STRENGTHENING INSTITUTIONS, ENHANCING COMPETITIVENESS, AND BUILDING MOLDOVA POLICY NOTES RESILIENCE 2021: SECTORAL RECOMMENDATIONS Moldova Policy Notes 2021 CONTENTS Acknowledgments ......................................................................................................................... 3 Executive Summary ...................................................................................................................... 4 Summary of Policy Priorities and Key Actions Going Forward .............................................. 9 Policy Notes.................................................................................................................................. 23 Strengthening the Capacity and Governance of Public Administration ................................... 24 Strengthening the Judiciary and the Fight against Corruption ................................................ 29 Supporting a Resilient Recovery while Safeguarding Fiscal Sustainability ............................. 32 Building Fiscal Resilience at the Subnational Level with Land Administration and Property Registration and Valuation........................................................................................................ 41 Enhancing Labor Markets and Addressing COVID-19 Challenges ......................................... 44 Achieving a Sustainable Social Protection System.................................................................... 51 Improving the Efficiency and Resilience of Health Service Delivery ........................................ 56 Strengthening Environment Protection and Disaster Risk Management .................................. 62 Water Resource Management .................................................................................................... 69 Increasing Resilience and Competitiveness of Agriculture ....................................................... 73 Enhancing the Business Environment and Market Competition ............................................... 79 Fostering SMEs and Strengthening FDI Linkages .................................................................... 85 Enhancing Financial Sector Stability and Governance ............................................................ 89 Strengthening Education Outcomes and Skills .......................................................................... 95 Expanding Inclusive Digital Development Opportunities ....................................................... 100 Multimodal Transport and Logistics ....................................................................................... 108 Addressing Energy Security and Sustainability....................................................................... 114 2 Moldova Policy Notes 2021 ACKNOWLEDGMENTS This report was prepared by the World Bank Group country team led by Stefano Curto and consisting of Natasha Rovo, Marcel Chistruga, Tom Bundervoet, Kristina Noelle Vaughan, Oxana Druta, Iryna Shcherbyna, Elena Corman, Constantin Rusu, Laura Pop, Eva Melis, May Olalia, Natalia Manuilova, Laura Pop, Sandra Sargent, Tarik Sahovic, Natalie Nicolaou, Galina Cicanci, Georgiana Pop, Alena Zielinski, Alberto Criscuolo, Ismael Fontan, Danilo Palermo, Pramita Moni Sengupta, Fernando Dancausa, Lucia Casap, Ion Gonta, Flora Kelmendi, Anna Olefir, Subhashini Rajasekaran, Denis Nikolaev, Elena Lungu, John Collier, Arcadie Capcelea, Cesar Niculescu, Axel Baeumler, Roman Zhukovskyi, Olga Kupets, Oleg Grigoroi, Alexandru Sinchetru, Volkan Cetinkaya, Adrien Dozol, Ilie Volovei, Olivera Jordanovic, Elena Lungu, Sandeep Kohli, Koji Nishida, Natalia Timofte, Amelia Midgley, Anatol Gobjila and Felica Pricop. This report was prepared under the overall guidance of Arup Banerji (Country Director, ECCEE), Inguna Dobraja (Country Manager, ECCMD), Jasmin Chakeri (Practice Manager, Macroeconomics and Fiscal Management Global Practice), Salman Zaidi (Practice Manager, Poverty and Equity Global Practice), and Karlis Smits, Caryn Bredenkamp, and Baher El-Hifnawi (Program Leaders). The team would like to thank Anna Akhalkatsi (former Country Manager, ECCMD) for initial guidance and Peter Kjaer Milne for editing the report. Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development (the World Bank) of the World Bank Group. The findings, interpretations, and conclusions expressed here do not necessarily reflect the views of the Executive Directors of the World Bank or the governments that they represent. The World Bank does not guarantee the accuracy of the data in this work. 3 Moldova Policy Notes 2021: EXECUTIVE SUMMARY EXECUTIVE SUMMARY Decades of strong yet volatile economic growth have improved Moldova’s average standard of living, but the country nonetheless remains one of the poorest in Europe. Between 2000 and 2019, per capita GDP expanded at an average annual pace of 4.9 percent—a cumulative increase of over 160 percent. Solid growth resulted in strong poverty reduction, from close to a staggering 90 percent in 2000 to just 13 percent by 2018 (based on the upper-middle-income poverty line of US$5.50 a day in 2011 purchasing power parity). Non-monetary dimensions of welfare improved too, as demonstrated by substantial increases in life expectancy and educational attainment, in particular in tertiary education. Despite this progress, Moldova, albeit a middle-income country, nonetheless remains one of the poorest countries in Europe, characterized by large urban-rural disparities in living standards 1 and a high degree of inequality of opportunity, 2 crystalized mainly across the spatial dimension. Figure 1: Solid growth since the Figure 2: Strong poverty Figure 3: Moldova remains late 1990s reduction, though slowing in among the poorest countries in recent years Europe and Central Asia GDP per capita (constant 2010 Poverty headcount (US$5.50 a GDP per capita (constant 2010 US$) day) US$) 4000 100 20,000.0 3000 80 15,000.0 2000 60 10,000.0 40 1000 5,000.0 20 0.0 0 0 BGR UZB MDA TUR KGZ KAZ MKD ARM BIH SRB 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: WDI, 2021. The growth model that yielded high growth and poverty reduction in the past had begun to show signs of waning in strength and low sustainability well before the COVID-19 pandemic. Moldova’s growth performance since the country’s 2014 banking crisis 3 has been strong, with average annual growth inching up to 4.3 percent. However, this was largely driven by temporary factors, including favorable financial and climate conditions. In contrast, potential GDP growth—a measure of the longer-term productive capacity of the economy—has fallen by 1 percentage point over the past decade. Moldova’s growth model, driven mainly by remittance-financed consumption, is increasingly confronted by structural issues. First, there has been a steep decline in remittances, which was previously an important source of income and consumption for many households. Second, a shrinking labor force and rapidly aging population are offsetting the positive contributions from capital accumulation and a slight increase in the labor participation rate, albeit solely driven by informal self-employment in subsistence agriculture. As a result, income growth among the poor has been primarily driven by pensions and social assistance, while the incomes of non-poor households have been boosted by increasing wages. 