGF at the PIU. In

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addition, the project will support the PIU to be prepared for this task through the provision of technical assistance for, inter alia: i) developing the matching grant manual; ii) designing the communication strategy; and, iii) defining the monitoring and evaluation strategy. Before or during the mid-term review, the option of transferring the “front office” of the MGF to ODIMM or MIEPO will be evaluated, considering their roles in promoting SME and export growth. If the “front office” of the MGF is transferred to ODIMM or MIEPO, the PIU will still retain responsibility for financial management, procurement, and safeguards aspects, as in CEP I.

Matching Grant Process

11. In order to provide matching grants to selected Moldovan SMEs for accessing to business development services, the project will follow the steps described below:

12. Establish MGF Administrator Team at the PIU. A team will be recruited and trained to lead the MGF. The team will be composed by: i) a subcomponent coordinator; ii) a matching grant officer; iii) a monitor and evaluation officer; iv) a communication officer, and v) an assistant. This team will be responsible for the management, implementation, and supervision of the matching grant facility according the provisions of the Financing Agreement. This team will work under the supervision of the PIU Director and supported by the fiduciary and other team members within the PIU.

13. Develop the Matching Grants Manual. The PIU will be responsible to:

(a) Prepare, under terms of reference satisfactory to the Bank, and furnish to the Bank for its review and approval a matching grants manual, consistent with the provisions of the Financing Agreement, setting forth, inter alia:

(i) The eligibility criteria for a Beneficiary to receive a Matching Grant

(ii) The rules and procedures for the review, approval and processing of Matching Grants;

(iii)The accounting, disbursements, financial management, procurement, social and environmental procedures to be followed in the administration of Matching Grants;

(iv) A list of activities that may be financed under Matching Grants;

(v) A negative list of activities that may not be financed under Matching Grants.

(b) Afford the Bank a reasonable opportunity to review such manual, and thereafter promptly adopt such manual as shall have been approved by the Bank (“Matching Grants Manual”).

14. No funds will be disbursed under the MGF until the MGF manual detailing further the rules and the administrative and fiduciary methods to be used is developed in form and substance satisfactory to the Bank and adopted by the PIU.

15. The Eligibility Criteria for Matching Grants, outlined in the MGF Manual, will be as follows: No Beneficiary shall be eligible for a Matching Grant, unless GoM shall have determined, on the basis of an appraisal conducted in accordance with the provisions of the

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Matching Grants Manual and of the financial agreement, that the proposed Beneficiary of such Matching Grant and the proposed activities for which the Matching Grant is to be made satisfy the following eligibility criteria, as further elaborated in the Matching Grants Manual:

The proposed Beneficiary: (i) is a Moldovan privately owned (defined as 100 percent private or 75 percent private per the JSC Law – to be confirmed with MoE) micro, small or medium enterprise; (ii) has prepared a detailed application form (Business Improvement Project), setting forth the activities proposed to be included in the application, and a financing plan for such activities to be developed on the basis of the Matching Grants Manual; and (iii) is able to provide the cost-sharing percentage set forth in the Matching Grants Manual of the total cost of the proposed activities out of resources other than the Matching Grant.

16. Develop the Communication Strategy: The MGF Administrator team at the PIU will be responsible for defining and implementing (or overseeing the implementation of) a broad communication strategy. In a first phase, the communication strategy will be used to make information available to all potential beneficiaries interested in receiving business development services. Communication material will include information such as: how the MGF works, how to apply, who can apply, what kind of activities can be financed, what percentage and amounts will be financed, and where to submit the proposals will be develop and deliver to the SMEs. In a second phase the communication strategy will be used to showcase how the MGF beneficiaries are implementing their business improvement projects and what their experience working with the business service providers has been. In a third phase the communication strategy will be used to disseminate the results achieved by the MGF beneficiaries.

17. Preparation of Business Improvement Projects (BIP): SMEs that apply for the matching grant facility will complete a detailed application presenting a “business improvement project” that will directly impact their competitiveness in export-oriented value chains (direct or indirect exports). The SME applicants will be responsible for developing their BIPs according to their needs. Each BIP will have goals such as: develop a new export product, export existing products to new markets, exporting for the first time, selling new products into export-oriented value chains, or selling to a new customer in an export-oriented value chain. Companies will state the package of services that they require to achieve this objective, for instance: a market study; assistance from an industry expert in product development; assistance from an industry expert in product packaging, branding, etc.; business process re-engineering to improve productivity; international quality management certification (e.g. ISO); assistance from a marketing expert; and many more.

18. Technical review and validation process: Each proposal submitted by the SME applicants will be reviewed by technical experts and validated by a committee comprised of representatives from the public and private sectors. After the business improvement project is prepared and submitted by the potential beneficiary, the proposal will pass through three instances before it is approved, as follows:

(a) Compliance Review: The first review will be done by the MGF Administrator team in charge of this subcomponent when the SME submits the proposal. The team will confirm if all the documents and requirements are complete based on the MGF manual. If the proposal is not complete, the SME will be advised of what is needed. If the proposal

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is complete the SME will get a receipt with the date and hour their proposal was submitted.

(b) Technical Review: The second review will be conducted by a technical team composed by representatives of ODIMM, MIEPO, MoE, and private sector representatives (which may include the Chamber of Commerce and Industry and relevant independent industry experts, among others). The technical team will review that the proposed activities defined in the business improvement project: (i) are technically feasible and environmentally sound; (ii) have been defined on the basis of the Matching Grants Manual; (iii) have been defined in accordance with the Safeguard Documents; and (iv) are in compliance with all laws and regulations of the Recipient. As a result of this review, the technical team will recommend the approval or the rejection of the proposal, or will require some adjustments or clarifications to the SMEs before their final decision. The technical review committee will document their recommendations on MGFs to approve, request adjustments/clarifications, or not approve in minutes.

(c) Validation: The proposals that are recommended to be approved and the minutes of the technical review meeting will be presented by the technical team to a Validation Committee integrated by the authorities of the institutions mentioned above. The validation committee will be informed about the number of proposals analyzed, from which sectors, geographical location, size of firms, expected results, among others. In this final instance the validation committee will decide if they approve the minutes of the technical review meeting and if they validate the business improvement projects recommended to be awarded with a matching grant.

19. Matching grant agreement: The GoM will make each Matching Grant to a Beneficiary under an agreement (the Matching Grant Agreement) on terms and conditions approved by the Bank, which shall include the following:

(a) The Matching Grant shall: (i) be made on a grant basis; and, (ii) finance up to 50 percent of the cost of the business improvement project.

(b) GoM shall obtain rights adequate to protect its interests and those of the Bank, including the right to:

(i) Suspend or terminate the right of the Beneficiary to use the proceeds of the Matching Grant, or obtain a refund of all or any part of the amount of the Matching Grant then withdrawn, upon the Beneficiary's failure to perform any of its obligations under the Matching Grant Agreement; and

(ii) Require each Beneficiary to: i) carry out its activities with due diligence and efficiency and in accordance with sound technical, economic, financial, managerial, environmental and social standards and practices satisfactory to the Bank; ii) provide, promptly as needed, the resources required for the purpose; iii) procure the approved business development services to be financed, defined in the business improvement project, in accordance with the provisions of the Matching Grants Manual; and, iv) maintain policies and procedures adequate to enable it to monitor and evaluate the progress of the activities and the achievement of its objectives.

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(c) GoM shall exercise its rights and carry out its obligations under each Matching Grant Agreement in such manner as to protect the interests of GoM and the Bank and to accomplish the purposes of the Financing. Except as the Bank shall otherwise agree, the Recipient shall not assign, amend, abrogate, terminate, waive or fail to enforce any Matching Grant Agreement or any of its provisions.

20. BIP Implementation: After the MG Agreement is signed, the beneficiary will be responsible for conducting the procurement process to select the business service providers that will support them to implement the activities and reach the objectives defined in the business improvement project. Beneficiaries will have the option to select the business service providers based on a quality and cost analysis. For each business service provider to be hired, the beneficiary will develop a terms of reference defining scope, time, and budget. At least 50 percent of the total cost will be paid with resources coming from the MG beneficiary. The remaining percentage will be covered with the awarded portion of the matching grants after the deliverables defined in the terms of reference are received and approved by the MG beneficiary.

21. Monitoring and Evaluation: An M&E strategy will be developed for the MGF during the first year at the beginning of project implementation. This strategy will ensure that key information is regularly collected and tracked so the MGF Administrator can measure the progress towards the subcomponent objectives. Baseline information of SMEs will be collected through the Business Improvement Project (application) form in order to generate information for measuring the results of the business service providers’ support. In addition, a team integrated by representatives from the PIU, ODIMM, MIEPO and the MoE will carry out site visits to the matching grant beneficiaries to evaluate the conditions of the enterprises to execute the business improvement projects, as well as to supervise the progress achieved by the firm during the implementation phase of their activities.

22. Dissemination: The results of the MG beneficiaries will be disseminated to a broader universe of SMEs. These dissemination activities will be organized in coordination with ODIMM and MIEPO. Videos and photos captured during the site visits will be used as a communication material to show that SMEs achieved their objectives. It is expected that SMEs will: i) improve existing products and services; ii) create new products and services; iii) improve production processes; iv) improve business management; v) improve business image; vi) find new customers and markets; and, vii) to create and strengthen partnerships within the value chain. Additionally, as a result of the M&E activities the PIU will be able to show if new export-oriented activities were developed and if additional business development services were demanded by the MG beneficiaries and paid the full cost of them after they received the support from the CEP II.

23. Impact Evaluation for Matching Grants: Finally, a quantitative impact evaluation will be conducted to assess the effects of the grants on SMEs’ outcomes. The project will conduct a randomized control trial in which a subset of all eligible SMEs will randomly be assigned to receive the matching grants. The randomized selection will be only made among the applicants that obtain final approval of their business improvement projects (matching grant applications), through the technical review and validation process outlined above. The firms that are not selected to receive matching grants will be part of the control group. These firms will be allowed to apply for a matching grant again, after the information required for the impact evaluation is

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collected. In addition, by randomizing the selection of matching grant beneficiaries the Project have an instrument with which to decide how to allocate the scarce MGF resources among the applicants who pass the approval process. This approach, also known as oversubscription design, is particularly useful for evaluating programs in which the demand for the intervention exceeds the limited resources available.

24. To understand whether or not SME competitiveness can be enhanced by matching grants alone, and to understand whether combining matching grants with closer monitoring and frequent site visits has an impact, the project will conduct the impact evaluation using two alternative treatment groups. The first treatment group will consist of firms who obtain matching grants, whereas the second treatment group will consist of firms who obtain matching grants and have closer monitoring and more frequent site visits from the MGF Administrator. The evaluation will then compare whether the outcomes of the two treatment groups are statistically different from each other. In this way, it will be possible to identify the effect of the matching grants on their own, and the combined effect of the matching grants and the more intense monitoring approach.

D. Component 3: Detailed Implementation Arrangements for Line of Credit

25. The Line of Credit will be administered through an apex arrangement. The apex will be placed with the Credit Line Directorate, a specialized entity operating under the Ministry of Finance. The CLD has ample experience with the Bank’s LOCs, and has also administered credit lines of a number of other international institutions. The CLD will utilize the Operational Manual developed for the Credit Line component, which will specify details about implementation arrangements and the related functions.

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Figure 2: Implementation Arrangements for the Line of Credit Component

26. CLD Functions

The apex functions of the CLD will include:

• Preparing and disseminating information about the Project to eligible beneficiaries; • Reviewing and approving sub-loan applications received from PFIs; • Signing SFAs for approved subprojects with PFIs confirmed as eligible PFIs to refinance

the PFI sub-loans to final beneficiaries (clients); • Preparing necessary documentation for PIU at the MoE to effect payments under the

Credit Line component; • Monitoring inflow of interest and principal from the participating banks; • Monitoring compliance of PFIs with terms and conditions of Subsidiary Finance

Agreement; • Preparing, in a format acceptable to the Bank, quarterly progress reports; • Facilitating external audits of the project accounts and records for LOC Component; and, • Assisting the Bank supervision missions.

Project Steering Committe (Ministry of Finance and Ministry of Economy)

CLD

PFIs

Project Steering Committee (Ministry of Finance and Ministry of Economy)

CLD

PFIs

PIU MoU

Subsidiary finance agreements

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27. PIU Functions

The PIU operating under the MoE will have the following functions:

• Maintaining the Designated Account (DA), preparing withdrawal applications, maintaining the local project account, and maintaining summary records of the flow of resources;

• Preparing, in a format acceptable to the Bank, quarterly progress reports; • Disbursement of credit line related payments reviewed and cleared by CLD; and • Making arrangements for external audits of the project accounts and records, including

the Designated Account, local project account, etc., as requested by the Bank financial management rules.

28. PFI Responsibilities

The PFIs’ responsibilities will include:

• Preparing and disseminating information about the Project to eligible beneficiaries; • Review of sub-loan requests from borrowers (i.e. final beneficiaries); • Appraisal of the sub-project to be financed and of the creditworthiness and financial

status of the potential borrowers; • Approval of sub-loan application by the Credit Committee once the application has been

endorsed by the PIUs/Bank, as applicable; • Assisting borrowers in the application of efficient procurement practices under close

supervision of CLD; • Making sub-loan related payments to borrowers/beneficiaries in a timely manner against

appropriate documents (to evidence use of funds, procurement aspects); • Ensuring that payments of interest and principal are made as due. On due-dates of interest

and/or principal, the participating bank will provide CLD with a written report on sub-loan performance, deviation of payments of PFIs’ borrowers from agreed terms, and an updated and credit history of the borrowers;

• Submitting annual external audits prepared by reputable external auditors on the basis of International Financial Reporting Standards (IFRS) financial statements, to be submitted to the CLD and the World Bank no later than six months after the end of each financial year;

• Keeping all necessary records and payment evidence, as specified in legal documents.

Line of Credit: Functional Responsibilities and Arrangements

29. Financial Management and Reporting. The CLD was not assessed from financial management point of view on the basis that: (i) it will not be involved in the funds flow, accounting and reporting; (ii) CLD has the adequate capacity to manage credit lines and this has been proved throughout the implementation of previous investment operations funded by the Bank. The past supervision reports denoted that CLD staffing arrangements were adequate and the staff was trained in financial management and disbursement matters in the Bank-financed projects. The CLD has automated accounting software for accounting of sub-loans. The existing internal control system is functioning well and the appropriate segregation of duties is in place.

