The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) Combined Project Information Documents / Integrated Safeguards Datasheet (PID/ISDS) Appraisal Stage | Date Prepared/Updated: 10-May-2021 | Report No: PIDISDSA31733 Apr 16, 2021 Page 1 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Project Data Country Project ID Project Name Parent Project ID (if any) Moldova P175813 Second Competitiveness P144103 Enhancement Project - Additional finance and restructuring Parent Project Name Region Estimated Appraisal Date Estimated Board Date MD Second Competitiveness EUROPE AND CENTRAL 12-May-2021 29-Jul-2021 Enhancement Project ASIA Practice Area (Lead) Financing Instrument Borrower(s) Implementing Agency Finance, Competitiveness and Investment Project Government of Republic Ministry of Finance, Innovation Financing of Moldova Ministry of Economy and Infrastructure Proposed Development Objective(s) Parent 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 Regulatory Reform/Digitization SME Development Access to Finance Project Management PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 35.00 Total Financing 35.00 of which IBRD/IDA 35.00 Financing Gap 0.00 Apr 16, 2021 Page 2 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) DETAILS -NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 35.00 Environmental Assessment Category F-Financial Intermediary Assessment Decision The review did authorize the team to appraise and negotiate Other Decision (as needed) B. Introduction and Context Country Context 1. The combination of the COVID-19 crisis and a severe drought has caused a severe economic contraction and increased poverty. Prior to the onset of the health crisis, Moldova’s economic growth rate was already trending negatively due to heavy reliance of its economic model on remittances and consumption growth. Between 2016 – 2019, economic growth fluctuated between 4.4 to 3.6 percent. In March 2020, Moldova was impacted by the global coronavirus pandemic1 and experienced one of the most severe droughts in the past two decades, both of which have exacerbated the economic downturn. Inbound remittances declined by 4.6 percent during the first half of 2020 and exports of goods in 2020 severely dropped by 10 percent year-over-year (y/y). The confluence of the global recession, disruptions in the global and domestic supply chains, lockdown measures to flatten the contagion of the virus, financial and investment risk aversion resulted in a severe economic contraction by 7.0 percent in 2020. While GDP growth is expected to rebound to 3.8 percent in 2021, a sustained recovery hinges on the containment of the pandemic and favorable external environment. According to the results of the Labor Force Survey, employment has dropped by 4.4 percent in 2020 as a result of job losses. On average, agriculture accounts for 12 percent of GDP in Moldova; however, agriculture production declined by almost 30 percent due to the drought. Based on the upper middle-income poverty line of US$5.5 per person per day, poverty in Moldova decreased from 18 percent in 2014 to 12.8 percent in 2018. According to the simulations on the effects of employment losses, remittance changes and return of migrants, poverty is estimated to have increased by 15.5 percent in 2020. 2. The government undertook several policy measures to blunt the negative economic downturn, resulting in a substantial fiscal deterioration and straining the 2021 fiscal budget. Moldovan authorities took several measures to support the economy. The National Bank of Moldova (NBM) decreased the 1 As of April 2021, Moldova has one of the highest COVID-19 inflection rate and death rate proportional to its population in Europe, with 235,000 COVID-19 infection cases and 5,136 fatalities amongst a population of 4 million. https://gismoldova.maps.arcgis.com/apps/opsdashboard/index.html#/d274da857ed345efa66e1fbc959b021b Apr 16, 2021 Page 3 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) base rate to 2.65 percent, decreased the required reserve ratio in local currency, carried out asset purchases, announced that it stands ready to intervene in the foreign exchange market to counter disorderly market pressures and excessive exchange rate volatility, as well as allowed banks to postpone or change the payment deadlines and amounts of payments due on loans until 30 June 2020.2 See Annex 2. The Moldovan government implemented wide-ranging policies to protect businesses and households ranging from expanded unemployment benefits, granted tax relief, and delayed tax payments to a credit repayment moratorium. In 2020, tax revenue increased by only 0.3 percent of GDP while public spending increased by 4.1 percent of GDP. As a result, the fiscal deficit reached 5.1 percent of GDP in 2020 compared to a historical average of 1 percent. Dependent upon the rollout of the vaccines and any new waves of restrictions imposed to contain the virus, the 2021 fiscal budget envisages an ambitious fiscal stimulus with the fiscal deficit expected to reach 6.3 percent of GDP. The government faces considerable financing needs, which will be difficult to be fully achieved through domestic financing and thus will critically depend upon the ability to access external public financing. 3. Moldovan businesses have been negatively impacted by the COVID-19 related lockdown measures with a greater share of female-managed firms closed or facing financial difficulties. Compared to regional peers, Moldova has a low business density at 13.5 MSMEs per thousand inhabitants in 2019.3 Women are under-represented in the enterprise sector, as female-owned businesses represent only one third of enterprises.4 MSMEs account for approximately 98.6 percent of all firms, 61.6 percent of business sector employment, and 39.5 percent of turnover in 2019.5 A follow-up enterprise survey was conducted in May 2020 during the initial wave of COVID-19 and a second round in November 2020 to gauge the impact of the pandemic on firms. According to the November 2020 survey, 10.8 percent of firms have permanently closed. A greater portion of female-managed firms have permanently closed (16.2 percent) compared to male-managed firms (9.6 percent). See Annex 3. The lockdown measures have resulted in 74.1 percent of firms having experienced decreased monthly sales, leading to 36.7 percent of firms decreasing employed hours. Finances for the enterprises have become constrained; 87.8 have experienced liquidity and cashflow availability while 64.4 of firms have delayed payments to suppliers, landlords, or tax authorities. More than one third of firms (34.5 percent) have overdue obligations to financial institutions, more so for female-managed firms (42.7 percent) than for male- managed firms (32.2 percent). Despite the government support, by November 2020, only 5.9 percent of firms had received or expected to receive assistance from national or local government. 4. Exporters have been hit hard by the COVID-19 crisis. Early estimations suggest there will be a 14.5 percent drop in exports for Moldova in 2020, which is significant for a small land-locked economy that relies on exported goods for a critical portion of its GDP - exported goods account for approximately 17 percent of GDP of which nearly 68 percent of the exported goods destined for Europe. Exporters have been hit harder by COVID-related disruptions and restrictions, with 48.2 percent of direct exporters 2 IMF Policy Responses to COVID-19 and KPM Economic stimulus measures. 