1 While the recent increase in poverty mainly occurred in urban areas (an increase of 3 percentage points), though rural areas remain much poorer (rural poverty rate of 35.3 percent vs urban one of 14 percent). As a result, poverty is predominantly a rural phenomenon with over 82 percent of the poor being less educated and older, and self-employed in agriculture living outside Chisinau or other cities. 2 The gap in access to the opportunity as measured by the Human Opportunity Index is 34 and 52 percent for urban and rural areas, respectively. 3 In 2014, three Moldovan banks, Banca de Economii, Unibank, and Banca Socială were involved in fraud with a total loss from the scheme equivalent to about 12 percent of Moldova’s GDP. 4 Moldova Policy Notes 2021: EXECUTIVE SUMMARY Figure 4. Steadily declining Figure 5. Formal sector wage Figure 6. Income growth of the potential growth, though less employment decreased poor driven by public transfers, volatile 2014–18 -0.05 0 0.05 130 Wage income 120 Self-Employment… Agricultural Income 110 Pensions 100 Social Assistance Remittances 90 Other Income 2014 2015 2016 2017 2018 Total employment Total Income Formal wage employment Informal self-employent poor non poor Source: WDI, 2021. Source: NBS, 2014–18. Source: NBS, 2014–18. The COVID-19 pandemic and a severe drought in 2020 4 have revealed the intrinsic vulnerabilities of an economic growth model with limited resilience to shocks. With a decline in GDP of 7 percent in 2020, the impact of the COVID-19 pandemic, combined with the 2020 drought, has been one of the most severe in Europe. The shock has had a large and heterogeneous impact across households, firms, sectors, and geographical areas in Moldova. Employment dropped by 4.3 percent in 2020, with the majority of job losses in trade and hospitality, 5 two of the most dynamic sectors in the past decade. Young workers and micro firms have been the most affected. As a result, poverty is expected to have increased from 25.2 percent in 2019 to 26.8 percent in 2020 (based on the national poverty line), marking the second consecutive year in which poverty has increased. Finally, energy security remains an area of concern, as shown by the gas crisis in the fall of 2021. While the pandemic was an unexpected event, the 2020 drought has been just the latest in a long and increasingly frequent series of weather-related events that are being exacerbated by climate change. Since 2000, Moldova has witnessed, on average, one major climate-related event occurring every three years. The total cost of inaction on climate adaptation is currently estimated at US$600 million, equivalent to 6.5 percent of GDP, and this is expected to more than double to US$1.3 billion by 2050. Flooding also poses a high cost on Moldova’s economy, estimated to be at least US$62 million annually. Similarly, droughts have large impacts, as agriculture continues to rely mostly on rainfall. While less frequent, major earthquakes could affect up to 62 percent of the country’s GDP in the future, and the average annual losses (AAL) due to earthquakes exceed US$35 million a year. 4 Above-average temperatures and poor rainfall in 2020, particularly in April and in July–August period (with cumulative precipitation levels between 65 and 75 percent lower than the long-term average values), respectively, severely affected wheat and maize crops, just before the maize harvest in September. As a result, the 2020 wheat and maize outputs were officially estimated at 568,000 tons and 778 000 tons, respectively, more than 50 percent lower than average levels. 5 Hospitality includes food, lodging, travel, tourism, and recreation. 5 Moldova Policy Notes 2021: EXECUTIVE SUMMARY Figure 7. The frequency and the impact of natural disasters have accelerated over the past 20 years Against this backdrop, the current juncture offers an opportunity for the new Government, elected in mid-2021, to begin laying the foundations for a more inclusive and resilient growth model. The economic recovery from the COVID-19 pandemic not only hinges on the containment of the pandemic and a more favorable external environment but also on providing effective support to the private sector and households. At the same time, measures aimed at mitigating the impact of the COVID-19 crisis and supporting the recovery should be complemented by structural reforms that would help steer the economy away from the current economic model, which now shows clear signs of starting to undermine Moldova’s long-term economic prospects. Remittances that had helped to support private consumption in previous years are expected to continue on a declining trend that started almost two decades ago. The lack of a level playing field in business will continue to suppress job creation, productivity, and growth. Population aging, a large and increasing diaspora, and climate change will remain threats to sustainability going forward. The new Moldovan Government has an important role to play in initiating long-awaited reforms to strengthen its institutions, build resilience, and enhance competitiveness, which will help accelerate the convergence of incomes and standards of living expected by Moldovan citizens. Strengthening institutions is the most pressing priority to support inclusive and sustainable growth. Moldova’s development continues to be hampered by high-level systemic corruption, poor governance, political pressures from vested interests, and the politicization of regulatory institutions, as well as in the judiciary, customs, and tax service. Both public administration and the judiciary continue to be perceived as inefficient, captured, and politically dependent, and unable to deliver services effectively and tackle high- level corruption. Governance is a challenge not only at the national level regarding the main state functions but also at the sectoral level, such as in energy, postal services, health, water, agriculture, transport, waste management, and communications. The dominant presence of a large group of state-controlled institutions in most sectors of the economy creates an uneven playing field, factor misallocation, and unfair competition. The modus operandi of state-owned enterprises (SOEs), such as Apele Moldovei in water, Calea Ferată din Moldova in railways, Energocom in energy, and Moldtelecom in telecommunications, compromises competition, limits competitiveness, and increases inequality of opportunity and rural-urban disparities. 