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The CLD performs regular monitoring visits to PFIs and beneficiaries under the projects it manages. The CLD’s activity and financial reports are publicly available on MoF web-site.

30. As under the previous operation (CEP I), the CLD will take responsibility for the technical implementation of the LOC Component. The CLD has extensive experience with a number of Bank-financed projects credit lines. The CLD will submit monthly reports on commitments, payments, collection and arrears under the Project to MoF and PIU. The information on execution of Credit Lines will be aggregated in the financial reports prepared quarterly by the PIU.

31. PFI Monitoring. The PFI monitoring functions will include: (i) monitoring that the qualified banks continue to meet the qualification criteria; (ii) a-priori evaluation and clearance of PFIs’ appraisals of eligibility and creditworthiness of final borrowers for sub-projects above the free limit and of the first two presented by a newly qualified PFI, and on a sampling basis during normal supervision missions for the subprojects below the free limit; (iii) a-priori evaluation and clearance of PFIs’ appraisals of subproject eligibility and of economic and financial analysis for all subprojects above the free limit and of the first three presented by a newly qualified PFI, and on a sampling basis during normal supervision missions for subprojects below the free limit; and (iv) monitoring and prior review by the Bank of the first two sub-loan applications for each new PFI, and supervision of all other commercial practice procurements on a sampling basis during normal supervision.

32. Monitoring and Evaluation of Outcomes/Results. The Bank will evaluate progress on the proposed indicators as part of supervision missions and through regular project related reporting by the CLD and PIU. PIU will produce quarterly reports, based on information collected by the CLD and from regular reports provided by the PFIs. The CLD/PIU will also submit detailed annual reports covering all output and all agreed outcome indicators.

33. Disbursements. For the LOC component, the PIU will disburse funds to the PFIs based on CLD’s requests.

34. Repayment of Subsidiary Loans by PFIs. The CLD will open separate Revolving Fund Account for repayment of the PFI subsidiary loans, which would be used for repayment of Bank loan or to extend new subsidiary loans to PFIs. The PFIs should be required to repay interest and principal of subsidiary loans semiannually, on March 1 and September 1. (The semi-annual repayments are easier to administer and should coincide with adjustment of interest rates on subsidiary loans to PFIs.) The PFIs will be required to make payments regardless of whether or not they have received payments from their borrowers.

35. Procurement. Procurements will be the responsibility of the PFIs’ final borrowers under close supervision of the CLD. In general, goods, works, consulting and non-consulting services under LOC component should be procured in accordance with the private sector commercial practices; Section F below provides more details in this regard.

36. Audits. Upon national requirements, the CLD is audited annually by an audit firm contracted in line with national procurement rules. Apart from this, in terms of activities to be implemented under this project, the CLD will be audited as part of the project overall audit and

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the TORs would require the auditor to check the controls referred to LOC execution on the basis of testing representative sample of loan files, and if necessary, visiting commercial banks. Consequently, the audit report should include a statement as to whether the CLD and the PFIs are in compliance with the financial covenants agreed under the Project. A separate audit of CLD is not required under this operation.

37. For past several years, the CLD financial statements prepared on the basis of National Accounting Standards were audited by independent auditor, licensed to do local statutory audits. The last audit report available to the Bank team covered financial year of 2012. The auditors issued unqualified audit opinion and no deficiencies were noted by them.

38. PFIs will be required to provide annual external audits of IFRS financial statements (balance sheet and income statement) and of capital adequacy, to be prepared by reputable external auditors. The external audits will form a basis for re-appraisal of financial condition and eligibility of PFIs, in order to confirm their continuous qualification.

E. Financial Management and Disbursements

Financial Management

Country Issues

39. The Bank has extensive knowledge of Moldova’s Public Financial Management (PFM) system. The 2011 Public Expenditure and Financial Accountability (PEFA) assessment noted that Moldova has made substantive progress in improving the quality of the country’s PFM systems, processes and institutions. This analysis measured the performance of Moldova’s public financial management system, as well as provided the basis for discussion regarding further improvements in public financial management. The PEFA assessment concluded that Moldova has an effectively functioning fiscal and budget management system, which has enabled the government to finance and execute a budget delivering public services to the general population. Furthermore, the government has launched a number of reforms aimed at increasing transparency of public finance and Moldova scores relatively well on budget credibility, comprehensiveness and classification, treasury operations (including budget, payroll and expenditure controls), in-year reporting and public access to government budget and financial information.

40. While progress has been made in a number of areas, the government continues to address remaining weaknesses and to advance on its reform agenda, which includes: (i) budget preparation and execution (including harmonization with European Union standards); (ii) accounting and reporting; (iii) development of FMIS and cash management; and (iv) internal auditing. PFM related training and technical assistance for the Court of Accounts is under implementation and the dialogue on procurement reform agenda is ongoing. A number of existing instruments have already been mobilized through a concerted multi-donor effort and continue to support the government’s critical PFM agenda.

Assessment Summary

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41. The World Bank assessment prepared for the project concluded that the financial management arrangements existent at the PIU and MoE satisfy the World Bank’s requirements and the current system can provide with reasonable assurance, accurate and timely information on the status of the proposed project.

42. Under proposed arrangements, the PIU within MoE will have overall responsibility for project financial management using existing procedures and systems. The PIU implemented the Competitiveness Enhancement Project, and its financial management arrangements have been assessed as satisfactory throughout the project life (since 2006). Accounting and Internal Control system of the PIU were reliable and effective. FM staffing arrangements of the PIU were also assessed as adequate. Currently the PIU is implementing ECA Capacity Development Trust Fund for Competitiveness Enhancement Project II preparation (TF016160).

43. The financial management of the Eligible Expenditure Programs (EEPs) for results-based financing will rely heavily on systems and procedures existing within the Ministry of Economy. Specifically, the operation will rely upon the existing accounting procedures and internal control framework to ensure that all procedures and controls are adequately documented, contract monitoring and invoice payment procedures are consistently adhered to and documented. The approved annual budgets are entered into the accounting system and used for periodic comparison with actual results as part of the interim reporting. The accounting staff within MoE complies with the statutory requirements on qualifications and experience. The Bank team observed a high-level of compliance by MoE’s accounting staff with national budget management and reporting requirements. This is also confirmed by the audit report performed by the Court of Accounts for financial year of 2012.

44. The controls over compensation and employment records are robust (MoE staff compensation records, including timesheets and employee rosters, are managed by MoE HR and accounting departments and are closely monitored by the Financial Inspection and the Court of Accounts).

45. The Inherent FM Risk, Control Risk, and Overall FM Risk are all rated as Moderate. A number of actions were agreed upon with the government, which are presented in the table below:

Table 5: Action plan

No Action By whom By when

1 The project audit ToRs would be adjusted in terms of extended audit scope proposed for this project and would be attached to the Minutes of Negotiations.

PIU/WB By negotiations

2 PIU would complete upgrading existing accounting automated system to accommodate requirements of the project.

PIU under the Ministry of Economy

After effectiveness

3 PIU would draft FM sections of the Project Operational Manual to reflect financial arrangements under this project, especially those related to the EEP.

PIU together with the accounting department of the MoE

After effectiveness

4 Treasury will open project Designated Account in the National Bank of Moldova.

Treasury based on the PIU’s request

After effectiveness

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Budgeting

46. The PIU will have overall responsibility to coordinate the project budget preparation. The PIU will prepare an annual activity plan for the project, which will be sent for approval to the PIU’s Supervisory Board headed by MoE Minister and agreed upon with the project task team. The budget is prepared on the basis of procurement plan approved at the beginning of the project for 18 months and subsequently amended on roll-over basis. Budget figures will be entered into the accounting system and execution will be monitored through the quarterly interim IFRs. The PIU will ensure timely data inflows from project beneficiaries in an agreed format. The project annual budget will be split by quarterly expenditures, components, and sources of finance. The draft annual budget will need to be agreed with the relevant government organizations before submission to the Bank.

47. The budgeting of EEP would rely on the established procedure for budget planning at the government’s level. Currently, the MoE budget on EPP are presented in sufficient details to capture MoE expenditures, and its preparation follows the Borrower’s regular budget and fiduciary management processes. The budget execution is monitored through the regular budget reports submitted to the Ministry of Finance.

Flow of Funds and Disbursement

48. The Treasury system operated by the MoF is a key element of ensuring proper authorization processes and controls over expenditure are followed and that budget institutions do not exceed the available appropriation and the monthly allocation. The government operates a Treasury Single Account, which functions in a comprehensive and satisfactory manner. Budgetary entities register contracts and payment orders, including payment plans, with the Treasury. Except for EEP, the Bank funds under the project will be disbursed through transaction-based disbursement methods that include: reimbursements with full documentation, reimbursements based on Statements of Expenditures (SOEs) for small expenditures with defined thresholds, payments against issued Special Commitments, direct payments to third parties, and payments through the separate Designated Accounts opened for the project at the National Bank of Moldova by State Treasury under the Ministry of Finance. Thus, it will form part of the Single Treasury Account as is the case for all investment loans in Moldova.

49. Disbursements against EEPs for this operation will be report-based and as such, will utilize the budget reports generated by the Ministry of Economy and reported to the Ministry of Finance. These reports show both the planned expenditures for the year and the actual expenditures executed to-date. Disbursements would be requested in accordance with the Disbursement Matrix included under Table 2 in Annex 3. Withdrawal applications would be sent by the MoF, for the amounts defined for each disbursement linked indicator, accompanied by the relevant budget and treasury reports and documentation for the achievement of DLIs. Full disbursement would be done if the team certifies the satisfactory achievement of the prescribed DLIs. Otherwise, the condition for under-or over-achievement of results as described in Annex 3 would be applicable.

Accounting Policies and Procedures

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50. Aside from EEP, the PIU will maintain the project-related accounting records in 1C based accounting system which will be adjusted to accommodate the Project. PIU accounting software is able to record and report of incurred obligations, availability of funds, and payments made against each contract. The financial management manual which outlines internal control framework of the PIU will be an integral part of the project operational manual (POM) preparation of which is set as an effectiveness condition. Accounting and Internal Control systems of the PIU were assessed as reliable and effective.

51. The record-keeping of EEP will follow the practice already established at MoE, which is done in accordance with accounting regulations for budgetary institutions in Moldova. The MoE accounting systems are adequate, and the quality and timeliness of key financial reports, record management and reconciliation of accounts are satisfactory. Modified accrual basis is used. According to internal procedures, the actual expenditures are compared to the budget on a monthly basis; explanations for significant budget variations are provided to MOF.

Internal Controls

52. Both the PIU’s and MoE’s internal control framework provides a sound basis for managing the Project. MoE has well performing internal audit unit which covers EEP in their annual work programs.

Reporting and Monitoring

53. The PIU will be responsible for submission of quarterly IFRs covering one calendar quarter, format and content of which have been agreed upon and are attached to the Minutes of Negotiation. The IFRs will consist of two basic parts. One part of the reports will be the MoE budget execution report, which will show details by type of expenditure (compensation costs: compensation and social insurance contributions) in compliance with the national economic budget classification system. This part of the reports will be provided by the Ministry of Economy to the PIU for further consolidation. The disbursement under RBF components will be made against the first part of the reports.

54. In the second part, the IFRs Interim Financial Reports would be prepared on a cash accounting basis and would comprise: Sources and Uses of Funds, Uses of Funds by project activities, designated account statement, project Balance sheet and Uses of Funds by project categories such as Goods, Consultancy Services and Operating expenditures. The Ministry of Economy will retain all detailed expenditure information related to the EEP which might be reviewed by the project auditor and the Bank during the course of the supervision of the operation.

External Audit

55. The PIU was in compliance with the audit requirements of CEP. As is the case with CEP, only financial audit of the project financial statements will be required: independent auditor will audit project financial statements under terms of reference acceptable to the Bank and in accordance with International Standards on Auditing. As specific requirement, the auditor will need to review the accuracy of reporting related to EEP against which the project funds are to be disbursed. The audit will also cover procurement under subprojects (both MGF and LOC sub-

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components) for the reasonableness of the price of contracts awarded by the beneficiaries. Project audit report will need to be submitted to the Bank within six months of the end of each calendar year and at project closing. In accordance with "The World Bank Policy on Access to Information" dated July 1, 2010 the Bank requires that the Borrower makes the audited financial statements publicly available in a timely fashion and manner acceptable to the Bank. In addition, following the Bank’s formal receipt of these financial statements from the borrower, the Bank makes them available to the public in accordance with this policy.

Disbursement Tables

56. The withdrawal of proceeds from the IBRD loan and IDA credit will be made in accordance with the schedule in Table 6 and Table 7 below.

Table 6: Schedule for Withdrawal of Proceeds (IBRD)

Category of Expenditure

Amount of the IBRD Loan Allocated

(Expressed in USD)

Percentage of

Expenditures to be Financed

(1) Sub-loans under Part 3 (a) of the Project

29,400,000 100 %

(2) Goods, consultant’s services (including audits), Non-Consulting Services, Training and Incremental Operating Costs under Parts 3(b) and 3(c) of the Project; and audits under Part 3 (a) of the Project.

600,000

100 %

TOTAL AMOUNTS 30,000,000

Table 7: Schedule for Withdrawal of Proceeds (IDA)

Category of Expenditure

Amount of the IDA Credit Allocated

(Expressed in SDR)

Percentage of

Expenditures to be Financed

(1) Goods, Non-Consulting Services, consultants’ services (including audits) Training and Incremental Operating Costs under Parts 1(a), 1(b), 2 (a), and 2 (b)(i) of the Project; and audits under Parts 1(c), 2(b)(ii) and 2(c) of the Project

5,822,000 100%

(2) Matching Grants under Part 2(b)(ii) of the Project

1,940,000 100%

(3) Payments for EEPs under Parts 1(c) and 2(c) of the Project

1,938,000 100% of the amount up to the withdrawal ceiling set forth in the table in Schedule 4 to the Financing Agreement

TOTAL AMOUNTS 9,700,000

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Retroactive Financing

57. The government has requested retroactive financing that would help to initiate some activities that would be essential for quick start of the project implementation following effectiveness. Retroactive financing would apply to payments made by the Borrower on or after May 7, 2014 (the date of negotiations). For the IBRD loan, the ceiling for retroactive financing is US$ 6,000,000, and it may be applied to eligible expenditures under Categories (1) and (2). For the IDA credit, the ceiling for retroactive financing is SDR 1,940,000, and it may be applied to eligible expenditures under Categories (1) and (3).