3 Compared to Romania’s 23.7 SMEs per thousand inhabitants, Turkey’s 30.1, Bulgaria’s 47.4 and Kazakhstan’s 61.3. 4 Supporting women’s entrepreneurship in Moldova: review, assessment, and recommendations (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/411391516856355553/Supporting-women-s-entrepreneurship-in-Moldova-review- assessment-and-recommendations 5 NBM. The activity of small and medium enterprises in the Republic of Moldova in 2019. Apr 16, 2021 Page 4 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) having discontinued their operations for some time in response to the outbreak (vs. 21.2 for non- exporters). Exporters experienced greater decline in monthly sales (58. 6 percent vs. 42.1 for non- exporters) and over 54.5 percent of them had to reduce their hours worked per week (vs. 34.0 percent for non-exporters) and registered a greater reduction of permanent full time and temporary workers compared to non-exporters. More than two thirds (68.6 percent) had overdue obligations to financial institutions, compared to 27.4 for non-exporters. While exporting firms have managed to adjust their product or service faster in response to COVID-19 crisis and introduced new products or services more frequent than non-exporting firms, their capacity utilization after re-opening remains lower than for non-exporters. As the demand for their products and services continues to recover, 60 percent of exporters decreased their supply of inputs, due to limited working capital availability. This may lead to loss of market and market share if no liquidity is provided within reasonable timeframes. Exporters estimate that it will take them 2-3 times longer to return to their pre-COVID level of sales (19 months on average), but the same amount of time to recover all jobs. There is an urgent need to help exporting firms and increase export competitiveness of Moldovan firms. 5. Financial intermediation in Moldova is low and has not yet recovered to the pre-fraud levels. The bank fraud in 2014, the ensuing liquidation of three large banks, and the weakening macroeconomic conditions, have taken their toll on the banking sector in recent years. The sector’s recovery has been slow and financial intermediation has not yet recovered to the pre-fraud levels. Private credit to GDP was a mere 24.8 percent in 2019, compared to 35.7 percent in 2013 and an average of 51.0 percent in the Europe & Central Asia region, excluding high income countries.6 See Figure 1. Business credit demand is constrained by the relatively low number of firms and low share of large firms, as well as a high share of foreign-owned firms, and the use of non-bank financing sources. The high level of non-performing loans (NPLs) post the 2014 fraud, minimal access to long-term funding, and a preference for government securities7 also undermine the ability of banks to finance the real economy. In addition to the impact of the fraud on banks’ balance sheets, financial intermediation is adversely affected by structural elements of the Moldovan economy, including poverty, rurality, and informality. 6 Source: World Development Indicators. 7 As of December 2020, 17.6 percent of the banking sector assets were debt securities, compared to 43.2 percent for loans. Apr 16, 2021 Page 5 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) Figure 1. Domestic credit to private sector, % of GDP Figure 2. Credit growth by debtor (2014 = 100), % 80 300 275.1 60 51.0 200 40 100 111.8 24.8 83.5 20 0 0 2014 2015 2016 2017 2018 2019 2020 BIH MNE TUR UKR ECA RUS MKD ALB BGR GEO MDA BLR Resident legal entities Resident individuals Total Source: World Bank, 2019. Source: NBM, 2020. 6. While total credit has been growing since 2014, credit to enterprises has been declining. While credit has improved compared to the post-2014 levels, with outstanding loans registering a Compound Annual Growth Rate (CAGR) of 1.9 percent in the period 2014-2020, this has mainly driven by the household sector, while loans to resident legal entities registered a negative CAGR of 3.0 percent. See Figure 2. The impact of the COVID-19 outbreak and the drought on the economy is expected to further weaken credit demand, particularly for enterprises, because of a significant number of business closures and loss of employment. Economic slowdown is expected to constrain lending, particularly for MSMEs. Supply of credit is likely to be curtailed through the deteriorating quality of banks’ balance sheets, reduced profitability, and higher costs of funding. 7. Even before the COVID-19 crisis, access to finance was a significant obstacle for Moldovan MSMEs. MSME access to finance and the high cost of credit are often cited as key constraints to SME development. According to the SME Finance Forum, 35.6 percent of micro enterprises and 13.9 percent of MSMEs are either fully or partly credit constrained with the MSME financing gap estimated at MDL 894.3 million, or 14 percent of GDP in 2017. According to 2019 Business Environment and Enterprise Performance Survey (BEEPS) only 23.6 of firms had a bank loan (16.8 percent of female-managed MSMEs and 25.2 percent for male-managed MSMEs). Only 16.0 percent of small firms8 had a bank loan, only 7.8 percent used banks to finance investments while 56.1 percent of small firms noted that their most recent loan application had been rejected. See Figure 3. In addition, access to finance for MSMEs is further constrained by high levels of collateralization in Moldova compared to regional peers. See Figures 4 and 5. 8 BEEPS firm size levels are 5-19 (small), 20-99 (medium), and 100+ employees (large-sized firms). Apr 16, 2021 Page 6 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) Figure 3. Access to finance indicators 60 56.1 50 42.6 42.3 40.2 38.6 39.7 40 37 30.9 30 26.8 23.6 21.9 23.4 18.4 16.2 20 16 16.1 13.8 8.7 7.8 10 0 0 Had a bank loan/line of Most recent loan rejected Using banks to finance Using banks to finance credit investments working capital All Small Medium Large ECA all Source: BEEPS, World Bank Group, 2019. Figure 4. Value of collateral needed for a loan (percent Figure 5. Proportion of loans requiring collateral of the loan amount) (percent) 250 100 90.4 221.2 200 80 150 60 100 40 50 20 0 0 TUR MNE RUS ALB BIH BGR UKR MKD GEO MDA BLR KAZ TUR MNE RUS BIH UKR BGR MKD GEO ALB MDA BLR KAZ Source: Enterprise Surveys, World Bank. Source: Enterprise Surveys, World Bank. 8. While banks remain relatively well capitalized and liquid, the uncertain economic recovery in the short to medium term has made banks more averse to riskier segments such as MSMEs. The financial sector is predominantly bank centered with 87.1 of total financial sector assets held by banks. The capital adequacy ratio of the banking sector, as measured by the share of regulatory capital in risk-weighted assets, stood at 27.3 percent as of September 2020, partly explained by the measures introduced by NBM aiming to relax the capital buffers requirements for banks. Liquid assets to total assets were at 49.6 percent in the third quarter of 2020. While the liquidity ratio remains high, it has been on a gradually declining trend since 2017 when it reached the level of 55.5 percent. At the same time, banks rely on deposits (92.8 percent of liabilities as of December 2020), which are predominantly short-term. The profitability of the banking sector was hit by the evolving COVID-19 shock, with the return on equity down from 14.6 percent in 2019 to 9.0 percent in the third quarter of 2020. Asset quality remains a vulnerability with the ratio of NPLs to gross loans as end 2020 at 7.4 percent and higher, at 11.7 percent, for MSMEs. While there has been a downward trend in the NPL ratio since 2016, a rise is anticipated in Apr 16, 2021 Page 7 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) 2021 as the impact of the COVID-19 related credit repayment restructuring and moratorium will be reflected on banks’ balance sheets. Banks are likely to tighten lending standards or refrain from extending new loans to riskier market segments such as MSMEs thus amplifying procyclical negative behavior. 