6 Moldova Policy Notes 2021: EXECUTIVE SUMMARY Given Moldova’s openness and its vulnerability to shocks, strengthening institutions should go hand- in-hand with policy efforts to build resilience. Exogenous shocks, such as those experienced in 2020, continue to derail Moldova from its long-term development goals. This is due to inadequate preparedness to mitigate the socio-economic consequences of shocks and also to withstand increasingly frequent shocks exacerbated by climate change:  Moldova still needs to advance reforms to build fiscal resilience. Moldova is confronted with the long-term challenge of declining revenues, mounting contingent liabilities, and increasing social pressures while it seeks the resources necessary to support the post-COVID-19 economic recovery and steer the economy toward a different growth path. Advancing reforms to create fiscal space, reduce fiscal risks, increase counter-cyclicality, and reduce budgetary rigidities will be key to building resilience and enhancing sustainability. Reorienting public finance toward emerging needs and development priorities is paramount to successfully steer the economy toward a new growth model rather than allowing precious resources to be absorbed by inefficient public spending in support of non- viable state-owned enterprises (SOEs), the deterioration of the financial sustainability of the pension system, and large inefficiencies in service delivery. A gradual shift is also needed toward direct and progressive taxation to support resilience and rebalance growth. Finally, relying on a stronger countercyclical stance and more effective fiscal rules will also be necessary to deal with the increasing threat of natural disasters.  Reforms in service delivery are necessary to build social resilience, cushioning the poor from shocks and enabling them to take advantage of wider economic opportunities. The coverage of social safety nets remains limited, despite being an investment with potentially high returns, as it leads to building human capital, has significant multiplier effects in the local economy, and contributes to inclusive growth and resilience in times of crisis. Improving the design of Ajutor Social, and tightening its linkages to activation and social services, will be crucial in this regard. Moreover, advancing reforms of the pension system will not only help with its long-term sustainability but will also avoid almost half the elderly population reaching retirement age without having acquired a sufficient contribution history to be able to claim social insurance. Furthermore, years of under- or inefficient investment in public services (e.g., education, water and sanitation, health, etc.) to reduce large structural vulnerabilities and gaps in access need to be reversed to bolster resilience and provide the opportunities to Moldovans, especially those from rural areas and low-income households. These gaps are preventing many Moldovans from reaching their full potential, and from withstanding both predictable and unpredictable shocks.  There is also a need to address institutional and policy weaknesses that undermine climate and natural disaster resilience. While some of the core institutional and legislative structures are in place, the current focus remains on reactive disaster response rather than proactive risk reduction or mitigation, and the country remains significantly underprepared for natural disasters. Climate change is expected to amplify natural disasters, with the potential to inflict serious damage on the economy, due to the continued importance of agriculture, with implications for fiscal balances and the well-being of vulnerable populations. The reform agenda on adaptation and disaster risk management (DRM) should comprise multiple elements, ranging from improved risk identification, better risk reduction, and enhanced preparedness, to stronger financial protection mechanisms, and resilient recovery and reconstruction policies. The reform agenda also needs to be mainstreamed within key sectors (e.g., urban planning, natural resources and water, agriculture, and infrastructure, particularly energy and transport). Among the top priority sectors, forestry reform and water resource management are essential to protect Moldova’s natural assets and promote more resilient agriculture, which is acutely sensitive to weather and is periodically affected by droughts and floods. Slow reform and ambiguities in Moldova’s water regulatory environment—including concerning key elements such as licensing of 7 Moldova Policy Notes 2021: EXECUTIVE SUMMARY water and sanitation operators, tariffs, and investment principles—hamper performance and affect outcomes. Enhancing private sector competitiveness is a second priority to steer the economy toward a more inclusive and sustainable growth model. The observed decline in formal employment and large outward migration is the result of the inability of the private sector to create higher-productivity well-paid jobs and of the overall economy to attract foreign investment. The environment in which firms operate is not conducive to productivity, growth, and job creation. Firms are not creating jobs mostly because of the low entry and survival rates. Most new entrants are small and face difficulties expanding and surviving. When firms reach a medium size, they tend to stall and are unlikely to become large. Large, incumbent firms, on the other hand, exploit their market dominance and the uneven playing field. The incapacity of productive firms to breakthrough is the result of multiple obstacles ranging from access to key inputs, a weak business environment, and inadequate infrastructure:  Inputs gap: Improving access to key factors and inputs is crucial for job creation, productivity, and growth, particularly for micro, small and medium enterprises (MSMEs). There is an urgent need to support a sustainable increase in financial intermediation for underserved segments such as the MSMEs. Despite significant improvements to strengthen financial sector governance and supervision, intermediation remains low and access to finance has not fully recovered after the banking fraud, with the financial sector primarily serving large firms and households. There are also important human capital and skills gaps that firms face, with more than 30 percent of firms reporting that a lack of skilled workers has become a severe constraint to their growth. Investments in digital and technological skills are particularly important to equip the workforce with skills needed in a modern economy and improve the innovation capacity of firms. Finally, strategies for recovering from the COVID-19-related learning losses suffered by school-age children are also necessary to secure future livelihoods and economic competitiveness.  