F. Procurement

58. Procurement under the proposed project will be carried out in accordance with the World Bank “Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” published in January 2011 (Procurement Guidelines) and “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” published in January 2011 (Consultant Guidelines) and with the latest Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits.

59. An assessment of the capacity of the adequacy of the procurement and related systems in place and the capability of the Implementing Agencies (IAs) to conduct procurement under the project has been carried out in March 2014. The assessment reviewed the organizational structure for implementing the project and the interaction between the project staff responsible for procurement and relevant units in IAs.

60. The project will be implemented by the Ministry of Economy (MoE), which through its PIU will implement the Regulatory Reform Component and SME Development Component, and by the Credit Line Directorate under the Ministry of Finance, which will implement the Line of Credit sub-component. The PIU under MoE will administer the Matching Grants Facility and will have a fiduciary role. It will be responsible for handling financial management, procurement, monitoring and evaluation aspects.

Ministry of Economy:

61. Technical experts from MoE will be involved in the preparation of the Terms of Reference and Technical Specifications for its respective components. Under CEP I, MoE’s personnel involved in project implementation have received training from the PIU on Bank procurement policies and procedures. Some of them have attended training on Bank procurement in ILO/Turin, and in Chisinau in in April 2014. Generally, MoE has the adequate capacity to implement the project.

Credit Line Directorate:

62. This institution was established under the Bank-funded Private Sector Development I Project in 1995 specifically for the purpose of administering credit line resources financed by IFIs. It currently administers several credit lines. The CLD is adequately staffed. They have been

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trained in Bank procurement. Four CLD staff attended the procurement training offered by the World Bank in Chisinau in April 2014, and some CLD staff also attended the Regional Workshop organized by the Bank in Kyiv, Ukraine. The assessment concluded that the CLD has the adequate capacity to implement the LOC.

Project Implementation Unit:

63. Procurement activities will be carried out by the PIU, which has extensive experience in implementing Bank-funded projects. It currently employs a Project Manager, a Financial Management Specialist, an Accountant and a part-time Procurement Specialist. Once project becomes effective, the PIU will employ a full-time Procurement Specialist, Component Coordinators, a team to lead the Matching Grants Facility, and other consultants as necessary to implement the project activities. The PIU has experience with all procurement/selection methods and procurement activities of different size, nature and complexity.

64. Given that this project will follow the same implementation arrangements as the ones under the CEP I, most of the agencies involved in project implementation, including the PFIs, have extensive experience in implementing Bank-funded projects. No major issues have been identified during the assessment. However, one of the proposed PFI, namely ProCreditBank, is new to the LOC requirements having no experience with Bank procurement. To address this capacity issue, the Bank procurement team together with the CLD will organize a training course for Credit Officers of all the PFIs on Bank procurement and CLD reporting requirements as early as feasible.

Table 8: Project Procurement Risks and Mitigation Measures

Risk Description Mitigation Measure Responsible Party Timeline No previous experience with Bank procurement procedures and policies of one of the PFIs

CLD with the support of the Bank procurement team to organize a training course for Credit Officers of all the PFIs on Bank procurement and CLD reporting requirements

Credit Line Directorate Before the loan effectiveness

The price of the procured items by beneficiaries of sub-loans and sub-grants may not reflect the market prices.

Conduct an increased technical review and site inspections and verification of prices

Credit Line Directorate (for LOC) and PIU (for MGF)

Throughout project implementation. PIU will submit this information as part of their regular reporting to the Bank

65. Given the complexity of the project and the risks identified during the assessment, the overall project risk for procurement is “Moderate”.

Procurement Arrangements

66. Procurement of goods and non-consulting services: Goods procured under the projects would include, inter alia: minor IT hardware and software, mainly office equipment, furniture, vehicles and others. Procurement will be done using Bank Standard Bidding Documents under

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all International Competitive Bidding (ICB) procedures. Goods and non-consulting services contracts below US$100,000 may be procured through Shopping procedure in accordance with the provisions of paragraph 3.5 of the Procurement Guidelines. In the case of Shopping for IT systems, the PIU will follow the procedures set forth on the Bank website. When soliciting quotations, the PIU would include in the shortlist the authorized suppliers (the list is available on the Bank’s website). In addition, other suppliers or local dealers may be added to the shortlist, upon checking their credentials with respective manufacturers. All ICB contracts are subject to the World Bank’s prior review. There will be no domestic preference in the procurements.

67. Procurement of consulting services: Consulting services under the project are of various size and complexity. These would include, inter alia: development of strategies, capacity strengthening, needs assessments, outreach activities, website development, monitoring and evaluation related assignments, project management, and others. Selection will be done using the Standard Request for Proposals. The employment of technical experts will be conducted through the selection of individual consultant in accordance with the provisions of the Section V of the Consultant Guidelines. In case the service is required from a consultancy firm, Quality and Cost Based Selection (QCBS) method will be applied in accordance with the Section II of the World Bank’s Consultants’ Guidelines. For the contracts below US$300,000 equivalent Selection Based on Consultants’ Qualification (CQS) method may be used in accordance with paragraph 3.7 of the Consultants’ Guidelines. The short list can comprise entirely national consultants, if the contracts with the firms are below US$300,000 equivalent.

68. Procurement of logistical and organizational services for various events organized under the project would be done using Shopping procedures. Training activities in the form of study tours, or participating in national or international workshops shall be procured in accordance with the procedures agreed with the Bank. The PIU, in coordination with the IAs, will develop a Training Plan which will be prior reviewed by the Bank. Each request to attend an event listed in the Training Plan or other events not listed in the plan will be submitted to the Bank together with the proposed list of participants, agenda of the event and the estimated budget with the breakdown of costs.

Procurement under the MGF and LOC:

69. Private Sector Commercial Practices may be followed for Goods, Non-Consulting and Consulting Services under sub-grants and for Goods, Works, Non-Consulting and Consulting Services under sub-loans in accordance with paragraph 3.13 of the Procurement Guidelines and paragraph 3.13 of the Consultant Guidelines, and the provisions stipulated in the Operational Manuals. Working capital sub-loans will have the maximum amount of US$500,000 equivalent. Investment sub-loans will have a maximum amount of US$800,000 equivalent. The aggregate amount of all Sub-loans provided to any one final borrower, or group of connected final borrowers, shall not exceed the equivalent of US$800,000. It is not foreseen that any contract under sub-grants or sub-loans exceeds the Commercial Practices thresholds (equal or more of US$5 million for goods, works and non-consulting services; and equal or more of US$1 million for consulting services). In the case any contract under sub-grants or sub-loans exceed these thresholds, ICB and QCBS methods will be applied as specified in the Procurement Guidelines and Consultant Guidelines respectively. Because of the demand-driven nature of the project, it is not possible to estimate neither the sub-borrowers/beneficiaries nor their procurement

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requirements under the LOC and MGF financing of the sub-loans/sub-grants under the investment lending component of the Project at the appraisal stage of the Project. Therefore, it is not possible for the PIU/CLD to develop a Procurement Plan which provides the basis for the procurement methods. All ICB and QCBS contracts and the first two sub-loan applications for each new PFI under the LOC sub-component and the first three contracts under the MGF sub-component are subject to the Bank’s prior review and all other contracts will be post reviewed by the Bank as specified in the agreed OM.

70. The Matching Grant Manual and Line of Credit Manual shall describe the basic guiding principles and acceptable procedures which shall, inter alia, include mandatory provisions that: (i) beneficiaries of the sub-grants and sub-borrowers shall not award contracts to their subsidiary or affiliated companies unless there is an established arms-length arrangement; (ii) procurement of second hand goods shall not be eligible for financing under any of the sub-components; (iii) no contract will be financed with a firm/individual which is not eligible under World Bank financing under Paragraph 1.8 through 1.10 of the Procurement Guidelines and under Paragraph 1.11 through 1.13 of the Consultant Guidelines; (iv) no contract signed with a firm/individual declared ineligible by the World Bank will be financed under any of the sub-components.

Retroactive Financing:

71. The government is considering retroactive financing for several activities under the project. Procurement procedures, including advertising, shall be in accordance with the Guidelines in order for the eventual contracts to be eligible for Bank financing, and the Bank will review the process used.

Filing and records keeping:

72. Filing of procurement related documents, and records keeping under the project, will be done by the PIU. Procurement progress reports will be submitted to the Bank as part of the quarterly financial management reports and annual progress reports.

Contract signing arrangements under the project:

73. All contracts under the TA components of the project with the exception of the contract with the PIU Manager, will be signed by the PIU Manager in accordance with the Government Decision No. 895 of August 25, 2005 on the establishment of the PIU. The contract with the Project Manager will be signed by the Minister of Economy.

Procurement Supervision:

74. Routine procurement reviews and supervision will be conducted by the Procurement Specialist. In addition, one supervision visit is expected to take place per year during which ex-post reviews will be conducted. The Bank will post-review at least 5 percent of the contracts subject to post review, including sub-loans and sub-grants. The percentage of contracts to be reviewed under the commercial practices could be revised during project implementation. Procurement documents will be kept readily available for Bank’s ex-post review during supervision missions or at any other point in time. A post review report will be prepared, shared with the implementation agency and filed in the procurement post review system.

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Results-based Financing (RBF):

75. There will be no procurement under the results-based financing. The EEPs include staff compensation cost and mandatory social insurance. However, if any procurement is foreseen under the selected budget lines, it will follow the Bank Procurement and Consultants Guidelines.

Procurement method and prior review thresholds:

76. Considering the risk assessment rating the proposed prior review and procurement method thresholds for the project are provided in the tables below. In addition to the below, the Bank will prior-review the first two sub-loan applications for each new PFI under the LOC sub-component and the first three sub-grant applications under the MGF sub-component.

Table 9: Prior Review Thresholds

Procurement /Selection Method International Competitive Bidding/Quality and Cost based Selection

All

NCB/Shopping First contract from each method Consultancy Selection Methods for Firms All above 0.3 Direct Contracting (Goods & Non-Consulting Services, Consulting Firms)

All above 0.05

Single/Sole Source Selection of Individuals All above 0.01 Terms of References All Individual Consultants All above 0.05 * Commercial practices First three sub-grant applications under MGF and

first two sub-loans for each new PFI under LOC * Key positions, long term consultants (as per paragraph 5.4 of the Consultants Guidelines) will be prior-reviewed

Table 10: Procurement Method Thresholds

Procurement Method Thresholds (USD million) National Consultant Ceilings

ICB NCB SH CQS Comm. Practices

Goo

ds

Wor

ks

Goo

ds

Wor

ks

Goo

ds

Wor

ks

Con

sult

ancy

Goo

ds,

w

ork

s &

N

CS

Con

sult

ing

Ser

vice

s

≥1 ≥5 <1 <5 ≤$0.1 ≤$0.2

≤$0.3 ≤$5 ≤$1 ≤0.3

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Table 11: Major Procurement Packages and Schedule for TA Sub-components

No. Activity Description Procurement

/ Selection Method

Estimated Cost (US$)

Estimated date of the advertisement

1

Training and workshops related to the elimination of the barriers to competition in assignment on introducing legal/regulatory amendments to remove the aspects of the laws and regulations identified that are limiting competition in the sectors identified

SH 60,000 Dec-15

4 Develop performance indicators and develop the methodology to monitor public authorities' impact on businesses as they carry out their regulatory functions

CQS 140,000 Oct-14

5 Full update of the Regulatory Reform Strategy CQS 120,000 Sept-18

6

Develop the IT system for the one-stop shop for permissive documents and the single registry of licenses, including its inter-operability with other public authorities

QCBS 350,000 Sept-15

7 Develop MIEPO Strategy CQS 150,000 Oct-14

8 Software development for ODIMM and MIEPO (MIS, monitoring and evaluation, etc. and including MIS needs for the credit guarantee facility)

QCBS 315,000 Mar-14

9 Assessment of opportunities to develop angel and venture capital funds

IC 100,000 Nov-16

10 TA for Risk Sharing Facility under ODIMM CQS 300,000 May-15

11 TA on Value Chain Financing CQS 200,000 May-15

G. Environmental and Social (including safeguards)

77. The project will be implemented by MoE, which has been a counterpart of World Bank investment loans focusing on private sector development for over a decade. This includes the 2006-2013 CEP I project as well as prior private sector development projects. MoE has implemented projects using Project Implementation Units (PIUs) established as separate legal entities under MoE, and staffed with professionals demonstrating adequate knowledge of Bank procurement, financial management, safeguards and other requirements. Implementation of CEP II, including its fiduciary aspects, will be managed by the same PIU that managed CEP I project activities. For the purpose of implementing environmental safeguards and monitoring social safeguards, a full-time Environmental Specialist (ES) will be hired within the PIU during the first year of project implementation. Thereafter, ES would be hired on a full-time or part-time basis, based on periodic assessment of project environmental arrangements, and the associated level of effort required to sustain them, by World Bank supervision team. The ES’s main responsibility will be to coordinate all Environmental Assessment activities and ensure adequate implementation of Environmental Management Framework requirements.

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78. The PIU will be responsible for implementing the matching grant sub-component under the second project component (SME Development), with technical inputs from ODIMM and MIEPO.49 This component is targeted at improving enterprises’ export competitiveness, by providing matching grants for relevant business development and other related services. Since the PIU does not currently have expertise on environmental issues, it was agreed that an ES will be hired by the PIU. The ES should have good knowledge of, and experience in applying, WB environmental safeguards and environmental management practices. The role of the ES will focus on following: (i) assessing any potential negative environmental or social impacts of the matching grant proposals (business improvement projects); (ii) conducting environmental screening and assessment of matching grant proposals; (iii) creating and/or strengthening Environmental Management Systems (EMSs) at participating enterprises; (iv) looking for opportunities to recommend environmentally and/or socially positive options (e.g. energy efficiency, recycling and reducing waste generation, etc.) to support the activities presented in the matching grant application; (v) monitoring to ensure that Involuntary Resettlement Policy OP4.12 is not triggered by any of the activities; (vi) providing TA on environmental management to ODIMM and MIEPO as required given their role in the MGF process; and (vii) providing inputs on environmental management into the Matching Grants Manual. If administration of technical aspects (the “front office”) of the MGF is transferred to ODIMM or MIEPO later in the project, the ES will provide additional TA to this ODIMM or MIEPO so that they can adequately screen the MGF applications for environmental issues, per the requirements in the MGF Manual.