9. While the country is vulnerable to climate change effects, there is potential for mitigation. According to the widely used ND-GAIN9 vulnerability assessment methodology, Moldova is the 84th least vulnerable country in the world and one of the most vulnerable countries in Europe. At the same time, it ranks 96 on the readiness indicator measuring the country’s ability to leverage investments and convert them to adaptation actions. River and urban floods and wildfires are the country’s most common hazards classified as high risk, while earthquakes, water scarcity and extreme heat have a medium level of expected frequency10. Temperature and rainfall have increased in Moldova over the last century, and severe floods and droughts have been occurring more regularly in recent times. For example, in the years prior to 2007, average annual losses from climate-related disasters were estimated at over USD60 million per year, but in the same year, a severe drought occurred which was later assessed to have caused around USD1 billion of damage and losses. In the 2019-2020 agricultural season, the country has again experienced a severe drought, with yield losses ranging from 20 to 60%. Climate models predict further mean temperature rises and more variable rainfall with anything from a slight increase to a significant decline in total precipitation. The hazard level of both river and urban floods is predicted to increase due to the effects of climate change. Even under scenarios with an increase in mean rainfall, however, water availability will decrease due to increased temperatures and rates of evapotranspiration. The frequency of fire occurrences, as well as duration and severity of fire are also predicted to increase. Rainfall will also become more variable and more concentrated due to the more common extreme events. These threats call for stronger engagement in adaptation, which the project will address through a set of activities under Component 1, 2 and 3. Such activities include inter alia digitizing government to business services to reduce paper consumption; capacity building aimed to focus on supporting climate informed production, both mitigation and adaptation; work with ODIMM to set up resources to help enterprises implement adaptation measures advising Project Implementing Unit (PIU) to amend MGF OM to include that small equipment purchases under Matching Grants have high energy efficiency and environmental and climate performance as criteria to be met before purchases can be made, as well as advising PIU and ODIMM to incorporate in OM for CGF that MSMEs contributing to climate action will be preferred by PFIs over other SMEs in case there are more applicants than funds available. C. Proposed Development Objective(s) Original PDO 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. 9 Notre Dame Global Adaptation Index - https://gain.nd.edu/our-work/country-index/ 10 ThinkHazard tool. https://thinkhazard.org/en/report/165-moldova Apr 16, 2021 Page 8 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) Current PDO The PDO will remain unchanged. Key Results There will be five PDO level indicators: • Reduction in compliance costs for businesses in meeting regulatory requirements (Amount(USD)) • Percentage of matching grant recipients that are engaged in a new export oriented activity (Percentage); • Cumulative value of exports generated by MSMEs supported by project activities (Amount (USD)); • Average annual percentage increase in lending to export oriented enterprises by participating financial institutions under CGF (Percentage); and • Share of medium and long term (>24 months) credits by participating financial institutions guaranteed by CGF under the project as % of total disbursements (Percentage). D. Project Description 10. The PDO will remain unchanged. The components under the AF will remain the same as in the parent project and will support: (a) access to finance for enterprises, (b) regulatory reform and digitization of digitization of government to business services, and (c) MSME development and export competitiveness through matching grants, export linkages and export promotion. Some of the activities will be adjusted due to COVID-19, as well as the progress in implementation thus far. Access to finance will be supported through public credit guarantees instead of a credit line. 11. It is envisioned that US$6 million of the total amount for the AF will be conditional on the achievement of performance-based conditions (PBCs). Building on the success of the results-based financing (RBF) element of the parent project, the AF will include US$6 million in PBCs, amounting to 17 percent of the AF amount, and bringing the total amount of RBF to 11.3 percent of the total amount of the combined parent project and AF. RBF was included in the design of the parent project to provide additional incentives in support the key regulatory reforms that had not moved forward as quickly or comprehensively as reform champions in the government would have liked. Issues hampering reforms included differences between ministries, underfunding, low capacity and weak institutions, and a lack of direction and accountability for results. The RBF design in the AF recognizes the importance of building on existing government programs to undertake reforms that will promote a timely crisis response for a faster recovery, digitization, export competitiveness, improve institutional capacity for ODIMM and IA and contribute to the overall effectiveness and sustainability of programs. Aiming at increasing the results orientation of the combined project, the proposed PBCs are linked to activities that are critical for the achievement of the PDO, especially as they relate to supporting a resilient recovery through improvements in digitization and the institutional environment for MSME development. Hence, the PBCs aim at motivating counterparts to undertake activities that will have lasting effects on policies beyond the project cycle. See Annex 5 for the PBCs under the AF. Apr 16, 2021 Page 9 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) 12. The costs per component will change. The final breakdown of costs/allocations per component will be