Regulatory gap: Addressing the weak regulatory environment, the presence of large and distortive SOEs, and the weak rule of law are key to attracting and retaining domestic and foreign investment. The presence of a significant number of SOEs in the utility sector is particularly harmful to the private sector’s productivity, technological progress, and competitiveness. In other sectors, the market dominance, together with favoritism and preferential treatment, of SOEs results in weak and unfair domestic competition. In addition to the significant use of state aid, which is frequently allocated to SOEs, the Government also adopts a range of price controls that further distort the market. Improving the efficiency, productivity, and performance in service delivery of SOEs, ensuring the presence of SOEs only where there is a clear market failure or in strategic sectors, and improving sectoral regulations, are key to unlocking the private sector’s full potential.  Infrastructure gap: Greater investment and reform of the regulatory framework and dominant SOEs are needed to favor competitiveness and tap into EU markets. As a landlocked country with a small domestic market, but strategically located close to the EU and the Russian Federation, high- quality connectivity is of great importance to reorient the current growth model and successfully integrate firms, consumers, inputs, and goods within the country, and with regional and global markets. Also strategic for Moldova’s competitiveness in an era of rapid digitization, as witnessed during the pandemic, digitization not only contributes significantly to competitiveness but also helps reduce the digital divide. This helps to prevent the poor from being left further behind and enables them to take better advantage of available jobs, most of which require basic digital skill competencies. Finally, ensuring energy security, reliability, and affordability remains a high priority to enhance the productivity and competitiveness of firms. Despite recent progress, reliance on a single import source, governance challenges, and slow reform implementation are impeding further progress in the energy sector. 8 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD STRENGTHENING INSTITUTIONS AND BUILDING RESILIENCE Strengthening the capacity and governance of public administration. Important efforts are needed to strengthen Moldova’s public administration, which continues to suffer from weak and poor-quality governance, resulting in low public trust in state institutions. A key priority going forward is accelerating the reform of the SOE sector, which is characterized by large inefficiencies, losses, rising long-term debt, poor performance in service delivery, low productivity levels, and weak governance arrangements. While public financial management (PFM), public procurement, and tax administration provide largely satisfactory, basic regulatory frameworks broadly aligned with EU principles, there are large gaps to be addressed in effective implementation. Key Actions Area Short term Medium term State-Owned  Conducting an evaluation of SOEs  Rationalizing SOEs based on the Enterprises along key metrics (financial evaluation and endorsing formal performance, market failures, regulation on state ownership strategic sectors, etc.)  Improving incentive structures for better SOE performance  Strengthening and consolidating the ownership function and board practices Public  Preparing a PFM Reform Strategy  Implementing PFM reform as part of Financial based on the PEFA findings the Budget 2023 Management Public Sector  Finalizing the remaining public  Updating relevant legislation, standard- Accounting sector accounting standards setting, regulation, enforcement, and IT State Assets  Finalizing the development of the  Integrating and consolidating state single state assets registry assets records into a single asset registry Public  Strengthening and enforcing the PIM Investment framework to expand its coverage Management Gender  Implementing gender-responsive Responsive budgeting as part of the 2023 Budget Budgeting Tax  Assessing the current tax  Building IT capacity based on Administration administration gaps and the STS international IT management systems capacity, including IT capability and big data analytics good practices  Accelerating the digitization of tax  Developing a new mid-term tax services, and simplifying administration strategy and its procedures for taxpayers implementation road map Procurement  Preparing a roadmap of reform  Implementing the public actions based on the procurement reform roadmap recommendations of the MAPS 9 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Strengthening the judiciary and the fight against corruption. Implementing deep reforms of the judiciary and strengthening the fight against corruption are needed to safeguard and recover public resources, establish an enabling business environment for domestic and foreign entities, and rebuild the trust of Moldovans in state institutions. The efforts undertaken by the authorities should focus on filling the institutional and legal gaps that have allowed integrity issues to emerge throughout the public sector. In addition, they should also focus on ending the culture of impunity for high-level corruption. Reforms also need to ensure the strengthening of the judiciary, and the prosecution and controlling bodies, along with the strengthening of the integrity of judges and prosecutors. This underpinning should ensure the ability of the courts to deliver justice effectively and efficiently, while also respecting the rule of law for vulnerable populations, the private sector, and those accused of corruption-related crimes. Key Actions Area Short term Medium term Supreme  Introducing a transparent and fair Council of mechanism for selecting and appointing Magistrates members of SCM and SCP and Superior Council of Prosecutors Human  Reviewing current HR policies/management of  Launching an integrity Resources judges, prosecutors, and court staff evaluation of prosecutors Courts  Assessing the status of courts consolidation and  Aligning court consolidation