79. The implementation of the Line of Credit under component 3 of the project (Access to Finance) will be done by the Credit Line Directorate under the Ministry of Finance. This is the same implementing agency as under CEP I, and CLD has extensive expertise in the application of Bank Safeguard policies (in addition to CEP I, it has managed several other lines of credit financed under World Bank’s Sector Rural Investment and Services Project). Furthermore, the CLD received adequate training to conduct screening of sub-project loan applications for compliance with safeguards procedures. Based on information gathered during WB implementation support visits, safeguards implementation in CEP I was considered positive overall. The EMF was implemented successfully – all submitted subprojects were preliminarily assessed from the environmental point of view, and were assigned an environmental category as well as required relevant environmental authorizations, licenses and permits. Furthermore, all approved subprojects have relevant supporting EA documents (Environmental Screening Checklist and/or simple Environmental Management Plan as well as if needed per national legislation), approvals from local environmental authorities and from the State Ecological Expertise (SEE), and environmental permits and licenses.

80. The PIU Environmental Specialist will be in charge of overall coordination for implementing and reporting on the EMF, inspecting environmental compliance at worksites, advising PFIs and project participants on environmental questions, and coordinating the overall environmental monitoring at project level. The ES will also assist the CLD and the PFIs in

49 As discussed elsewhere in this PAD, the responsibility for administering the technical aspects of the MGF (not financial management or procurement) may be shifted to ODIMM later in the project if this is deemed to be feasible and optimal for project implementation.

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reviewing environmental management plans, monitoring their implementation, advising and guiding PFIs on specific environmental issues and management options, and ensuring that cumulative environmental impacts are addressed. Furthermore, the ES will also identify training needs of the PFIs, ensure that environmental requirements are integrated into bidding documents for physical investments, and analyzing contracts and loan applications in terms of environmental management and mitigation issues. The ES will periodically collect information on changes and impact of the project activities and will study the environmental condition of the areas of supported by CEP II subprojects and identify main environmental parameters. The ES will also be responsible for monitoring any land acquisition issues under LoC sub-projects in order to make sure that OP4.12 is not triggered.

81. The PFIs will play major role in implementing EMF provisions, and will be required to ensure that borrowers conduct an appropriate EIA and where necessary prepare an environmental management plan for each sub-project. The PFIs will be involved in the process of sub-project implementation from the very beginning, i.e. at the sub-project’s appraisal stage. They will evaluate the sub-projects proposals, to assign them an environmental category according to World Bank guidelines and to determine the type of Environmental Assessment that must be conducted for the proposed sub-project. The PFIs will review the set of documents prepared by sub borrowers (sub-projects’ Information Sheet or Project Summary Sheet, as well as all necessary permits and clearances needed for project implementation), will complete the Environmental Screening Checklist, and will make a final decision on whether the sub-project will receive financing. In case of non-compliance with presumed mitigation measures during sub-project implementation, the PFIs can decide whether or not to suspend funding.

82. The sub-project EMPs implementation will remain under the direct responsibility of the sub borrowers and the PFIs, including responsibilities for their supervision and monitoring. Compliance with the EMPs and monitoring of the impact during the implementation phase will be undertaken by the PFIs and periodically by PIU Environmental Specialist.

83. The LoC Operational Manual that will be developed will set forth the rules and procedures for environmental assessment of subprojects as described in the EMF, eligibility criteria for enterprises that can benefit from the LoC, criteria for the eligible investments and working capital loans, terms and conditions of the sub-loans, and other modalities and agreements of the LoC. The Matching Grants Manual will provide rules and environmental assessment procedures for matching grants. Both manuals should be satisfactory to the World Bank.

84. For the LoC, the EA documentation for the first two Category B subprojects from each participating PFI will be subject to prior review and approval by the PIU and World Bank. The project will also provide PFI capacity-building activities prior to PFI approving of any subprojects. This capacity-building would be completed before prior review by the World Bank. During sub-project appraisal, PFIs will have to ensure that proposed sub-projects are in compliance with all national environmental laws and standards, as certified by the relevant local or national authorities of the country. All relevant documents and permits should be kept in each sub-borrower document file maintained by the PFI, and be made available for review by PIU, CLD and WB representatives.

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85. A training program targeting the PFIs and other interested parties will be implemented in the framework of the project’s TA activities. The training program should be practical and include work with realistic case studies, based on actual loan proposals and types of business activities supported by the project. It should also cover an explanation and practical application of the environmental standards and forms designed for use by the PFIs, covering the following issues: (a) national and World Bank requirements for environmental assessment; (b) screening and scoping procedures including checklists of potential environmental impacts of the agricultural production and agro-processing activities; (c) main provisions of environmental management plans for proposed sub projects, including mitigation and monitoring requirements. Field visit also may be included. Such training will enable the PFIs’ environmental officers to recognize and assess potential negative environmental impacts of the selected subprojects and set of measures to mitigate them. The program will also provide an overview of the World Bank requirements for social safeguards to ensure that participants understand the triggers of OP4.12 and are able to ensure that the activities screened by them do not trigger it.

86. The PIU disseminated the draft summary EMF to the Ministry of Economy, Ministry of Environment, and other relevant ministries for their review and comments. On March 7, 2014, the document was posted on the website of the Ministry of Economy (www.mec.gov.md) so that the public could access it. On March 21, 2014, the PIU held a consultation on the draft EMF. After the consultation, the draft document was revised to consider inputs from the parties consulted. On March 25, 2014, the final draft EMF was posted on the website of the MoE and submitted to the World Bank for its disclosure in the Infoshop.

H. Monitoring & Evaluation

87. As stated in section IV.B of the PAD, monitoring and evaluation of outcomes and results during implementation will follow standard World Bank practice. The Results Framework with indicators and targets is presented in Annex 1 of the PAD. The PIU will prepare quarterly reports with data for the Results Framework (see Annex 1), to be reviewed and discussed with the World Bank Task Team Leader and other project counterparts as applicable. The Credit Line Directorate within the Ministry of Finance will provide data on elements related to the LOC, to be included in the PIU’s reports. Both institutions performed this role effectively during CEP I. ODIMM, MIEPO, authorities involved in regulatory reform, and other project beneficiaries will report on their results to the PIU. In order to capture the potential positive gender effects of the project, the PIU will collect data on how many MGF beneficiaries are owned by a female. The Results Framework data will be captured in the Implementation Status and Results reports that the World Bank will prepare semi-annually.

88. In addition, the PIU and World Bank team will agree on additional indicators to monitor in order to track the project’s progress and activities (“monitoring indicators”).50 These will be

50 Potential monitoring indicators include: number of trainings held on regulatory reform topics; number of events held on the business enabling environment, for competition advocacy, and on SME and export related topics; number of participants in the trainings and events, per topic; number of recommended laws/regulations/ amendments/codes enacted or government policies adopted; number of legal amendments to remove anti-competitive elements of legislation (laws, regulations, or other legal provisions) adopted; number of new programs, and number of participants in those programs, developed by ODIMM and developed by MIEPO (to be monitored separately); and others along these lines.

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mostly focused on the specific outputs provided through the project, and will be a very useful complement to the indicators in the Results Framework, which aim to capture the project’s outcomes at a more aggregated level. The monitoring indicators will be documented in the Project Operations Manual.

89. To monitor the achievement of targets for disbursement-linked indicators, specific protocols have been identified. See Annex 3 on Results-Based Financing. Additionally, over the course of the operation, the government and World Bank teams will monitor and evaluate progress meeting DLIs through the technical assistance to be provided through the operation, the PIU’s activities, and implementation support to be provided by the World Bank throughout the process. The government will provide reports on progress in meeting indicators during implementation support visits and through regular communications with the World Bank Task Team Leader. Both EEPs and DLIs will be carefully tracked during the year to verify progress towards compliance, identify and resolve problems, and ensure the necessary evidence of compliance is available and presented.

90. The project will also be monitored through World Bank implementation support visits, assistance provided by the World Bank to review terms of reference for project activities and deliverables; reviews and updates of the procurement plan; reviews of compliance with fiduciary requirements (by the World Bank’s procurement and financial management teams); and the annual project audits. Thus, progress against objectives will be assessed on an ongoing basis.

91. We expect that the cost of M&E systems will not be substantial, and will be covered under the normal operating costs of the PIU and CLD. Costs associated with developing monitoring mechanisms for SMEs will be covered as part of institutional capacity-building through the project, as this activity will primarily benefit GoM.

92. Component-specific M&E arrangements are described below.

a. Regulatory Reform: This component will include several activities to help the Government of Moldova monitor and evaluate implementation of its regulatory reform strategies. For instance, performance indicators for public institutions with a regulatory role will be developed and monitored on an annual basis, the Cost of Doing Business survey will be implemented on an annual basis, and the reform governance structure will monitor implementation of reform strategies. The PIU will have access to these systems, which will provide a wealth of data on relevant aspects of the project. In addition, the PIU will develop methods to collect data to update the project’s specific results framework on a quarterly basis.

b. SME Development: As part of institutional strengthening, ODIMM and MIEPO will establish M&E Units to monitor project activities and track progress toward their objectives. They will provide regular reports on the various programs of their agencies and results of those programs. A transparent and periodic method for reporting will be established with the assistance of the M&E Consultant financed by CEP II in Year One. The websites of the two agencies will also be used to report on program progress and results. Particular attention will be given to tracking exports and increased employment as a result of project activities. These same systems may be used to monitor achievement of results under this project. In addition, the project

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will help MoE to develop a more systematic way of collecting and analyzing data on SMEs and exports – with participation of the Bureau of Statistics and likely the Customs Service. This mechanism will be used in support of project objectives, and can also provide monitoring data for the project as appropriate.

For the Matching Grant Facility, a quantitative impact evaluation will be conducted to assess the effects of the grants on SMEs’ outcomes. The project will conduct a randomized control trial in which a subset of all eligible SMEs will randomly be assigned to receive the matching grants. The randomized selection will be made only among the applicants that obtain final approval of their business improvement projects, through the technical review and validation process outlined in Annex 2. The impact evaluation will allow the team to develop an understanding of whether or not SME competitiveness can be enhanced by matching grants, and to understand whether combining matching grants with close monitoring and frequent site visits has a significant effect.

c. Access to Finance: The CLD will maintain appropriate M&E systems as described in the section above. The Results Framework indicators for the Access to Finance component includes the World Bank core micro, small and medium enterprise (MSME) access to finance indicators that are relevant to this project.

93. A midterm review will be held approximately 2.5 years into the project. Based on this review, the results framework, DLIs, planned project activities, and other aspects of the project will be updated given the progress achieved to date at that point, the updated sector context, and the need for or possibility of additional financing, among other things.

I. Government Contribution

94. The Government of Moldova will make in-kind and monetary contributions that will support implementation of this project. These represent costs related to the Ministry of Economy, the Working Group of the State Commission on Regulation of Entrepreneurial Activity (“Working Group”), ODIMM, MIEPO, and Project Management costs related to the Project Implementation Unit’s work during the project closing period (grace period running for four months after the project’s closing date). The estimated Project Management cost during the closing period is US$ 44,000.

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Annex 5: Operational Risk Assessment Framework (ORAF)

Moldova: Second Competitiveness Enhancement Project (P144103) .

.

Project Stakeholder Risks

Stakeholder Risk Rating Moderate

Risk Description: Risk Management:

1) There are risks that reforms may be stalled by vested interests and/or political gridlock. 2) The 2014 elections may result in a change in the composition of government. 3) The project's stakeholders also include the PFIs that will partake in the credit line. Weaknesses in Moldova's financial sector, including poor governance in financial institutions and lack of transparency on ultimate beneficial ownership may present additional stakeholder risks.

1) The project aims to mitigate the first risk by: i) discussing the scope of the project with multiple government authorities during project preparation, including not only the Ministry of Economy, but also the Ministry of Finance and State Chancellery, and getting their buy-in; ii) using results-based financing with disbursement-linked indicators and unencumbered disbursements to Treasury to help generate more consensus around achieving key project results; and iii) maintaining strong communication with the Ministry of Finance on relevant reform areas during project implementation. In addition, MoF is a beneficiary and implementing agency of this project through the Credit Line Directorate. The World Bank team has also supported the MoE’s proposal for the government to set up offices of State Secretary to avoid political gridlock and continue the work programs of the ministries on a technical level; however, these will not be introduced before the November 2014 elections. 2) The World Bank team will mitigate the risk of a change in government counterparts through: i) leveraging the Country Office’s attempts to maintain dialogue open with all parties, including during the preparation of the 2014-2017 Country Partnership Strategy; and ii) focusing on the government’s clear, long-term priorities of export competitiveness and diversified growth, which should remain priority areas no matter which party (or parties) control government. In addition, experience with the CEP I project shows that projects focused on long-term government priorities can be implemented successfully through significant changes in government. 3) The due diligence of potential PFIs by WB team included a strong focus on governance. The same due diligence criteria will be applied to PFIs that wish to join the project in future. Due diligence during project preparation identified two PFIs that meet

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the criteria. In addition following the FSAP Update undertaken in early March 2014, WB team will continue policy dialogue/potential technical assistance with financial sector regulators and other government authorities to implement key FSAP recommendations including on improving corporate governance in financial institutions. The WB team will also continue to coordinate with other government authorities, donors, private sector associations, and other stakeholders as necessary to support successful loan design, and as part of our overall dialogue on private and financial sector development.