agreed during appraisal/negotiations with the Borrower. The estimated components cost is: Table 1. Estimated cost per component Components Original Cost AF Total Cost (US$ million) (US$ million) (US$ million) Access to finance 30.00 10.00 40.00 Regulatory Reform/Digitization* 6.24 14.50 20.74 MSME Development/Export competitiveness* 8.04 9.90 17.94 Project Management 0.72 0.60 1.32 Total 45.00 35.00 80.00 * Includes PBCs amounting to US$6 million in total. (Regulatory reform/digitization includes US$3.6 million; and MSME Development/Export competitiveness includes US$2.4 million in PBCs.) 13. The Access to Finance component will support CGF in its provision of financial guarantees to export- oriented and COVID-affected MSMEs. (a) The AF will support the CGF, managed by ODIMM, in order to expand its capacity to facilitate access to funding for MSMEs. The AF will support ODIMM in launching a portfolio product under the CGF. The portfolio product will be launched at the end of 2021. This new delivery mechanism will significantly reduce the period of access to credit for MSMEs and streamline the requirements for qualifying MSMEs. Implementation costs for the design of the portfolio guarantee are covered from the European Fund for South East Europe (EFSE).11 ODIMM is benefiting from technical assistance with regards to elaborating a beneficiary evaluation system, estimation of credit risk exposure for each transaction, the elaboration of the operational manual / guide for issuing portfolio guarantees and the possibility to access a counter-guarantee fund. With the implementation of the new portfolio guarantee mechanism, the terms and conditions of the guarantees will be revised, in order to enable expansion and flexibility on guarantee coverage, and in turn will foster ensure financial sustainability while expanding outreach over the medium-term. As an effectiveness condition, ODIMM will launch the portfolio guarantee product with an operational manual that will include, at minimum transparent eligibility criteria, a streamlined claims process under first-loss principles, a coverage and pricing structure and have two signed agreements with PFIs. Out of the US$10 million to be allocated to access to finance, US$8 million will be allocated to CGF’s exporter support program with the ratio between direct and indirect exporters maintained at the same levels as in the credit line under the parent project: i.e. 70 percent direct vs. 30 percent indirect exporters. The remaining US$2 million will be allocated to the COVID-19 MSME recovery program, which will support MSMEs that have been affected by COVID, regardless of exporting status. This is aimed at increased survival of MSMEs and productive assets maintained/increased during & after COVID-19. Additionally, MSMEs contributing to climate action will be preferred by PFIs over other SMEs in case 11 EFSE aims to foster economic development and prosperity in Southeast Europe and the Eastern Neighborhood Region by investing in the success of micro and small enterprises as well as improved living conditions for private households. EFSE invests in local financial intermediaries for on-lending to micro and small enterprises and private households. In addition, the EFSE Development Facility provides technical assistance, training, and other non-financial support to institutions and individuals. Apr 16, 2021 Page 10 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) there are more applicants than funds available. (b) The AF will enhance the effectiveness of CGF products and ODIMM’s operational capacity with disbursement conditions under a PBC. The PBC will be included under the component on MSME Development/Export Competitiveness as it relates to broader measures for supporting MSME export potential and access to finance. To ensure that the portfolio product outreach is scalable and that financial sustainability can be achieved over the medium-term, the PBC will focus on enhancement of financial and statistical reporting pf CGF (including granular use of proceeds data), improvements in internal control and risk management policies, and establishment of a framework for monitoring and evaluation, including assessment. To ensure that the portfolio product is flexible and responsive to movements in market demand and to channel credit to policy priority sectors, CGF will assess the portfolio guarantee performance, including preliminary outreach and will conduct additional market demand assessment to align its product composition and delivery to target underserved markets (whether through product adjustments or enhancements). The World Bank will assist ODIMM by providing templates and technical advice during project preparation and implementation. The team will incorporate specific disbursement conditions under the composite PBC no 5 Enhanced export potential and access to finance for the project beneficiaries MSMEs. 14. Activities under Regulatory Reform / Digitization will focus on scaling up digitization of Government to Business services (permissive documents, authorizations, businesses registration, etc.) to reduce regulatory burden for private sector and increase competitiveness in post-COVID recovery. This will be complemented with digitizing and enhancing capacity of inspections (equipping them, improving e- Inspection management system, and enabling risk-based inspections). Relevant regulatory reform as needed to implement digitization, as well as reforms linked with removing anti-competitive measures in the selected sectors in the economy will complement digitization. Activities on digitizing government to business services will directly lead to the reduction of paper consumption and reduce emissions of GHG. Planned activities are as follows: (a) Scale up digitization of government to business services (permits, licenses, approvals, notifications, etc.), and ensuring they are digitized and placed on the OSS for permissive documents. This work will include national as well as local level procedures (local level will include construction permits and other local permissive documents) to reduce regulatory implementation gaps at the local level. So far, 67 procedures have been fully digitized in the OSS, and 135 configured (out of 150) under the parent project, and the AF will support further digitization both at national and local level. Upgrade MMIP system. This will enable and promote touchless interaction with businesses in line with COVID-19 precautions and will considerably reduce administrative burden businesses face. (b) Scale up, digitize and equip business inspections. Enhance and upgrade e-Inspection system to enable proper inspection planning and implementation of field inspection visits. Ensure inspections are properly equipped with equipment and tools to do their work and able to implement the digital inspection agenda. This will also promote touchless interactions in line with COVID-19 precautions and will considerably reduce administrative burden businesses face. Ensure inspection’s annual planning is done in accordance with key performance indicators adopted as a part of performance- based indicators for inspection services. All the above will enable inspection agencies to proceed Apr 16, 2021 Page 11 