providing a set of recommendation on the next with international best steps practices and refraining from a “classic” model of organizing court jurisdictions Specialized  Limiting the competence of the Specialized Anticorruption Anticorruption Prosecutor’s Office to Prosecutor prosecuting high-level corruption Asset  Amending the legislation on asset declarations Declaration and the National Integrity Authority to strengthen the content of the asset declaration form  Introducing a risk-based approach to verification Supporting a resilient recovery while safeguarding fiscal sustainability. The post-COVID-19 recovery period represents an opportunity to steer the economy toward a more inclusive and resilient growth model, which can be achieved with a more effective and efficient fiscal policy framework. Advancing reforms to improve efficiency and reduce budgetary rigidities will be key to creating more durable fiscal space necessary to reorient public finance toward emerging needs and development priorities, rather than precious resources being absorbed by inefficient SOEs or an unsustainable pension system. A gradual shift is also needed to increase direct and progressive taxation, while also rationalizing tax expenditure to support resilience and rebalancing growth. A more equitable system is also necessary to strengthen the social contract and build consensus around the reform program. Finally, given the country’s vulnerability to shocks, particularly from natural disasters, relying on a stronger countercyclical stance and more effective fiscal rules will also be necessary. 10 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Revenue  Rationalizing the entire spectrum of  Introducing a progressive personal tax expenditure income tax (PIT)  Strengthening the collection of domestic VAT and excise tax regimes Spending  Introducing public expenditure reviews  Improving planning, monitoring, and with sectorial and thematic evaluations execution of public investment Resilience  Strengthening monitoring of  Revisiting the current fiscal rules to contingent liabilities, including consider the business cycle SOEs, pension funds, and the  Implementing an action plan to financial and insurance sectors strengthen and deepen domestic debt markets Subnational  Enhancing land registry and property Finance valuations  Strengthening local tax administration Building fiscal resilience at the subnational level with better land administration, and property registration and market valuations. Moldova has a relatively well-functioning land market and land administration system, which serves transactions and mortgaging of registered property rights well. The cadaster in Moldova offers efficient, transparent, and cost-effective services, including free access to the registry through an electronic service, e-cadastru. However, an incomplete land register in rural areas, separate ownership of land and buildings, and weak administration of the state, municipal, and public lands, continue to hamper market activity and limit local governments’ capacity to collect. A first priority is to update and regularly evaluate properties with up-to-date market values to increase revenue and fiscal resilience at the local level. A second priority is the effective management of Moldovan public land registration and inventory to reduce disputes in Moldova between central and local governments. Key Actions Area Short term Medium term Property  Conducting public and private  Conducting public and private Registration property delineation and registration property delineation and registration in 12 rayons as planned in an additional 20 raions Property  Developing and adopting a new and  Introducing new valuations for Valuation cost-effective model for property property taxation valuation Enhancing labor markets and addressing COVID-19 pandemic challenges. An aging population and a shrinking labor force may be dampening Moldova’s prospects for sustainable growth. Low rates of both labor force participation (LFP) and employment, which have further decreased due to the COVID-19 pandemic, accentuate the demographic risks. To respond effectively to the demographic challenge, Moldova needs a steady increase in both LFP and labor productivity. To increase participation, aside from adopting policies to promote competitiveness and job creation, the country must also review and perhaps revise labor regulation, taxation, and the productive use of remittances. In this context, reforming the Labor Code to reduce rigidities and facilitate flexible work arrangements, while ensuring social protection and providing funding for the National Employment Agency for adequate unemployment assistance and active labor market policies, are priority areas. 11 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Labor Code  Reforming the Labor Code to reduce rigidities and facilitate flexible work arrangements while ensuring social protection Facilitate  Implementing regulations and tax  Earmarking funds for programs to Employability treatment of internships and promote the reintegration of the for apprenticeships for youth marginalized minorities and people Vulnerable  Revisiting the rules for maternity and with disabilities into the labor market Groups parental leave  Increasing the availability of quality,  Continuing the implementation of the affordable childcare services for pilot for the recognition and validation children under 3 of non-formal and informal learning,  Building the capacity to monitor and particularly for returned migrants evaluate these programs COVID-19  Extending support to informal, seasonal, and part-time workers  Providing funding for the National Employment Agency for adequate unemployment assistance and active labor market policies Achieving a sustainable social protection system. Moldova’s social protection system has been helping the country to reduce poverty and advance shared prosperity. It should continue to be central in protecting the poor and vulnerable households from economic shocks and adverse developments. However, the 2009– 17 social assistance reforms achieved important results but remained incomplete. Improving social protection policies and service delivery should continue to reduce fragmentation and better target social assistance benefits. Moreover, recent increases of categorical benefits and shrinking coverage of the means- tested Ajutor Social program have led to a reversal of progress. Consolidating the categorical benefits and focusing more on targeted cash transfer programs are a priority going forward. In the pension area, the 2017 parametric reform has put Moldova’s public pension system on a path to fiscal and social