Resp: Status: Stage: Recurrent: Due Date: Frequency:

Both In Progress Both 15-Sep-2019

Implementing Agency (IA) Risks (including Fiduciary Risks)

Capacity Rating Moderate

Risk Description: MoE has a good track record of successful implementation of World Bank-funded projects. It has delegated this management to a Project Implementation Unit (PIU) staffed with specialized consultants, so the capacity within MoE itself is low. However, given that the same PIU team will remain in place as under CEP I, this risk is mitigated given the experience of the PIU and successful implementation of CEP I. Credit Line Directorate: Credit Line Directorate (CLD) is a specialized entity operating under the MoF. The CLD has ample experience with the Bank’s lines of credit, and has also administered credit lines of a number of other international institutions. Notwithstanding the strong experience and capacity of the project’s implementing agencies, there is a risk that with the upcoming general elections in November 2014, the government may change, and new individuals may

Risk Management:

Capacity of Implementing Agencies: The Director of the PIU has been confirmed as the same director of the PIU under the previous WB project, who has good understanding of all WB procedures and requirements, as well as a solid relationship with MoE and other stakeholders. The PIU will be reinforced with “component coordinators” for the Regulatory Reform and SME Development components. The CLD has extensive experience with the Bank’s LOCs including under CEP 1. It has also administered credit lines of a number of other international institutions. The CLD will utilize the Operational Manual (OM) developed for the Credit Line component, which will specify details about implementation arrangements and the related functions. If the staff at the implementing agencies experiences substantial changes as a result of a change in government after the election, the World Bank will reinforce its implementation support efforts with additional training and other activities as required to enable the new counterparts to implement the project well. In addition, the Operational Manuals developed for the Project’s implementation will remain valid and be a very useful guide to any new staff involved. Capacity of Beneficiaries: The project will work with and strengthen the capacity of MoE, ODIMM, MIEPO, and the Competition Council. MoE has performed its regulatory reform mandate as well as

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become involved in the project that do not have the same level of experience with project implementation as the existing staff. Additional risk to the achievement of the PDO stems from the fact that the overall capacity of MoE and the other beneficiaries to carry out some of the components remains questionable. Procurement: The Procurement assessment during project preparation concluded that most of the agencies involved in project implementation, including the PFIs, have extensive experience in implementing Bank-funded projects. No major issues have been identified. However, one of the proposed PFIs, namely ProCreditBank, is new to the LOC requirements having no experience with Bank procurement. Financial Management: The Inherent FM Risk, Control Risk, and Overall FM Risk are all rated as Moderate. To ensure that the FM arrangements are up to date, the PIU will utilize the current accounting system to accommodate requirements of the Project, and FM policies and procedures have been revised for the needs of the Project.

possible given its resources, and we expect that it will have the capacity to carry out its envisioned role under this project. The knowledge that the head of the Department for Business Development has on relevant issues, and the capacity of the consultants at the RIA Secretariat, for instance, is solid. ODIMM and MIEPO have solid leadership but are at different stages of development. ODIMM has a track record of successful program implementation, but now needs to align its program and service offerings more closely to the needs of various segments of SMEs and strengthen its communications, monitoring and evaluation, and other aspects. MIEPO is performing at a basic level, and needs additional resources and capacity to more effectively carry out its mandate. The project will address capacity concerns at MIEPO by funding consultants to carry out important roles and providing a transition mechanism for these consultants to be phased out and replaced by staff that are paid from government sources or other donors, in a sustainable manner. The project will address capacity concerns at both institutions by developing strategies for each institution that include: i) design of programs and services to serve their key client segments; ii) delivery mechanisms for the programs and services; iii) organizational and governance structures to ensure effective delivery of these programs and services, including position descriptions and qualifications; iv) description of interactions with other relevant institutions in Moldova; v) short-term and medium-term budgets that will allow the agency to implement the strategy; and vi) an action plan for implementing the strategy, with milestones, indicators, and monitoring mechanisms. Adoption of these strategies, adequate budgeting, and adequate implementation and monitoring are required as disbursement-linked indicators (total of US$1.5 million to be disbursed against achievement of the DLIs over the life of the project). The project will then provide key inputs to strengthen the institutions so that they can effectively implement the strategies. The key inputs include monitoring and evaluation systems, communications tools, more effective tools for service delivery on the organizations’ websites, study tours to learn from international good practices, assistance to generate funding from additional sources, and more. The Competition Council has been reformed through the new Law on Competition, Law on State Aid, and related legal acts. It is currently building its staff and capacity, and will benefit from a capacity-building program of the EU. The project is designed to complement ongoing and planned activities by taking a “learning-by-doing” approach to help the Council address priority problems related to competition in key sectors.

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Thus, the measures to mitigate capacity risk include: i) development, adoption and funding of organizational strategies; ii) “learning-by-doing” approaches; and iii) solid support from the PIU and World Bank team during implementation. The implementation support plan includes a strong focus on helping these institutions achieve their goals under the project.


Client In Progress Both 15-Sep-2019

Risk Management:

Procurement: To address any capacity issue with PFIs, the CLD with the support of the Bank procurement team will organize a training course for Credit Officers of all the PFIs on Bank procurement and CLD reporting requirements before the project effectiveness. It has been agreed that the Project Operations Manual (POM) for CEP II will be developed. The POM will describe in details the project implementation arrangements, overall responsibilities of the unit and of individual staff, as well as fiduciary arrangements.


Both In Progress Preparation 15-Sep-2019

Risk Management:

Financial Management: To ensure that the FM arrangements are up to date, the PIU will utilize the current accounting system to accommodate requirements of the Project, and FM policies and procedures have been revised for the needs of the Project. Audits will be performed annually.



Governance Rating Substantial


Overall governance risk in the country and in this project is substantial. Although no major governance issues emerged under the prior project (CEP I), in the country overall there have been cases in which vested interests

The regulatory reform component aims to improve governance in areas related to the business enabling environment, by increasing transparency and accountability of reform implementation. This will make it more difficult for vested interests to block or co-op the business environment reform process. The project’s use of results-based financing

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have used the state apparatus to extract private benefits. This is a concern across sectors, but is an especially strong concern in the judiciary and financial sectors. In addition, the fairly complex nature of the project design could lend itself for possible governance issues.

will also provide greater incentives for reform during the project, in specific areas related to the disbursement-linked indicators. The WB team has mitigated governance risks to the extent possible given the project design by: i) including detailed eligibility criteria for project beneficiaries that receive funds directly from the project, including PFIs (financial and governance criteria), enterprises that receive sub-loans from the line of credit (eligibility criteria on enterprises and the use of funds), and enterprises that receive matching grants (eligibility criteria on enterprises and the use of funds); and ii) including strict oversight of the application of these criteria (three-stage review of MGF applications and implementation support/supervision from the World Bank team). We have also designed the reform implementation support sub-component to focus on priority reforms and ensure that project support to each institution is justified, well-designed, and appropriately costed from the technical point of view. Criteria for including reforms and institutions in this sub-component include that the reforms to be supported must be part of the government’s regulatory reform strategies and the work must be approved by the World Bank TTL through the project’s annual procurement plans. All aspects of the project design have also passed the World Bank’s financial management and procurement review.



Risk Management:

The Bank supported the regulatory reform (Guillotine I, II and II+) – by which an important number of authorizations and permissive acts are set to be eliminated – thus improving the regulatory environment and strengthening the stability and predictability of the governmental processes. Governance as a cross-cutting theme will be strengthened to ensure enhanced accountability and transparency, as described above. The World Bank is helping to strengthen central public administration, public financial management and procurement systems, which will remain essential as core areas of engagement, in addition to supporting social accountability mechanisms to critical social sectors - education, health and others - where corruption is pervasive.


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Project Risks

Design Rating Substantial


The design of this project is fairly complex, including three components with two sub-components each, results-based financing, and a line of credit.

The project design has been simplified as much as possible given the government’s objectives and demand. All sub-components of the project are fully owned by, and were demanded by, the government. To mitigate risks stemming from the complexity of the project, the team has: i) closely examined international good practices and lessons learned (in Moldova and elsewhere), and incorporated relevant lessons and approaches into project design, ii) strengthened the PIU with “component coordinators” to increase the government’s capacity to coordinate work under the components; and iii) identified the activities to be funded in detail, and developed a detailed procurement plan for the five years of the project.



Social and Environmental Rating Low


The potential adverse environmental impacts will be different for different types of matching grants and subprojects that might be supported and in particular: (a) for agricultural production: soil erosion, loss of soil productive capacity, soil compaction, soil pollution, surface and underground water pollution, loss of biodiversity, health and environmental risks due to agro-chemicals use; (b) for agro-processing: contribution to surface water pollution, wastes generation, odor; (c) for manufacturing: air pollution, waste waters, use or solid waste generation; (d) for construction: soil and air pollution; acoustic, aesthetics impacts, etc.

To address potential adverse impacts the borrower updated the Environmental Management Framework (EMF) prepared for CEP I, which sets environmental assessment procedures and mitigation requirements for the matching grants and subprojects which will be supported by the CEP II. The EMF provides details on procedures, criteria and responsibilities for matching grants and subprojects preparing, screening, appraisal, implementing and monitoring. The document will also include Environmental Guidelines for different types of proposed subprojects providing analysis of potential impacts and generic mitigation measures to be undertaken for subprojects in agricultural production, agro-processing and manufacturing sectors at all stages - from identification and selection, through the design and implementation phase, to the monitoring and evaluation of results. To strengthen implementing capacity the project will provide TA and training both on environment and social safeguards for PIU, PFIs as well as for ODIMM and MIEPO, the main project entities.


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Program and Donor Rating Moderate


The program and donor risk is moderate. There are a number of donors that are working directly with MoE on addressing some of the same topics that the WB loan will address, while the capacity and sustainability of these efforts to be carried out by the government on its own is quite low.

Risk Management: Program The project will fund a cohesive and well-defined program of activities and reforms. The project results that depend on other government programs are those related to institutional strengthening for reform governance and SME/exporter assistance. During project implementation, the project will help the government design or improve the design of these programs and will then provide comprehensive support to them, so any risk of a disconnect is low. The risk increases due to sustainability considerations after the project ends. To mitigate this risk, the project has included the following elements: i) requiring adequate budgeting for the ODIMM and MIEPO strategies (including programs and operating costs) as a disbursement-linked indicator for results-based financing; and ii) support to the government to find a way to maintain the independence of the RIA Secretariat without relying on donor funds, by the end of the project. Risk Management: Donor During project design, the WB team and MoE consulted extensively with all other donors working in areas related to the project’s objectives, including USAID, EU, SIDA, EBRD, and OECD to coordinate assistance. We have ensured that there are no overlaps in specific activities, and that there are clear coordination mechanisms and sequencing where our activities do intersect. For instance, the WB project will help implement the RIA methodology to be updated by USAID and reviewed by WB; the ODIMM strategy that the WB project will fund will be used as an input into the design of EU assistance that will begin in 2016; etc. The project design has also incorporated relevant recommendations from the OECD reports on SME development. The project will continue to coordinate with these donors during project implementation, building on the work done during the preparation phase.


Bank In Progress Both 15-Sep-2019

Delivery Monitoring and Sustainability Rating Moderate

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The outcome of the project depends to a large extent on the capacity of three agencies – ODIMM, MIEPO, and the implementing agency for the risk-sharing facility – that needs to be substantially enhanced. Related to institutional capacity risk, there is also a risk that the gains in capacity will not be sustained after World Bank funding is no longer in place. SME Development Component: The risk is that it is not guaranteed that the progress can be maintained once the World Bank Group or other international donors are no longer involved. Access to finance Component: The risk is high that governance issues in the financial sector may result in few banks meeting the due diligence eligibility criteria which could result in low disbursements under the LoC.

The project will ensure that implementing agencies are able to maintain the systems implemented as the result of the project. The project will provide capacity building on every component, including capacity building for agencies involved in areas related to regulatory reform, SME development, and access to finance. Capacity building will include trainings and workshops. The improved regulatory framework, improved coordination of SME development actors, and increased access to finance for SMEs will also enhance the probability of long term stability and growth of Moldova’s SME sector, and thus economy as a whole (nearly 98 pecent of Moldovan companies are SMEs). Furthermore, the project preparation grant will support PIU operation during project preparation and initial assessments to inform project design of CEP II, as well as the main driver of the envisioned reforms—MoE. This support would positively contribute to increased capacity of the MoE, during and after completion of CEP II. Moreover, the outputs and outcomes of the project will be closely monitored against clearly defined results indicators. It is unlikely that the need for donor/World Bank funding to lend an “objective” status to staff involved in regulatory reform can be mitigated in the short to medium term. This is related with the overall governance and government structure in the country. SME Development Component: To mitigate this, the loan will work not just on training and capacity-building, but also on institutional restructuring and reform (including governance and the incentives of management and staff) and on adjusting the agencies’ programs and service offerings to meet private sector companies’ needs and market demand. In addition, CEP II will encourage public-private partnerships both to improve the services offered by the agencies and to fund future activities, based on the success of the agencies under CEP II in increasing exports and revenues for SMEs. As referenced in the PAD, the Office of Wine and Vineyards can serve as a model for the future financial sustainability of MIEPO. The current Director of MIEPO comes from the private ICT sector and is interested in exploring this type of arrangement in the future. Access to finance component: The WB team will continue policy dialogue/potential technical assistance with financial sector regulators and other government authorities to implement key FSAP recommendations including on improving corporate governance in financial institutions.

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Overall Risk

Overall Implementation Risk: Rating Substantial

Risk Description:

The project was assigned a Substantial risk rating due to the fact that appropriate mitigating measures have been incorporated in project design to minimize risks posed by weak governance, complexity of project design, implementation capacity, and coordination.

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Annex 6: Economic and Financial Analysis


Introduction

1. The project will have significant positive benefits for the implementing agencies, clients, the government, and for overall private sector development in Moldova. Under this operation substantial reforms are envisioned in the areas of SME development, access to finance for exporters, and reduction in costs and uncertainty in the regulatory environment. These elements all contribute to an improved enabling business environment and export competitiveness of Moldova. These project components are expected to yield economic benefits by boosting private sector growth, productivity, and job creation.

2. The scope and nature of the investments envisioned under this project fully justify public financing, given that the project’s impact will improve the business enabling environment, and improve conditions for export-based growth. The project will provide public goods such as a lower-cost regulatory environment, increase in efficiency of public agencies to implement reforms, and services that have positive spillovers for growth of export-oriented sectors (e.g. improved access to information on export markets from MIEPO, the export promotion agency). The project will directly reduce the cost of doing business by decreasing the time that managers spend dealing with regulation. The project will also remove market failures that are hindering the ability of the business development service market to support additional value creation in enterprises. The project will provide direct and indirect benefits to Moldovan export oriented enterprises and SMEs which face severe constraints to medium to long term financing. In addition, the project poses no risk to macroeconomic or fiscal stability of Moldova. The proposed loan of USD 45.0 million for the project represents approximately 0.6 percent of GDP. This suggests that inflationary and monetary pressures created by the project would be marginal, if any at all.

3. The project’s impact will be far-reaching. The improvements in the business enabling environment will affect all firms. Small and medium enterprises represent nearly 98 percent of companies in Moldova, and thus activities to promote increased competitiveness and exports in this sector will affect large segments of the economy.