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) implementing performance-based indicators that have been adopted and set in 2020 to ensure reduced compliance burden for private sector. This will result in more efficient inspections. (c) Build on the existing work on competition and work with counterparts to enable level playing field for private sector, making recovery for vulnerable but viable SMEs easier. Activities will build on the current work on promotion new Competition Law and will focus on further amendments to by laws and other relevant regulation, as well as removing anti-competitive measures in some sectors to enable greater private sector participation. This sector focus is pilot to provide demonstration effect of the benefits of competition. By enabling reforms in two sectors, this pilot work should help in broader discussion on removing competition barriers for private sector. (d) RBF: US$3.6 million has been set aside for compliance with PBCs that reflect the Government’s own objectives and are relevant to the success of regulatory reform. It is intended to raise the profile of targets, encourage accountability, and improve results. The focus will be on reducing regulatory burden from inspections, permits/licensing and other administrative costs, and support pilot work to remove barriers to competition in two sectors. There will be two composite PBCs: one linked with regulatory reform and digitization, and the other one linked with competition reforms and removing competitive barriers for MSME development. 1. Establish and apply performance indicators for Government authorities with a business regulatory function. This PBC will consist of several disbursement conditions. 2. Cumulative number of reforms enacted according to the Action Plan to reduce regulatory barriers and remove anti-competitive elements of legislation and regulation. This PBC will consist of two disbursement conditions linked to removing antio-competitive measure in two pilot sectors. 15. Activities under MSME Development / Export Competitiveness will support firms through matching grants, export readiness, and export promotion programs. Activities under this component are interlinked and cross-support each-other. A new program initiated by ODIMM on internationalization and export readiness aims at helping aspiring local enterprises become export ready. Tools provided under this program will help companies to address some of the shortcoming at present and improve them to be able to export. The MGF is designed to provide business development services (BDS) for these as well as other companies in Moldova willing to export. BDS have proven to be very effective in reaching international markets, thus this activity fits well in the overall scheme of increasing export competitiveness. Local linkages program is aimed to help local firms to link into exporting value chains of FDIs present in the country. At present, very few FDIs source locally (30%) and local firms are not integrated in exporting value chains. Given the recent trends in near shoring12 and the fact that most FDIs are from neighboring countries, Moldova has an opportunity to explore this potential in post-COVID recovery. Local linkages, export readiness, and the MGF and targeted promotion programs will provide 12 Trade policy shocks and the outbreak of Covid-19 have highlighted the vulnerabilities of the current organization of global supply chains. Firms are thinking about near-shoring (i.e. moving production home) or find an alternative input source closer to home. Imports from more remote regions of value chains may be substituted by suppliers from Eastern European countries (Javorcik, 2020). At the same time, foreign firms in Moldova may start to rely more on domestic suppliers for raw materials and intermediate inputs. Thus, it is up to the national government to invest in domestic firms, not only to ensure that they can survive the crisis, but also to develop their capabilities. This, in tandem with changing sourcing strategies of foreign firms may lead to increased linkages among foreign and domestic firms in a post Covid-19 Moldova. Apr 16, 2021 Page 12 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) tools for this. Finally, targeted export promotion to selected countries of interest will open opportunities for exporters to reach international markets. Planned activities are as follows: (a) Continue export promotion through focused technical assistance and capacity enhancement activities to help exporting MSMEs with: (i) information sharing on key target markets, which may face new COVID-19 requirements to export their products; this should be done through exporter meetings, webinars, and focus groups; (ii) export missions and export promotion to key target markets where Moldovan exporters will be linked with key target export markets; and (iii) trade fairs. (b) Continue enabling local firms to export through matching grants. The matching grants program has proven very effective and impactful, thus continuing with support to firms to obtain business development services is one of the critical tools to enable exports. Energy efficiency and environmental and climate performance criteria will be applied for purchases of small equipment as a climate change mitigation measure. (c) Continue with internationalization and export readiness programs for MSMEs to bring them to export readiness. This activity will complement the other activities, including the matching grants program, export missions and export promotion, and the local linkages program. (d) Enable local linkages, where local firms will relate to Foreign Direct Investors or exporting companies to enable value chain integration. This is a critical tool for recovery from COVID-19 since Moldova is landlocked with limited local market potential. Exporting local products will enable MSMEs to grow, generate revenues and maintain and even create employment that would not be possible without exports. Work with ODIMM on capacity building aimed to focus on supporting climate informed production, both mitigation and adaptation, as well as to set up resources to help enterprises implement adaptation measures. (e) Results-Based Financing: This work will also benefit from a US$2.4 million intervention to enable more Moldovan firms to become ready to export and linked to export value chains and gain access to medium- and longer-term finance. It is intended to raise the profile of targets, encourage accountability, and improve outreach of the interventions. There will be one composite PBC: 1. Enhanced export potential and access to finance for the project beneficiaries MSMEs. The PBC will consist of several disbursement conditions throughout the implementation of the AF, including institutional building of ODIMM for CGF. 16. The AF will benefit a broad range of private enterprises as well as public institutions mandated with export promotion and MSME development. As in the parent project, firm beneficiaries will include new and prospective direct and indirect exporters. In the AF, beneficiaries of the credit guarantees will also include COVID-affected MSMEs regardless of export-status. All firm beneficiaries will be MSMEs, as defined by domestic legislation. In addition, business service