sustainability, but its benefits have been undermined by subsequent policy measures, such as the reduction in the social contribution rate. More recent policy changes, such as a reduction of the retirement age and effective double indexation of pensions, are even more damaging to the sustainability of the pension system. The reversal of these measures is necessary, or other adjustments should be sought on the expenditure side. Key Actions Area Short term Medium term Social  Adjusting eligibility criteria, including income  Consolidating the Assistance threshold, for means-tested d programs in line with categorical benefits and other social programs (e.g., minimum pension) focusing more on targeted  Reviewing the list of documents required to apply cash transfers programs for targeted benefits Pensions  Reversing the reduction of the retirement age to  Revisiting preferential 57/62 years for women/men and reinstate contributions treatment for retirement age of 63 years for men and gradual various groups of increase to 63 years for women contributors  Abolishing ad hoc pension increases and the double indexation 12 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Improving the efficiency and resilience of health service delivery. Although Moldova’s spending on public health compares well with that of other countries of similar incomes, its health outcomes are not as good as would be expected for the amount that it spends. With the population aging, the rise of noncommunicable diseases (NCDs), the advent of new medical technologies, and Moldova’s dilapidated hospital infrastructure, the cost of health care is likely to grow if preventive and low-cost technologies are not expanded. Continuing to manage the COVID-19 outbreak, while also improving health system resilience, is a key priority for the country. Improving the efficiency of Moldova’s hospitals is also important to create the space to make primary health care (PHC) services a higher priority, better address the needs of patients, and improve financial protection. There is also a need to reduce the prevalence of NCD risk factors through public health interventions, including the use of health taxes. Key Actions Area Short term Medium term Efficiency  Improving strategic purchasing and  Redesigning the hospital system to selectively contract health-care increase efficiency and quality providers  Redirecting resources toward primary  Introducing managed entry health-care (PHC) services agreements for single-source expensive and innovative medicines Noncommunicable  Introducing health taxes to a  Supporting integration of PHC, Diseases broad range of products to specialized care, and social services prevent and reduce the for the management of patients with prevalence of NCDs NCDs and multi-morbidity Preparedness  Strengthening and harmonizing  Strengthening pandemic health information and the eHealth preparedness and resilience of the systems health system based on a COVID- 19 response assessment Strengthening environmental protection and disaster risk management. Climate change is expected to further intensify the severity and impact of natural disasters, and disproportionately affect poor and vulnerable income groups. While Moldova has already begun to enhance its disaster and climate resilience institutional frameworks, and legislative approximation with EU directives and regulations is underway, enforcement is poor because the necessary institutions are inadequate or nonexistent. Moldova needs to implement a comprehensive reform program. This should comprise multiple short- to medium-term reform and investment programs. For example, these should include: (i) improving Moldova’s risk identification; (ii) investing in better risk reduction, both in terms of structural and non-structural interventions; (iii) enhancing disasters preparedness, including early warning systems; (iv) providing stronger financial protection mechanisms; and (v) rehabilitating, rebuilding, or reinforcing under-maintained critical infrastructure assets. Implementing the Forest Institutional Reform Strategy is also a priority. 13 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Disasters  Launching a comprehensive national  Launching a program to finance Risk program to strengthen DRM and rehabilitating, rebuilding or Management climate resilience, including through reinforcing under-maintained critical the adoption of the draft National infrastructure assets (Ministry of Disaster Risk Management Strategy Infrastructure and Regional (Ministry of Interior) Development)  Upgrading the Early Warning System  Strengthening the organizational and to achieve national coverage (Min. of service delivery capacities of the State Interior) Hydrometeorological Service (SHS) to  Upgrading capacity, equipment, and implement the National Framework for instruments for fire and rescue units Climate Services (Ministry of Interior) Environment  Continuing the harmonization of  Strengthening capacity of the legislation and regulation with the Environmental Agency to perform its Association Agreement and the mandate and creating an agency to DCFTA Chapter on Technical Barriers manage chemical substances to Trade Forests  Implementing the Forest Institutional  Reorganizing forest-related institutions Reform Strategy  Launching a long-term program on  Preparing a National Program for forest regeneration and rehabilitation participating in the EU4Environment  Preparing a national wood energy program for forests program Water resource management. The drought in 2020 showed the far-reaching impacts on a system with only limited resilience. It revealed the disproportionate impacts on rural populations, where low access to water and sanitation services (WSS) makes Moldova an outlier among European countries. Going forward, Moldova faces increasingly challenging prospects in terms of water security because of climate change and new Ukrainian hydropower plants built on the river Nistru. While, on average, Moldova’s physical water resources can meet existing water demands, water security is undermined by a lack of infrastructure, financing, and institutional weaknesses. Moldova requires a comprehensive long-term approach to address these challenges so that accelerated investments turn into better water, sanitation, and irrigation services, water resources are leveraged sustainably, and resilience is built into the system. In this context, it is crucial to consolidate institutional reform, clarifying the mandates of Apele Moldovei and basin level authorities, establishing a lead water supply and sanitation agency/unit, and developing a national investment plan and financing framework. Developing a strategic vision for Moldova’s irrigation and drainage (I&D) sector aligned with the country’s broader agricultural and climate context is also a priority. 