4. The World Bank brings significant value-added to this operation, due to the depth and breadth of its expertise and long-standing engagement with the GoM on these issues. This operation will strongly benefit from World Bank’s international experience in advancing private sector development in the Europe and Central Asia region, as well as globally; its ability to provide long-term financing; and its solid reputation for project supervision, responsible financial management, and transparent procurement practices. Moreover, in the Republic of Moldova, the World Bank has been leading dialogue on these reforms and has been dynamically engaged with the government agencies tasked with their implementation, for over a decade. The Government of Moldova sees the World Bank as a strong and trusted partner in private sector development issues. The World Bank’s work in these areas includes under the first Competitiveness Enhancement Project (CEP I, 2006-2013), previous projects (Private Sector Development I and II, in 1996-2002 and 1997-2005 respectively), and analytical work (such as the 2013 study on Policy Priorities for Private Sector Development). Lastly, the WB’s status as

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an objective third party (especially important for regulatory reform, in which disagreements among ministries can impede progress) brings additional value.

5. More detail on the economic analysis by project component is presented below.

Regulatory Reform

6. The Regulatory Reform component will bring about significant reform in efficiency of government processes and facilitate a business-enabling environment. The key activities of this component will aim to reduce the cost of doing business faced by SMEs, by greatly improving the efficiency of government processes used to regulate of private sector activity, and thereby reducing the cost to businesses of interactions with public agencies. Given that the direct benefit of this activity will be economy-wide and would strengthen capacity of the public sector, public financing is fully justified. Moreover, the project would result in positive gains for the government agencies through a system of incentives and performance monitoring. The component will introduce performance monitoring indictors, which will allow government agencies tasked with reform to not only gage their progress, but also implement a positive system of incentives to improve public authorities’ interactions with businesses in terms of time, cost, and number of procedures. By its nature, this is a public good, the benefit of which is hard to capture in a quantitative measurement. Given the nature of these reforms as continuing beyond project completion date, the benefit to Moldova’s SMEs and the gains in efficiency will continue to increase, after the one-time injection of funds needed to support these reforms.

7. The component is expected to reduce the time spent by managers of Moldovan enterprises to deal with regulatory requirements by over 20 percent. This will result in in greater time available for value-added and revenue-generating activities, increasing the potential of Moldova’s private sector overall. Through improved regulatory processes and reforms, it is expected that the time that senior managers at Moldovan enterprises spend dealing with regulatory requirements will be reduced from 10.7 percent in 2013 to 7.0 percent in 2019. The project will continue the progress achieved under CEP I project, during which managers’ time spent dealing with regulatory requirements fell from 16 percent in 2007 to 10 percent in 2010, and rose slightly in 2013 to 10.7 percent. Calculating the overall benefit to the economy of the reduction in time would depend on compounding many assumptions that may not eventually hold. However, given that there are approximately 50,700 enterprises in Moldova as of the end of 2012, in order for the regulatory reform component to have a positive net economic effect, the Net Present Value of the benefit to firms would need to be only US$140 per firm. This is approximately equivalent to the daily rate of a mid-level consultant for one day. A senior manager’s salary would be much higher, and 10.7 percent of time is equal to nearly 28 days of work in one year. Freeing a larger percentage of senior management’s time for strategic business activities would bring additional benefits in the form of the fruits of that labor (higher revenue and/or lower costs, and higher overall productivity). Therefore, the expected benefit from the reform governance subcomponent is much higher than the cost of the component overall.

8. In addition to savings in management time, the component will contribute to gains in efficiency that is expected to specifically benefit exporters. The component will streamline the processes for obtaining permissive documents, with a focus on those that present particular problems for Moldovan exporters. Through implementation of one-stop shops, electronic

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issuance, and legal reforms to reduce overlaps and duplicates, Moldovan exporters stand to significantly benefit with increased efficiency, less delays, quicker financial turn-around, and possibly higher revenues (due to larger volume of sales). Based on the 2013 Cost of Doing Business survey,51 about 71 percent of the companies in Moldova in 2013 were obliged to hold authorizations52 to carry out their business activities. Taking into account that exporters usually face more documentation than non-exporters, a reduction in authorizations’ processing will yield broad-ranging benefit for SMEs, and in particular for exporting SMEs. Moreover, in 2013, a manager spent on average 6 hours to obtain an authorization, and it took 15 days to obtain the authorization, while the cost of obtaining an authorization was about US$215. Thus, this component further fosters savings in time and resources for management of exporting SMEs. Lastly, there is additional value that could be generated if these savings are effectively invested in revenue-generating activities, possibly resulting in a multiplier effect of the benefit produced.

9. Moldovan enterprises will also benefit from this component’s focus on advancing fair competition in the Republic of Moldova. International experience confirms that firms competing in open, contestable markets are more productive and therefore more likely to export, while anti-competitive practices and restrictive product market regulations increase the cost of intermediate services and products, decreasing country competitiveness in global markets. Thus, the component’s goal to remove regulatory barriers to competition in three economic sectors, will contribute to healthy competition between Moldovan firms, contributing in return, to sustained productivity and increased export competitiveness of the economy. The component will work with the Competition Council to build its capacity in applying and enforcing Law on Competition, which closely follows EU norms. Thus, in addition to the macro-economic benefits outlined above, the value of these activities will also include a strengthened regulatory body and a normative alignment with the EU standards on competition. This will benefit firms and individual producers in the selected sectors, as well as consumers on the domestic and international market. Moreover, empirical evidence illustrates that improved competition has tangible effects on productivity, growth, and consumer welfare. The box below summarizes some of the international examples of gains from improved competition policy.

Box 2: International evidence in support of vibrant competition policy:

A study of 22 industries in 12 OECD countries showed that an improvement of 20 percentage points on a competition policy index – roughly equivalent to moving from the level of enforcement in the Czech Republic to that in the United Kingdom – increases total factor productivity growth by one percent. In Australia, competition policy reforms in the 1990s increased GDP by 2.5 percent, or US$20 billion. In 24 transition economies, as they moved from an economic system without competition to a market economy over a period of three years, firms that remained as monopolies saw their real sales decline by one percent, while firms that faced between one and three competitors experienced sales growth of almost 11 percent over the same period. However, this boost to sales through competition tapered off as more competitors entered the market. These findings are from Carlin, Schaffer, and Seabright 2004, which explores why sales growth is stronger when facing a larger set of competitors. The paper concludes that the transition to at least some rivalry in the market (when firms face 1-3 competitors) incentivizes firm

51 World Bank, Ministry of Economy of Moldova, and NGO Centrul de Dezvoltare Economică Rurală Promo-Terra. Final Report on the Cost of State Regulatory of Business Activity. May 2013. 52 The definition of authorization includes: permits, licenses, certificates, clearances, approvals, coordination, patents, certificates of qualification issued by public authorities or the institutions legally authorized with regulatory and control functions.

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managers to use resources more efficiently. The paper also finds indications that more intense competition increases productivity growth. An analysis of nearly 2000 retail stores in 41 Indian cities found that pro-competition reforms can boost labor productivity by about 87 percent. In Kenya, eliminating controls on prices and private trade in maize facilitated consumer savings of nearly US$10.1 million a year. An analysis of 40 international cartels in the 1990s found that prices fell by 20-40 percent after the cartels were broken up. A study of 20 OECD countries showed that reforms reducing state controls would increase long-term employment rates by 2.5-5.0 percentage points. Research on state aid indicated that sectors where subsidies and state aid are concentrated in only a few firms have lower productivity growth, and the effect is particularly strong in developing countries. Source: World Bank. Republic of Moldova: Policy Priorities for Private Sector Development. June 2013.

SME Development

10. The activities envisioned under the SME development component will result in significant positive benefits for Moldovan SMEs and exporters. Given that the objective of this component is to strengthen Moldovan SMEs’ linkages to markets and ability to compete in those markets, this component carries wide-ranging benefits across most of Moldova’s private sector. The strengthening of linkages to international markets, diversification of international markets and associated decreased vulnerability of enterprises to volatility in specific markets, gains in efficiency, better management, development of niche industries or products, other new export-oriented activities53, and increased revenue are among the benefits that Moldovan SMEs may gain from the activities envisioned in this component. Such activities will address information asymmetries on export markets, provide programs and services that are better designed to fit SMEs’ needs, make available matching grants to SMEs to foster linkages to BDS providers, among others.

11. The component’s specific activities on institutional reform of ODIMM and MIEPO present strong evidence of expected public gain from this project. Given that both institutions are public entities, under the auspices of MoE (that are tasked with advancing the development of SMEs and facilitating export linkages), effective reform in these institutions would significantly positively affect the capacity of Moldovan SMEs and exporters, by designing programs and products that are much more responsive to the needs of these enterprises. International experience suggests that countries with robust SME development agencies tend to have more vibrant, well developed, and more profitable SME sectors and higher degree of export competitiveness than countries that do not have such support. Such institutions could improve conditions for SMEs by addressing information asymmetries about available business development services to SMEs, addressing information asymmetries and coordination failures through contributing to supplier development, and providing other publicly-justified support to facilitate management training, improving financial management, fostering linkages with markets and national branding, or facilitating international representation for exporters through commercial attaches.

53 “Other new export-oriented activities” is defined in this project as “Beneficiaries exporting to new markets or new customers, exporting for the first time, exporting new products, or selling new products into export-oriented value chains”

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12. The SME component also aims to directly addresses the market failure of information asymmetry on business development services (BDS) that is observed in Moldova’s private sector. Research54 cites an underdevelopment of the Moldovan business development services sector, a key ingredient in many vibrant export competitive economies. More alarmingly, the OECD research also points to a lack of trust between SMEs and BDS providers and an absence of more complex services such as marketing and value-chain analysis; a key ingredient for export facilitation. Moreover, international experience has shown that there is a strong role for government agencies to play in the development of their SME and business development services sector, as long as these institutions play a market-facilitator role55. The reforms envisioned under this component would aim to address these market failures by developing the capacity of these institutions in precisely this manner; enabling them to effectively connect SMEs with BDS providers that are best positioned to respond to SME needs, while addressing the lack of access to finance to cover the costs of these services. Thus, the potential benefit from this component is not limited to the SMEs that will benefit from interactions with ODIMM and MIEPO, but also extends to a whole sector of BDS providers. In addition, some business support infrastructure (BSI), such as market information for exports, efforts to reduce barriers to competitiveness of sub-sectors, etc., has positive spillovers and benefits multiple enterprises across various sectors. The study had also concluded that this development would be most supported by a market-oriented approach. These findings had informed the design of CEP II.

13. Through the MGF, the SME development component will further address the information asymmetry that is faced by SMEs about the value of BDS for export competitiveness. The MGF subcomponent will provide financial subsidy for SMEs to invest in value-added activities or export-oriented processes. Thus, this program is expected to overcome the market failure by encouraging SMEs to use BDS to help increase their competitiveness, and see first-hand that these services will increase their opportunities to reach new markets, new customers, export new products, and develop other new export-oriented activities. Once the enterprises experience the benefits of these services, they will be more likely to pay for them. In this way, the MGF will address the market failure. The MGF is also expected to result in net gain by encouraging growth and development of the sector, as well as an improvement in BDS quality, increase in SMEs’ trust in market-oriented activity, and ultimately make better-informed decisions about their business development and value from future investment in such services.

14. The calculated benefit from the MGF is expected to be significant and positive for participating SMEs. Using the impact assessment of CEP I as a possible proxy for possible benefit to be expected under CEP II, regression analysis of CEP I’s MGF has suggested that “a positive and statistically significant impact on export performance two year after the application was found.”56 The CEP I impact assessment report also calculated that the additional value of exports was in the MDL 9-12 million range (roughly, between US$780,000 and US$1,040,000). Moreover, the analysis also concluded that the MGF resulted in a “positive significant impact on total sales” of participating SMEs. Given that the MGF under CEP II will be similar in design

54 OECD Investment Compact for South East Europe. Fostering SME Development in the Republic Of Moldova: Business Development Services. September 2013 55 Business Development Services for Small Enterprises: Guiding Principles for Donor Intervention. February 2001. Committee for Donor Agencies for Small Enterprise Development. 56 Economisti Associati. Impact Evaluation of the CEP Matching Grants and Line of Credit Component: Final Report. June 2013.

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and target similar beneficiaries, as well as build-in improvements drawing from the lessons of CEP I, the expected impact from this activity is expected at least as much as under CEP I. Although the MGF is designed to be a temporary, short-term mechanism designed to address the market failure, its benefit will not be short-lived. If the component is successful at fostering linkages between exporting SMEs and BDS providers and the development of a more commercial BDS market as the market failure is overcome, then the gain from such increased interaction will continue beyond the life of the project and the initial investment, as well as incorporate spillover effects extending to non-participating SMEs.

Access to Finance

15. The access to finance component will provide direct and indirect benefits to Moldovan export oriented enterprises and SMEs which face severe constraints to medium to long term financing. Under the LOC, the main beneficiaries are export oriented enterprises in agriculture, agro-processing, manufacturing or other economic sectors that provide goods or services directly related to generation of foreign exchange export revenues. Up to 30 percent of funds under the line of credit are expected to be lent to indirect exporters (enterprises providing inputs/services to export oriented enterprises). With Moldovan economy gradually recovering and recently surpassing its pre-crisis levels, businesses has become more active in seeking long-term working capital and investment financing at competitive prices. Financial institutions, however, have remained risk-averse and have not adjusted their lending portfolios to meet the rising demand. The proposed US$29.3 million LOC will help address this increase in demand. While the maximum exposure to one beneficiary will be capped at US$800K, it is estimated that the average sub-loan amount will be approximately US$300K. That will ensure disbursement of at least 95 sub-loans out of the proposed LOC. Moreover, additional benefits from this activity will be in form of disbursements of sub-loans from the revolving fund that will be accumulated by the CLD upon re-imbursement of the original sub-loans by beneficiaries and will continued after the completion of project.

16. The LOC will also offer micro economic benefits as it will allow for a diversification in participating banks’ sources of funding, as well as provide monitoring of the financial sector through first-hand engagements with the participating commercial banks. While the proposed PFIs are benefiting from parent bank financing, as well as make use of other IFI/donor funded credit lines, conversations by the team with PFIs management revealed that they view participation in this WB funded project as an important strategic objective, where it will allow PFIs to access long term resources at a very reasonable cost. More importantly, the design of the LOC ensures observance by the PFIs of all prudential requirements of the National Bank of Moldova (NBM), including major prudential indicators such as Total Normative Capital (TNC), Capital Adequacy Ratio (CAR), liquidity ratios, and lending concentration and large exposures and improved governance. These improvements can have great significance for the stability of a financial system, especially in times of financial distress. Given the benefit of these involvements as contributing to growth and systemic stability of Moldova’s financial sector, the perceived benefit outweighs the initial investment.