providers and PFIs will also benefit from the AF by mitigating the credit risk. The AF, as the parent project, will also increase the capacity of government institutions tasked with export promotion and MSME development to serve MSMEs more effectively. Finally, all enterprises operating in Moldova – both domestic and foreign – will benefit from the improvements in the business enabling environment. Apr 16, 2021 Page 13 of 22 The World Bank Moldova Second Competitiveness Enhancement Project Additional Finance (P175813) E. Implementation Institutional and Implementation Arrangements 17. The Project Implementing Unit is experienced and adequately staffed and will continue under the AF. The PIU is staffed with E&S staff, in addition to regular PIU staff. Given that focus will be on credit guarantees, ODIMM will be involved in the technical implementation alongside the PIU. The PIU will support ODIMM in the implementation of the access to finance component. . F. Project location and Salient physical characteristics relevant to the safeguard analysis (if known) The project will be implemented countrywide based on demand by beneficiary enterprises for services and credit. Project activities will not be located in protected or culturally/socially sensitive areas. G. Environmental and Social Safeguards Specialists on the Team Arcadii Capcelea, Environmental Specialist Mohamed Ghani Razaak, Social Specialist SAFEGUARD POLICIES THAT MIGHT APPLY SAFEGUARD _TBL Safeguard Policies Triggered? Explanation (Optional) This OP was triggered in the parent project and Environmental Assessment OP/BP 4.01 Yes continues to be triggered in the AF Performance Standards for Private Sector No n/a Activities OP/BP 4.03 Natural Habitats OP/BP 4.04 No n/a Forests OP/BP 4.36 No n/a This OP was triggered in the parent project, but for Pest Management OP 4.09 Yes some reason was not showing, so we had to trigger it again. Physical Cultural Resources OP/BP 4.11 No n/a Indigenous Peoples OP/BP 4.10 No n/a Involuntary Resettlement OP/BP 4.12 No n/a Apr 16, 2021 Page 14 of 22 The World Bank CEP 2 Additional finance (P175813) Safety of Dams OP/BP 4.37 No n/a Projects on International Waterways No n/a OP/BP 7.50 Projects in Disputed Areas OP/BP 7.60 No n/a KEY SAFEGUARD POLICY ISSUES AND THEIR MANAGEMENT OPS_SAFEGUARD_SUMMARY_TBL A. Summary of Key Safeguard Issues 1. Describe any safeguard issues and impacts associated with the proposed project. Identify and describe any potential large scale, significant and/or irreversible impacts: The original project was prepared under the WB Operational Policies (OP) and assigned environmental category of Financial Intermediary (“FI�) based on the OP 4.01 Environmental Assessment. The assigned category remains unchanged for the AF. The two Safeguard Policies triggered for the original project are the OP 4.01 (Environmental Assessment), which is relevant to all proposed for financing subprojects, and OP 4.09 (Pest Management), where applicable. These OPs will also, continue to be triggered for the AF. As within the initial project, it is expected that most of the supported projects will require financing of working capital, raw materials, or new equipment and respectively their direct environmental and social impacts will be negligible or are already addressed at the beneficiary SMEs. Under these subprojects, in rare cases, there may be some small-scale civil works may occur (rehabilitation/retrofitting or new construction for replacing old equipment or installing of new equipment); they are expected to have moderate environmental risks associated with dust and noise, waste generation, as well as operational health and safety (OHS). PIU will be retaining both environment and social specialists throughout AF. The project AF will continue to support different types of subprojects (through Portfolio Credit guarantee under ODIMM) and matching grants to enterprises, including in the area of industrial and agricultural production, agro- processing, and manufacturing. The grants and subprojects might cause some environmental and social impacts that can be summarized as follows: (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, wastewaters, 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 project design and implementation practices. All grants and subprojects to be supported under the project will be subject to environmental and social screening as per criteria established in the new CEP II AF ESMF (in preparation; draft shared with the World Bank). In cases where these may cause significant impacts which require a full EIA (Category A projects), such subprojects will be not financed under the project. Additionally, the project will not fund subprojects located in protected areas, critical habitats, or culturally or socially sensitive areas, and may involve physical or economic displacement, child or forced labor, violate human or labor rights as well as subprojects that might have impacts on international waterways. Most of the subprojects will fall under Category B projects, which will require a simple Environmental Impact Assessment and/or preparation of a simple Environmental and Social Management Plan (ESMP). It is also expected that many grants and subprojects will have insignificant environmental and social impacts and will fall under Category C projects, which will require only an environmental due diligence procedure. Apr 16, 2021 Page 15 of 22 The World Bank CEP 2 Additional finance (P175813) Importantly, the subprojects to be supported under Access to Finance (Component 3) will also generate a great number of both direct and indirect positive social impacts. Direct positive impacts will be generated by increased production, products, and goods which would result in the creation of new jobs and respectively, more employment and increased income. Indirect positive impacts will relate to the overall improvement of the business environment, increased exports and improved market position of enterprises, the introduction of advanced technologies and techniques, creation of new opportunities for access to foreign markets, enhancement competitiveness of domestic production and products, contribution to poverty reduction and food safety, and improvement of country's socio- economic conditions. As all proposed activities are to be implemented within existing agricultural land and settlement boundaries, the financing will not have impacts on wildlife and natural habitats and thus OP/BP 4.04 “Natural habitats� is not triggered. It is also expected there will be no impact on physical cultural resources, and therefore OP/BP 4.11 “Physical Cultural Resources� is not triggered. 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 that involved and/or would involve officially supported 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 CLD operational manual will define a screening procedure to be filled by PFIs, and the implementing agency will closely monitor the screening procedure, with the support of the Bank task team. With these restrictions in place, the project does not trigger OP/BP 4.12 “Involuntary Resettlement�. 