14 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Water  Consolidating institutional reform,  Strengthening the mandate of Apele Resources clarifying mandate, and enhancing Moldovei and basin level authorities Management inter-ministerial and inter-agency and securing resources for their coordination operation  Strengthening the monitoring and  Implementing the priority measures information management systems, for river-basin management and e.g., on water quality, groundwater, flood risk management to restore flood, and drought forecasting watersheds and environmental flows,  Developing a financing strategy for implement urban drainage solutions, priority measures from for river- regulate small reservoirs, improve basin and flood risk management dam safety, and enhance storage capacity Access to  Making universal access to safely  Establishing a lead water supply Water Supply managed WSS a national priority, and sanitation (WSS) agency/unit and Sanitation with a particular focus on inclusion and developing a national WSS Services investment plan and financing framework  Regionalizing WSS service providers and enhancing the regulatory framework Irrigation and  Developing a strategic vision for  Mobilizing public resources to Drainage Moldova’s irrigation and drainage support and implement the vision Services (I&D) sector aligned with the  Accelerating the uptake of country’s broader agricultural and rehabilitated I&D schemes through climate context investments in on-farm support, competitiveness, and supply chain development  Ensuring that future I&D investments are embedded in a market approach, and closely linked to farmer demand and activities Increasing the resilience and competitiveness of agriculture. Agriculture is vital to Moldova’s economy, but low productivity limits incomes and inhibits on-farm investments. The volatility of agricultural output is amplified by the country’s acute vulnerability to weather-related shocks and perpetuated by the lack of effective weather mitigation tools and services. Transforming agriculture into a modern, vibrant, and market-oriented sector would require a variety of strategies to boost agricultural productivity and competitiveness by focusing on strengthening public services, supporting potential entrepreneurs with capital formation needs, increasing productivity, and building resilience to climate shocks. Revising the existing subsidy program to create incentives to increase productivity, develop more higher-value activities, and support small farmers is a priority to exploit the opportunities, and mitigate the challenges for Moldova’s agricultural producers that trade integration with the EU entails. Enhancing compliance with EU requirements for food safety and quality will improve market access and help Moldova to compete domestically with increasing agricultural imports. 15 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Financial  Launching capital formation initiatives  Revising the existing subsidy program Incentives for young agriculture entrepreneurs with to create incentives to increase and a focus on innovation and digitization productivity, higher-value activities, Subsidies  Promoting targeted subsidies for smart and support small farmers agriculture  Setting up a mechanism for impact evaluation of subsidies Knowledge  Re-introducing dedicated services to  Upgrading education and knowledge improve access to knowledge management systems Food  Expanding/improving public food Quality and quality and safety programs/services Safety including animal registration and traceability ENHANCING COMPETITIVENESS Enhancing the business environment and market competition. While Moldova has made notable progress in reducing the regulatory burden for SMEs, more efforts are needed in those areas where the country still lags behind. These include insolvency procedures, together with the overly complex procedures required to obtain construction permits and electricity connections, both of which are closely linked to new investment. A key priority going forward is to address unfair competition, particularly from the presence of SOEs, state aid, and the regulation of prices and profit margins on a number of products. There is also the need to improve food safety for products of animal origin, which would pave the way toward obtaining export accreditation. Key Actions Area Short term Medium term Competition  Adopting the new Competition Law that  Rationalizing products under the is being prepared price control regime and SOEs  Ensuring bylaws are in place to implement transparent concessions and PPPs framework Digitization  Implementing electronic issuance of  Developing online business registration business permits and licenses by all for local and foreign businesses government entities  Initiating the digitization of government  Continuing the use of the e-Inspection business services and registries, register phytosanitary, veterinary, sanitary, and tax services  Creating an online repository of businesses financial statements Customs,  Negotiating green customs corridor with  Digitizing export/import procedures by export/ neighboring countries for export of implementing the single window at import perishable products customs procedures  Upgrading NQI infrastructure and animal traceability systems and obtain accreditation for EU exports for producers and processors of products of animal origin 16 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Fostering SMEs and strengthening FDI linkages. Despite being open to international trade, Moldova has not been fully able to realize its benefits because of the challenges faced by firms, particularly SMEs. In this context, the priority should be on upgrading firms’ productivity and innovation, as well as in supporting firms’ internationalization. Unlocking SMEs’ potential will not only depend on export product quality and improving standards, but also well-functioning input markets, and alleviating the shortage of skills and access to finance. Despite preferential tax treatment and other state support measures for resident firms in special economic zones (SEZs), there has been little or no spillover effect on the rest of the economy. A priority going forward should be amending the investment incentives framework to promote foreign direct investment (FDI) in upstream sectors, stimulate investment in research and development, and encourage local linkages, and technology and knowledge spillovers from FDI and SEZs to the rest of the economy. Key Actions Area Short term