17. The estimations of significant and tangible benefits to Moldovan SMEs from CEP II LOC are derived from the success of CEP I. The impact assessment of CEP I, the design of which had informed the design of CEP II, found that about three fourths of the interviewees ascribed to

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LOC loans a positive effect on their ability to (i) purchase raw materials in larger quantity and/or at the most appropriate time, and (ii) improve their payment terms to business suppliers. In case of less frequently occurring investment loans, beneficiaries typically reported an appreciable influence on the modernization of business equipment and/or facilities (e.g. expansion of bus/trucks fleet, installation of new equipment for sorting and packing seeds, modernization of bottling line, etc.), which, in turn, led to improvements in the technical efficiency of business operations and/or to an expansion of production capacity. Finally, the influence exerted by LOC loans on the composition of the product mix (with the development of new products) also showed some positive results, as illustrated in Box 3 below.

Box 3: CEP I, Examples of development of higher value added products and services

• Example #1. A leading agribusiness company involved in processing and exporting walnuts obtained an investment loan to modernize the processing process. Thanks to the purchasing of a walnut sorting machine investment, the company significantly improved the final product quality with reference to different international quality parameters, such as size, color, and packages, which are of paramount importance for foreign buyers. More specifically, the new machine allowed fully meeting an international standard concerning the marketing and commercial quality control of inshell walnuts (i.e. UNECE Standard DDP-01). This positively influenced the company’s reputation vis-à-vis foreign importers and facilitated the penetration of new export markets: in 2012, the company moved beyond its traditional European markets to start exporting to China and Australia (and received its very first order from an US importer).

• Example #2. A company in the hospitality industry used LOC loan proceeds to complete the reconstruction and modernization of a hotel in Chisinau. As a result of this renovation works, the company was able to largely increase the hotel quality standards and to start and successfully conclude partnership negotiations with world’s largest hotel chain (i.e. Best Western). After (and largely due to) the LOC loan, the company managed to double its annual turnover and to hire two additional full-time employees.

18. In addition to the above mentioned direct effects, indirect and/or broad positive effects are also expected from the LOC. Several CEP I beneficiaries pointed out that in addition to the strong positive influences reported above LOC loans also allowed beneficiaries (i) free up internal resources, which could be used for other investment purposes, and/or (ii) relax business financial constraints during difficult periods. These benefits are hard to compute numerically, but the impact of more agile business practices that are able to respond to changing financial environments directly affects sustainability of business and its growth potential. Thus, resulting in a multiplier effect to the enterprise, as well as to the economy.

19. The LOC is also expected to promote best practice in lending with regards to transparency and uniformity of pricing of the sub-loans. This impact will be transmitted by requiring the PFIs to simplify their pricing structure to beneficiaries and include only the interest rate and commitment fee – no disbursement fee, front-end fee, or prepayment penalty. Even though the final decision on applicable fees and commissions will rest with the PFIs, the team is pleased to note that during CEP I implementation the banks have been responsive to CLD’s and WB team’s requests and the vast majority of sub-loans have been priced and quoted in such a transparent manner by the PFIs. This is an important good practice in the area of SME and consumer finance protection that has been introduced with the help of the CEP I credit line and will be sustained under the proposed CEP II Access to Finance component. The latter practice has been also very much appreciated by the beneficiaries of CEP I, based on multiple interviews with beneficiaries during the team’s site visits.

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20. The access to finance component will also have positive impact on SME lending through the provision of technical assistance on establishing a Risk Sharing Facility. This activity will undertake TA to revamp the existing credit guarantee scheme undertaken by ODIMM to effectively implement its current guarantee programs. A fully functional credit guarantee scheme will facilitate greater SME lending by reducing the credit risks that commercial banks face in expanding in this segment and by providing a new type of collateral i.e. guarantees to address SME financing constraints resulting from insufficient or unacceptable collateral. Thus, the direct benefit of this activity will be to strengthen GoM’s capacity and understanding in exploring such forms of innovative financing for SMEs, while the benefit for Moldovan banks would be a mechanism to address the perceived high risks and lack of sufficient collateral in SME financing. More importantly, the impact from institutional strengthening of RSF are the Moldovan SMEs that stand to benefit from increased access to finance and better portfolio and risk assessment, allowing them to engage in more revenue generating activities and pursue exporting opportunities.

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Annex 7: Implementation Support Plan


1. This implementation support plan (ISP) describes how the World Bank will support the implement the risk mitigation measures and provide the technical advice necessary to help the client achieve the PDO. This ISP also identifies the minimum requirements to meet the World Bank’s fiduciary obligations. It has been developed based on the nature of the project and its risk profile. Formal implementation support visits and field visits will be carried out semi-annually and focus on the areas detailed below.

2. There will be strong coordination between the World Bank, the implementing agencies, the PIU, and partners. The World Bank task team will bring a comprehensive set of instruments and expertise to advise on project activities. It will work closely with the implementing agencies and the PIU to ensure project success. The team plans four implementation support visits on average per year to the Republic of Moldova, as well as ongoing dialogue via videoconferences, telephone, and email.

3. In addition to implementation support visits and ongoing engagement, the World Bank project team will carefully monitor the progress of project implementation and achievement of results via formal and informal reporting channels. Formal reporting channels include Implementation Status and Results reports, consultant deliverables, and results monitoring reports supplied by the PIU (more detail in Monitoring and Evaluation below). Informal channels include interaction with direct beneficiaries of the project, reports from local media, and international assessments such as Doing Business Indicators and country economic analysis.

4. The project team will also take a flexible approach to ensure that it meets client needs as circumstances evolve. The World Bank will continue a close policy dialogue with the implementing agencies and the government.

5. Financial Management. The World Bank will conduct risk-based financial management supervision, initially after every six months (as part of implementation support visits), and later at appropriate intervals based on assessed risk. During project implementation, the World Bank will supervise the project’s FM arrangements in the following ways: i) review the project’s quarterly interim financial reports, the annual audited financial statements, the auditor’s report, and remedial actions recommended in the auditor’s management letters; ii) during the World Bank’s onsite implementation support visits, review project accounting and internal control systems, budgeting and financial planning arrangements, and disbursement management and financial flows, as applicable; and iii) at other times when applicable, participate in discussions with the client, checking that payments are done strictly in accordance with contract provisions, and look into any areas requiring attention on results-based financing.

6. Procurement. As part of implementation support visits, the World Bank will undertake procurement supervision, including post reviews. In addition, as required, a dedicated procurement specialist will be available on an ongoing basis to work with the client to ensure proper understanding and application of the Bank’s procurement guidelines early during project implementation. Implementation support missions will be geared towards: i) ensuring that implementing agency staff properly understand the procurement guidelines and how to apply

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them; ii) reviewing procurement documents; iii) providing detailed guidance on the Bank’s Procurement Guidelines; and iv) monitoring procurement progress against the detailed Procurement Plan.

7. Monitoring and Evaluation. The World Bank will review the updated result framework submitted quarterly by the PIU during the supervision mission or as a desk review. The team leader will discuss the progress and deviations with the PIU to identify any areas where additional help from the World Bank is needed. The PIU and World Bank will also use results data to build awareness of project results among key beneficiaries and counterparts.

8. The tables below detail the key areas of focus of the implementation support activities for the first 48 months of the project’s implementation. These have been determined based on conversations with the client and an understanding of the priority activities to be implemented during the first two years of the project. Future updates will be based on progress on project activities, timing of major new activities or large procurement packages, and the expertise required to address any issues that arise, among other things.

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Implementation Support Plan Time Focus Skills Needed Resource

Estimate (staff weeks)

Partner Role

Months 1-12 General WB supervision (FM, procurement,

establishment of the M&E system and collection of M&E data)

FM Specialist, Procurement specialist, M&E Specialist

3

Project coordination and monitoring TTL, Procurement Specialist, FM Specialist

4

SME Development

Procurement of IT, minor office equipment for ODIMM and MIEPO

TTL, Procurement Specialist 1

Capacity building of ODIMM and MIEPO: assessment of Industry/Sector/Subsector needs, assistance in strategy formulation, detailed program design and delivery mechanisms, hiring of local consultants

TTL, PSD Specialist

10

Build on existing USAID sector studies and collaborate on new studies

Consult and coordinate with EU on previous work to reorganize ODIMM and MIEPO

Development M&E capacity of ODIMM and MIEPO (technical capacity building of staff and IT procurement)

TTL, PSD Specialist, Procurement specialist 2

Outreach and Communication development of ODIMM and MIEPO (strategy, assessment of additional tools, website, local/regional events)

TTL, PSD Specialist 2

Consult with EU

Matching Grant Facility and BDS technical support


Impact Evaluation for MGF TTL, Impact Evaluation Specialist

4

Regulatory Reform

Permissive documents-related implementation support (legal and ICT-specific)


Governance-related implementation support (M&E system, including performance

TTL, PSD Specialist, Public Sector specialist

6

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indicators) Competition-related implementation support TTL, PSD Specialist 4

Access to Finance

Line of Credit for export-oriented enterprises TTL, Financial Sector Specialist, Due Diligence Expert, Safeguards Specialist, Procurement Specialist

8

Technical assistance to ODIMM to revamp the existing credit guarantee program

TTL, Financial Sector Specialist, Risk Sharing Facility Expert

3

Technical assistance to MoE and banks on undertaking assessment of appropriate agriculture value chain financing models and implementation of pilot

TTL, Financial Sector Specialist

1

Months 13-24 General WB supervision (FM, procurement,

establishment of the M&E system and collection of M&E data)

FM specialist, Procurement specialist, M&E Specialist 3

Project coordination and monitoring TTL, procurement specialist, FM specialist

4

SME Development

Capacity building of ODIMM and MIEPO: assistance in strategy formulation, detailed program design and delivery mechanisms, hiring of local consultants, study tours for staff

TTL, PSD Specialist

8

Consult and coordinate with EU on work to reorganize ODIMM and MIEPO Collaborate with IFC Competitiveness Unit in Singapore

Development M&E capacity of ODIMM and MIEPO (technical capacity building of staff and IT procurement)

TTL, PSD Specialist, Procurement Specialist 3

Outreach and Communication development of ODIMM and MIEPO (roll out of additional tools, website, local/regional events)


Consult with EU

Launch of assistance from an international expert in Angel Funds and Venture Capital Funds

TTL, PSD Specialist, Procurement Specialist

2

MGF & BDS technical support TTL, PSD Specialist 4

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Impact Evaluation for MGF TTL, Impact Evaluation Specialist

2

Regulatory Reform

Permissive documents-related implementation support (legal and ICT-specific)

TTL, PSD specialist 3

Governance-related implementation support (M&E system, including performance indicators)

PSD, Public Sector Specialist 3

Competition-related implementation support TTL, PSD Specialist 2 Access to Finance

Line of Credit for export-oriented enterprises TTL, Financial Sector Specialist, Safeguards Specialist, Procurement Specialist, Due Diligence Expert (if required)

8

Technical assistance to ODIMM to revamp the existing credit guarantee program

TTL, Financial Sector Specialist, Risk Sharing Facility Expert

2

II. Skills Mix Required (over the total 24-month period)

Skills Needed Number of Staff Weeks

Number of Trips Comments

TTL 25 8 PSD Specialist (MIEPO and ODIMM reform) 10 4

PSD Specialist (Matching Grant Facility and BDS technical support) 8 4

Impact Evaluation Specialist 4 2 PSD Specialist (business regulation & public sector governance) 8 4

PSD Specialist (competition) 4 3

Coordinate with ongoing IFC TA

Public Sector Specialist (governance) 6 3 Financial Sector Specialist 12 6 Environment Specialist 6 4 Due Diligence Expert 2 1 (2 if needed)

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Risk Sharing Facility Expert 3 2 FM Specialist 8 – Based in Chisinau Procurement Specialist 8 – Based in Chisinau

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Annex 8: Appraisal of PFI Eligibility

1. The success of a credit line operation critically depends on the effectiveness and quality of the participating financial institutions (PFIs). Strong and capable PFIs, which are in a stable financial condition with proper capacity to appraise and carry the credit risk, are more likely to support enterprises in the export sector and deliver funds effectively and efficiently to viable subprojects, which are consistent with Project objectives. This is especially important for operations in the unstable economy recovering from crisis.

2. Based on CAMELS methodology, interested banks will be obliged to satisfy the following eligibility criteria:

• Compliance with National Bank of Moldova prudential regulations and other applicable laws and regulations.

• Good governance – “fit and proper” owners; adequate Board composition and practices; adequate organization and institutional capacity for its specific risk profile; existence and effectiveness of business and risk related committees (ALCO-Assets/Liability Management, Risk Committees, Credit Committees, Audit Committee, etc) operating with adequate policies and procedures; competent management with adequate managerial autonomy; business strategy aligned with bank's size and management experience.

• Capital Adequacy -- good capital structure and compliance with risk-based capital adequacy requirements; positive trend adequate for bank’s growth perspectives and risk characteristics of new business initiatives.

• Adequate Liquidity and Effective Asset/liability Management (ALM) -- liquidity meeting NBM regulations and bank’s needs with effective liquidity management practices. Good funding structure without heavy concentration and capacity to mobilize domestic resources. Adequate contingency planning for funding to meet unanticipated events or periods of excess liquidity.

• Adequate Profitability – The bank must have positive profitability with well diversified and stable earnings trend and acceptable risk profile. It must maintain the value of its capital57. Level and growth trends of operating costs and expenses should be well managed.

• Good Asset Structure and Portfolio Quality -- Good asset structure including type, concentration, liquidity and diversification; effectiveness of loan underwriting and the related policies, procedures and practices; lending to connected parties; asset classification and provisioning practices58; level, distribution and severity of classified assets and timely identification and collection of problem assets.

• Adequately Managed Financial and Operational Risks -- Financial and operational risk management functions should be well organized; the bank must have well defined and prudent policies and written procedures for management of all types of financial risks

57 “Maintaining the value” of its capital means that the bank is adequately provisioned for the level of risk it is taking and that the bank’s retained earnings are at least at the level of inflation. 58 The bank must classify its assets and off-balance-sheet credit risk exposures (at least four times per year) and make adequate provisions. It must have adequate portfolio quality. The bank should not have more than 10 percent of criticized assets (i.e., classified as doubtful and loss).

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(liquidity, credit, currency, interest rate and market risk, as well as risks associated with balance sheet and income statement structures) and operational risk; exposure to interest rate risk, currency risk and market risk at the instrument, portfolio, and balance sheet levels within risk limits and well managed.