2. Describe any potential indirect and/or long term impacts due to anticipated future activities in the project area: The expected cumulative impact of the activities which might be supported by the financing is mostly positive and include improved knowledge on best agricultural, agro-processing and manufacturing practices, with consequent improvements in the status of the environment in the country. 3. Describe any project alternatives (if relevant) considered to help avoid or minimize adverse impacts. The task team has analyzed the possible implications of a “no project� scenario and concluded that in the absence of financing there is an increased probability for negative economic and social consequences in the country, stemming from an inability of companies to increase their competitiveness given changing market conditions and COVID-19. 4. Describe measures taken by the borrower to address safeguard policy issues. Provide an assessment of borrower capacity to plan and implement the measures described. As part of the AF process, the EMF for the Project has been revised and updated to fully comply with the World Bank Group Environmental Health and Safety Guidelines, Guidance Note on COVID-19 considerations in construction/civil works contracts and World Health Organization COVID-19 Occupational Health and Safety Guidelines, to provide clear guidance on reducing COVID-19 infection risks and necessary mitigation measures. The revised and updated EMF updated as ESMF incorporating required social dimension's , including measures to address potential impacts. The ESMF outlines environmental and social assessment procedures and mitigation requirements for the subprojects which will be supported by the CEP II AF. It also provides details on procedures, criteria, and responsibilities for subprojects preparing, screening, appraisal, implementing, and monitoring. Apr 16, 2021 Page 16 of 22 The World Bank CEP 2 Additional finance (P175813) Furthermore, the document includes Environmental and Social Guidelines for different types of proposed matching grants and subprojects. These guidelines provide guidance on potential impacts and generic mitigation measures to be undertaken for sub-projects 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. It also specifies the outline for an ESIA process, as well as the outline for the ESMP and ESMP Checklist that could be applied by the sub borrowers in the case of small scale construction and reconstruction activities. The criteria for using the ESMP Checklist approach are presented in section 4 of the document. The ESMF provides a monitoring plan format that includes monitoring indicators, timing, methods, institutional responsibilities, etc. in all phases of projects’ implementation. The ESMF includes a section describing measures that will be used to ensure compliance with national laws and World Bank requirements relating to Pest Management issues. In addition, the ESMF describes the process of inclusion of vulnerable and disadvantaged beneficiary firms, screening of GBV/SHE risks, and labor- management procedures to ensure the protection of labor rights and working conditions. Under the parent project, there have been supported a series of subprojects involving medium-sized agricultural companies which requested financing for fuel, seeds, and for new agricultural equipment (seeder, tractors, planters), but no financing related to Pest Management and respectively they didn’t trigger OP 4.09 and no ESMP and/or Pest Management Plans (PMPs) have been prepared. As the project will support agricultural activities it may stimulate more use of agro-chemicals and thus it potentially triggers OP 4.09 on Pest Management, the revised ESMF document provided more details on the assessments that need to be carried out for such sub-projects. These assessments will need to go beyond checking for permits and licenses, to assessing whether the subproject is likely to result (indirectly) in increased usage of pesticides and also include an assessment of safety and appropriateness of the subproject beneficiaries’ existing pesticide management practices (storage, handling/application, disposal of unused products and packages.) and whether they are applying an Integrated Pest Management approach. In case of identified unsafe practices and/or of the absence of any type of IPM approach among the subproject beneficiaries, the updated ESMF document requires that a PMP would need to be prepared and implemented. Furthermore, the ESMF document provides in a special Annex a template for such PMP. The respective social screening will also be done. PIU will be retaining both environment and social staff throughout AF. The AF project will be implemented by the MoEI 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 2014- 2020 CEP II. It has implemented projects using Project Implementation Units (PIUs), established as separate legal entities under MoE, and staffed with professionals who know how to apply Bank procurement, financial management, safeguards, and other rules. Implementation of CEP II AF, including its fiduciary aspects, will be managed by the same PIU that managed CEP I and CEP II project activities. For the purpose of implementing social and environmental safeguards, in addition to the existing Environmental Specialist (ES) a Social Safeguards Specialist (SS) is hired within the PIU. She will be retained on full or part-time basis, based on periodic assessment of project ES arrangements, and the associated level of effort required to sustain them, by World Bank supervision team. The main goal of these specialists will be to coordinate all Environmental and Social Assessment activities and ensure adequate implementation of ESMF requirements. In order to ensure accountable and transparent project implementation and address stakeholder concerns and issues, a Grievance Redress Mechanism (GRM) will be established and maintained throughout the project. The PIU will continue to be responsible for implementing the matching grant sub-component under the second project component (SME development) with technical inputs from ODIMM and Investment agency. This component is targeted at improving enterprises’ export competitiveness, by providing matching grants for relevant business development services. ES and SS experts will provide support to PIU to help out with Matching grants monitoring. The Apr 16, 2021 Page 17 of 22 The World Bank CEP 2 Additional finance (P175813) ES and SS will focus on the following: (i) assessing any potential negative environmental or social impacts of the business development proposals, (ii) conducting matching grants environmental and social screening and assessment, (iii) creating and/or strengthening ESMF, (iv) looking for opportunities to recommend environmentally and/or socially positive options to support the activities presented in the matching grant application, (v) providing TA on environmental and social management to ODIMM as required given their role in the MGF process; and (vi) providing inputs on environmental and social management into the Matching Grants Manual. The implementation of the Credit Guarantee Facility under component 3 (Access to Finance) will be done by ODIMM and PIU. Based on information gathered during WB implementation support visits, safeguards implementation in CEP II was considered overall positive. CEP II has EMF and it was implemented successfully - all submitted subprojects were preliminarily assessed from an environmental point of view and were assigned an environmental category as well as relevant supporting EA documents – Environmental Screening Checklist and/or simple Environmental Management Plan and if needed per national legislation – approvals from local environmental authorities and from the State Ecological Expertise (SEE) along with the environmental permits and licenses. In the AF, ESMF is being prepared and this will be coupled with SS and social screening and monitoring. Implementing agency has the capacity to implement the Project. While overall the PFIs have experience and capacity in terms of screen sub--project proposals and to monitor implementation of Safeguards aspects, the PIU will support additional institutional and human building activities, including on OHS, labor, community health and safety, SEA/SH, COVID-19 related issues, as well as in developing Environmental and Social Management Systems, in line with the best international practice and WB Environmental and Social Standard 9 on Financial Intermediaries. 5. Identify the key stakeholders and describe the mechanisms for consultation and disclosure on safeguard policies, with an emphasis on potentially affected people. Key stakeholders are citizens, banks, micro, small and medium enterprises in the country, NGOs, as well as MoEI, MoF, ODIMM. ESMF will be publicly disclosed in the week of April 19 and consulted in line with COVID-19 precautions. Going forward, there are several channels for consultation with citizens and government stakeholders, and reaching out to the private sector that will be deployed under AF. PIU, together with ODIMM and IA will continue to reach out to stakeholders to inform them of all relevant project activities. Social safeguards specialist will work with PIU and respective agencies to provide positive recommendations on improving project activities to try to reach out to vulnerable groups. Finally, PIU and Ministry have up-to-date web pages where citizens and beneficiaries can provide feedback and comments. And lastly, GRM will be set up to respond to any issues beneficiaries might have. PIU and key implementing agencies will continue to organize formal events, workshops and conferences to promote project activities and reach out to the public. Each event will track the satisfaction rates (this is one of the project results indicators). PIU ODIMM, and the Matching Grants team will reach out to women business associations and women entrepreneurs to explain matching grants and portfolio guarantees to encourage more to apply. The One Stop Shop digital tool helps citizens to track processes/applications online. This will continue as a part of AF. Regulatory Impact Mechanism, which is a mechanism for public consultations on new business regulations, is established as a part of CEP II. RIA compliance rate (meaning percentage of regulations that went through proper RIA wetting and consultations with the public and businesses) is now at 77 percent%. In addition, a digital platform for comments of the public and citizens on new legislative proposals is online and working. This tool enables any interested party to provide comments and track the adoption process of respective legislation. Apr 16, 2021 Page 18 of 22 The World Bank CEP 2 Additional finance (P175813) Social and environment safeguards specialists will actively involve in field level implementation of ES requirements and engage with stakeholders to make the AF project an inclusive and accountable .. OPS_SAFEGUARD_DISCLOSURE_TBL B. Disclosure Requirements (N.B. The sections below appear only if corresponding safeguard policy is triggered) OPS_EA_DISCLOSURE_TABLE Environmental Assessment/Audit/Management Plan/Other For category A projects, date of Date of receipt by the Bank Date of submission for disclosure distributing the Executive Summary of the EA to the Executive Directors 06-May-2021 06-May-2021 "In country" Disclosure Moldova 06-May-2021 Comments Disclosed OPS_ PM_D ISCLOSURE_TAB LE Pest Management Plan Was the document disclosed prior to appraisal? Date of receipt by the Bank Date of submission for disclosure NA "In country" Disclosure Moldova 06-May-2021 Comments OPS_PM_ PCR_TABLE If the project triggers the Pest Management and/or Physical Cultural Resources policies, the respective issues are to be addressed and disclosed as part of the Environmental Assessment/Audit/or EMP. If in-country disclosure of any of the above documents is not expected, please explain why: OPS_COMPLIANCE_INDICATOR_TBL C. Compliance Monitoring Indicators at the Corporate Level (to be filled in when the ISDS is finalized by the project decision meeting) (N.B. The sections below appear only if corresponding safeguard policy is triggered) OPS_EA_COMP_TABLE Apr 16, 2021 Page 19 of 22 The World Bank CEP 2 Additional finance (P175813) OP/BP/GP 4.01 - Environment Assessment Does the project require a stand-alone EA (including EMP) report? Yes If yes, then did the Regional Environment Unit or Practice Manager (PM) review and approve the EA report? Yes Are the cost and the accountabilities for the EMP incorporated in the credit/loan? Yes OPS_ PM_COM P_TABLE OP 4.09 - Pest Management Does the EA adequately address the pest management issues? Yes Is a separate PMP required? No If yes, has the PMP been reviewed and approved by a safeguards specialist or PM? Are PMP requirements included in project design? If yes, does the project team include a Pest Management Specialist? NA OPS_ PDI_ COMP_TAB LE The World Bank Policy on Disclosure of Information Have relevant safeguard policies documents been sent to the World Bank for disclosure? Yes Have relevant documents been disclosed in-country in a public place in a form and language that are understandable and accessible to project-affected groups and local NGOs? Yes OPS_ALL_COMP_TABLE All Safeguard Policies Have satisfactory calendar, budget and clear institutional responsibilities been prepared for the implementation of measures related to safeguard policies? Yes Have costs related to safeguard policy measures been included in the project cost? Yes Does the Monitoring and Evaluation system of the project include the monitoring of safeguard impacts and measures related to safeguard policies? Yes Have satisfactory implementation arrangements been agreed with the borrower and the same been adequately reflected in the project legal documents? Yes Apr 16, 2021 Page 20 of 22 The World Bank CEP 2 Additional finance (P175813) CONTACT POINT World Bank Tarik Sahovic Senior Operations Officer Natalie Nicolaou Senior Financial Sector Specialist Borrower/Client/Recipient Government of Republic of Moldova Implementing Agencies Ministry of Finance Octavian Armasu Minister octavian.armasu@mf.gov.md Ministry of Economy and Infrastructure Octavian Calmic Minister of Economy octavian.calmic@mec.gov.md FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Tarik Sahovic Task Team Leader(s): Natalie Nicolaou Apr 16, 2021 Page 21 of 22 The World Bank CEP 2 Additional finance (P175813) Approved By Safeguards Advisor: Agnes I. Kiss 11-May-2021 Practice Manager/Manager: Mario Guadamillas 13-May-2021 Country Director: Anthony A. Gaeta 14-May-2021 Apr 16, 2021 Page 22 of 22