• Adequate Internal Audit Function, including organization of internal audit and NBM compliance functions; internal audit policies, procedures and practices; annual audit planning and execution, ensuring that all risk areas are examined, and that those areas of greatest risk receive priority; reporting requirements to senior management and Board; quality of reporting and responsiveness to audit suggestions, recommendations, or requirements; follow-up on any noted issues.

• Adequate Information Technology (IT) and Management Information Systems (MIS) – Adequate organization of IT functions, including operation and maintenance of hardware and software systems; use of modern IT technology and relational database systems and professionally developed and updated application systems; on-line real time interconnectivity with branch offices; real time support for e-banking (ATMs, Internet and mobile phone banking); adequate and effective back-up and support systems.

• Appropriate Capacity, including staffing for carrying out subproject appraisals and for supervising subprojects implementation that would meet the requirements for effective participation in the Credit Line.

3. All larger banks licensed in Moldova that have actively participated in Bank’s earlier credit line projects in Moldova have been invited to express interest for participation in the project. As of January 2014, seven banks have confirmed their interest for participation, including Moldova AgroInd Bank, Victoria Bank, MoldIndCon Bank, Mobias Bank, ProCredit Bank, FinCom Bank and Comert Bank. Recent NBM stress tests indicate that these banks are in fairly stable financial condition, whereby the banks’ capital would remain positive under any crisis scenario. Table 12 summarizes the key performance indicators for the seven banks.

Table 12: Performance Indicators of Interested PFIs Bank Share of

Assets(i) (%)

Share of

Capital (%)(ii)

CAR (%) (iii)

ROA/ROE (%)(iv)

Total Loans (MDL mil.)

Share of Loans (%)

Non-performing loans as %

of Total

Deposits (%)

Banking System

100.0 100 23.4 1.6/9.4 38,096 100 11.50 100

AgroInd 17.6 21.19 22.2 2.77/15.51 8,723 21.78 6.35 19.96 Victoria 15.3 13.18 18.84 2.27/15.73 6,837 15.86 12.49 19.72 MoldIndCon 16.8 13.18 17.44 2.92/25.66 7,454 17.96 5.31 18.34 Mobias 5.85 9.56 34.87 1.95/8.62 2,603 6.55 6.01 6.20 ProCredit 3.87 3.41 18.62 0.73/6.52 2,102 5.25 5.99 3.35 Comert 1.14 3.10 50.33 0.70/2.65 422 2.45 4.34 1.13 FinCom 2.57 2.89 20.47 0.80/3.81 951 0.95 9.78 2.45 Notes: From statistics of NBM and reported by banks to CLD (i) Share of total banking system assets (ii) All banks in the Table have only Tier 1 capital in their capital structure at this time. (iii) CAR – capital adequacy ratio. (iv) ROA- Return on Assets; ROE – Return on Equity

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4. While all interested banks will ultimately be appraised, the decision was to start with three banks with higher market presence and that are likely to be able to meet the eligibility criteria. The specific criteria used to select the first three banks included: i) Market presence and active participation in earlier World Bank credit lines with positive attitude and ready to cooperate; ii) Compliance with NBM prudential regulations and other applicable legal framework; iii) Adequate capital, which must comply with NBM regulations and provide space for growth (i.e., high capital adequacy ratio); iv) High asset quality – substandard, doubtful and loss should not be higher than 10% of the total loan portfolio. If higher than 10%, there should be a declining trend and the bank should be highly profitable with well diversified income structure that is not heavily dependent on interest income; and v) Good loan portfolio structure without heavy concentration.

5. ProCredit Bank, Mobias Bank and Victoria Bank were selected to start the due diligence assessment. Agroind Bank currently has some on-going issues related to the ownership structure that have been raised by the National Bank of Moldova. This needs to be resolved before the start of due diligence review. Comert Bank and FinCom Bank are among the smallest banks in Moldova.

6. The appraisal of three banks included a detailed assessment of whether a bank meets the CAMELS-based eligibility criteria (as specified above). The due diligence review process included:

• Interviews with senior management regarding bank organization, business strategy, ownership and governance structure.

• Interviews with senior management on Bank’s financial condition and profitability, including review of related bank’s policy documents and Board reports.

• Review of externally audited financial statements as of December 31, 2012 and unaudited financial statements as of December 31, 2013.

• Interviews with senior management on lending policies, procedures and practices, financial risk management, operational risk management and review of related documents on bank’s policy and procedures.

• Review of internal audit function and review of related documents on bank’s IA policy/procedures and IA reports and follow-up process.

• Summary information related to IT systems.

ProCredit Bank

7. Pro-Credit Bank (PCB) is present in Moldova banking market since 2008 with primary focus on micro and small enterprises. PCB is a member of the ProCredit Group (PCG), which owns 22 banks in 22 countries and four continents.59. PCG is a public-private partnership60, including a number of well-known international financial institutions, such as IFC.

59 Since 1998, ProCredit Holding has become a parent company of 22 banks and financial institutions. The equity base of the ProCredit group is EUR 469 million. The total assets of the ProCredit group are EUR 5.5 billion. 60 PCB shareholders are ProCredit Holding with 85.8 percent of shares, KfW (Development Bank owned by the Government of Germany) with 10.2 percent of shares and Dutcb DOEN Foundation with 4 percent. ProCredit Holding is a public-private partnership. In addition to IPC (the private consulting company from Germany) and IPC Invest (the investment vehicle of the staff of IPC and ProCredit), the other private shareholders of ProCredit Holding include the Dutch DOEN Foundation, the US

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The bank started as microfinance institution and had a few challenging years, typical for early stages of development, trying to establish presence in Moldova banking market and develop branch network of 23 branches (of which half out of Chisinau). After a few challenging years, PCB managed to cover its operating cost in 2012 and become profitable. The bank has about 34 thousand clients, of which 12 thousand borrowers.

8. PCB has a stable financial condition and meets all NBM prudential requirements. As of end 2013, PCB assets totaled MDL 2.95 billion (US$246 million), with total loan portfolio of MDL 2.2 billion (US$168 million), total deposits of MDL 1.6 billion (US$120 million) and capital of MDL 388 million (US$29 million). PCB is one of the smaller banks in Moldova – its assets are about 4.2 percent of the total banking sector assets with loan portfolio accounting for about 5,25 percent of the total banking system loan portfolio. In 2013, its profit was US$1.3 million. Its return on assets (ROA) was 0.73 percent and return on equity (ROE) was 6.52 percent. (In 2013, average ROA for the banking sector was 1.77 percent and average ROE was 10.72).

9. Pro-Credit Bank is well managed. PCB has organization and policies and procedures that are the same for all members of the PCG group and receives significant training and technical assistance, when needed. As a matter of principle, Pro-Credit Holding guides the development of all its members – it provides banks’ senior management and supports the banks in all key areas of activity, including banking operations, human resources and risk management. It ensures that PCG corporate standards are implemented group-wide, and also in line with standards set by the German supervisory authorities.

10. PCB has introduced some innovative MSME credit risk management concepts. In 2012, the bank introduced the Business Client Advisory (BCA) concept aiming to improve the efficiency of services provided to SME clients and improve understanding and management of credit risk associated with long term finance. The results were positive. Loans classified as substandard, doubtful and loss accounts for 5.4 percent of the total loan portfolio.

11. PCB meets the eligibility criteria. The bank plans to increase its presence in the Moldovan banking market. It expects to see fast growth period in the next couple of years, providing that it is able to ensure adequate funding. Consequently, the bank is expected to be a very active and successful participant in the Project.

Mobias Bank

12. Mobias Bank (MBSG) is one of the first commercial banks in Moldova. It started operations in 1990. In 2007, Societe Generale61 (SG) became a dominant shareholder and the

pension fund TIAA-CREF, the US Omidyar-Tufts Microfinance Fund and the Swiss investment fund ResponsAbility. The public shareholders of ProCredit Holding include KfW (the German development bank), IFC (the private sector arm of the World Bank), FMO (the Dutch development bank), BIO (the Belgian Investment Company for Developing Countries) and Proparco (the French Investment and Promotions Company for Economic Cooperation). 61 Founded in 1864, Societe Generale is one of France’s largest financial services groups with total assets of EUR 1.25 trillion and total equity of about EUR 51 billion, as of end 2012. It has subsidiaries in 77 countries with around 172,000 employees serving over 33 million clients. Based on a diversified universal banking model, SG Group is active in retail banking, corporate

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bank changed its name to Mobias Bank - Societe Generale Group (MBSG) in 2008. Since 2008, MBSG has a stable ownership structure62. The bank has traditionally been focused on large clients and retail banking. With savings and loan accounts of about 96,000 clients, its consumer and mortgage lending accounts for about 25 percent of the total Moldova’s retail banking market. It also has some of the largest clients in Moldova, such as Moldtelecom and Transoil Group. The SMEs have not received particular focus so far, but this is likely to change once the business plan with staff reallocation has been implemented.

13. MBSG is in a stable financial condition and meets NBM prudential requirements except for credit concentration due to bank’s focus on larger clients. With assets of about MDL 4.5 billion (US$346 million) and loan portfolio of MDL 2.76 billion (US$212 million) as of end 2013, MBSG has a mid-market position (5.86 percent of assets and 6.55 percent of total credit in the Moldovan banking market). As of end 2013, the total loans classified as substandard, doubtful and loss (C/D/E) were 5.81 percent of the total loans. As of end-2013, MBSG capital adequacy ratio was 34.6 percent, much higher than the NBM requirements63. As of end 2013, its net profit was MDL 71 million with return on assets (ROA) of 1.9 percent and return on equity (ROE) of 8.1 percent.

14. MBSG has a well defined business strategy and good governance. MBSG has organization, risk management standards and practices and policies and procedures that are typical for the SG Group. It has excellent support (from France and BRD-SG) and practically unlimited access to know-how for any issue that may arise. The bank has 56 branch offices and plans to open 2 more in 2014. There are five regional centers of which three in Chisinau, one in the north and one in the south of Moldova. The regional centers manage 8-15 offices. The business plan envisages reorganization in which bank staff will be reallocated so that 50 percent are in head office and 50 percent in branch offices (as of end 2013, the distribution was 70/30).

15. MBSG meets the eligibility criteria. The bank expects that the issue with high concentration will be solved in due course. Its capital will increase (from retained earnings) allowing higher exposures and the short-term loans would be repaid. The business reorganization plan would allow more effective focus on SMEs and MBCG expects to see a much faster growth of its SME lending portfolio in the next period. The increasing SME lending portfolio would also have positive long-term effects on the concentration issues.

Victoria Bank

16. Victoria Bank (VB) is one of the oldest commercial banks in Moldova, as it started operations in 1990. The bank has a complex shareholding structure with 238 shareholders64.

financial services and investment banking, specialized financing and insurance, private banking, and asset management and securities services. 62 The share of Societe Generale (SG) is 67.85 percent; Romanian Development Bank (RDB), also member of the SG Group, holds 20 percent; European Bank for Reconstruction and Development (EBRD) has 8.84 percent. Individuals, mostly management of the original Mobias Bank hold 2.75 percent and associated legal entities 0.50 percent of bank shares. 63 While the capital adequacy ratio is very high, the paid-in capital accounts only for about 13.5 percent of the total capital. The MBSG capital structure mostly consists of retained earnings. 64 As of end-2013, for the corporate ownership there were 12 shareholders with over 1 percent of VB shares holding 67.35 percent of the total shares, and 20 shareholders with less than 1 percent of VB shares holding 3 percent of the total shares. For

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The largest corporate shareholders are EBRD with 15.06 percent and Alpha Bank- Romania (a subsidiary of one of the largest banks in Greece) with 12.5 percent of the total shares65. In the past few years VB has been the second largest bank in Moldova accounting for about 13.8 percent of total banking assets and about 14 percent of total credits. It is proud to be among the first to introduce bank cards and e-banking, as well as to bring automatic cash terminals (ATM) to Moldova. In addition to standard commercial banking services (deposits, credit, currency exchange, money transfers, settlement and cash services), VB has also started with investment services including underwriting, depositary, brokerage and consulting services. Its branch network includes 29 branches and 46 representative offices.

17. VB is in good financial condition and among the most profitable banks in Moldova. As of end 2013, its assets totaled MDL 11.64 billion (US$895 million), with total loan portfolio of MDL 6.68 billion (US$511.5 million), total deposits of MDL 9.44 billion (US$726 million) and capital of MDL 1.04 billion (US$80 million)66. With ROA of 2.27 percent and ROE of 15.73 percent, it is one of the most profitable banks in Moldova. However, the loan portfolio quality is below Moldova averages for the banking sector. VB’s very good earning structure allowed it to remain profitable, but it needs to start focusing on improving organization and risk management processes in order to be able to keep its market position and remain in stable financial condition. With some of the new developments in 2013, that has become a challenge.

18. VB reports full compliance with the NBM prudential requirements. However, VB shareholding structure has recently changed and six new owners have joined the ownerships structure without prior NBM clearance. NBM has established a deadline to get the clearance or sell the shares. There were some incidents in latest shareholder meetings and it remains to be seen if EBRD and other significant owners will be able to keep the matters under control, ensuring transparency and regulatory compliance. The recent NBM on-site supervision has raised a number of issues that need to be addressed

19. VB meets the eligibility criteria related to liquidity, profitability and capital adequacy. VB management remained focused on maintaining its market position, but improvement of its financial and operational risk management processes did not receive high priority. The criteria that are related to management and execution of key banking functions (i.e., good asset structure and lending portfolio quality; adequately managed financial and operational risks; adequate internal audit function; and adequate information technology and management information systems) are met at the basic level. However, the bank has to address a number of issues raised by NBM.

20. Victoria Bank is not ready for immediate participation in the Project. The bank has to address a number of issues raised by NBM to be eligible for participation in the project.

individual ownership, there were 6 individuals with over 1 percent of VB shares holding 22.9 percent of the total shares, and 200 shareholders with less than 1 percent of VB shares holding 6.7 percent of the total shares. 65 Of the private shareholders, the largest is Victor Turcan with 10.45 percent of the total shares. He is the only one cleared by NBM – one of the original shareholders who established Victoria Bank, its first CEO and currently the president of VB Board. 66 VB reported total capital of MDL 1.726 billion, which is significantly higher than the normative capital calculated as per NBM rules. The difference is due to differences in the provisions required by NBM.

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