Medium term SME  Implementing an actionable  Implementing programs on export exports program of building linkages and readiness, match-making, export standards the integration of local firms into the international value chain, and support certification FDI/Special  Implementing supplier development  Amending investment incentives Economic programs linked with larger framework, to promote FDI in upstream Zones firms/FDI (OEMs in automotive; sectors, stimulate investment in research machinery and appliances; food and development and encourage local sector, etc.) linkages and technology and knowledge spillovers Enhancing financial sector stability and governance. The authorities have taken major steps to restore the stability of the banking sector after the 2014 banking crisis and have tightened up bank supervision and regulation to align with EU directives. However, the financial sector is small compared with the size of the economy and financial intermediation has declined for underserved segments, especially MSMEs. A comprehensive approach, including reviewing and enhancing the scale and operation of public development finance institutions, and risk-sharing mechanisms such as improved credit guarantees, is needed. In this context, adopting the law on the new deposit guarantee scheme (DGS) for banks and Saving and Credit Associations (SCAs) is crucial. It is also critical to ensuring the smooth and efficient transition of supervision of the non-banking financial sector to the National Bank of Moldova (NBM), as well as the adoption of the draft Insurance Law and Motor Third Party Liability (MTPL) Insurance Law. Furthermore, it is important to ensure adequate and complete financial infrastructure, including the amendment of data protection legislation, to enable the development of digital financial services. 17 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Banks  Assessing the resources, policies, and  Operationalizing the DGS for banks and procedures with supervisory actions to SCAs to ensure adequate staffing and strengthen banks’ preparedness for procedures, regulations, and dealing with NPLs methodologies.  Implementing the MREL and bail-in  Continuing the upgrading of banks’ regulations, and continuing the Resolution Plans and implementing first upgrading of banks’ Resolution Plans banks’ MREL requirements. to operationalize the new bank  Reviewing the bank liquidation resolution framework framework.  Adopting the law on the new deposit guarantee scheme (DGS) for banks and Saving & Credit Associations (SCAs) Non-Bank  Accelerating the transfer of  Strengthening supervision of non-bank Financial regulatory and supervisory powers credit organizations, paying special Institutions over the non-banking sector to attention to combating money NBM laundering.  Adopting the draft Insurance Law  Strengthening supervision of the SCA and MTPL Insurance Law and sector. addressing the legal hurdles for enforcement of NCFM decisions  Preparing for the transition of the SCA sector to the DGS, including the clean- up and consolidation of the sector Financial  Amending data protection  Introducing a consumer insolvency Infrastructure legislation to enable the framework development of digital financial  Upgrading the collateral registry IT services system  Upgrading the regulatory framework  Enhancing the credit information of the movable collateral registry sharing system  Strengthening consumer protection Strengthening education outcomes and skills. Over the past decade, Moldova has made progress in improving the efficiency of its primary and secondary school systems. However, challenges related to the equity, access, inclusion, quality, and relevance of education remain. These challenges have only been deepened by the COVID-19 pandemic, which has led to learning losses, thus risking the human capital gains made over the past decade. Immediate priorities are the implementation of strategies to reopen schools safely and the formation of programs for teaching at the right level for remediation and re-engagement. Throughout the entire education service delivery value chain—from pre-primary to lifelong learning programs—there is a need to concentrate on recovering from COVID-19-related learning losses, adaptability to the new job opportunities, and building system resilience in preparation for potential future disruptions. It is also a priority to implement the recommendations of the Digital Education Readiness Assessment to prepare to build back better by digitizing education. 18 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Implement  Implementing strategies to reopen  Continuing the implementation of for recovery schools safely learning recovery and acceleration  Providing teachers support to tackle strategies for foundational skills and learning losses and recovery, including disadvantaged children digital skills Protect  Establishing Programs for Teaching  Introducing entrepreneurship, learning for at the Right Level for remediation innovation, and applied ICT skills in the all and re-engagement curricula  Establishing programs that offer  Improving curricula by involving psychosocial support to the employers in reviewing occupational disadvantaged and vulnerable profiles and qualification standards  Formulating a national lifelong learning strategy with a specific focus on digital skills development, second chance, and short-term education Prepare to  Conducting a Digital Education  Implementing the recommendations build back Readiness Assessment to identify of Digital Education Readiness better - priority reforms based on the readiness Assessment Digitizing level  Leverage interdependencies with Education relevant entities and stakeholders for improving learning outcomes Expanding inclusive digital development opportunities. For the past decade, Moldova has adopted and rolled out the Digital Moldova Strategy 2020 and put in place a robust horizontal digital government infrastructure with a modern e-ID system, digital authentication, and payment services, as well as legal and regulatory frameworks for e-ID, privacy, cybersecurity, and data protection. However, not all Moldovans are connected at higher speeds and there is also a rural-urban broadband divide. The pandemic has clearly demonstrated that countries at the advanced end of the spectrum of digital development were better able to cope by adjusting their health care, education, social services, and commerce to an online environment. Priorities going forward are improving competition in the sector and enhancing social digital inclusion by restructuring Moldtelecom and developing financial strategies, including incentives for rural broadband in ‘white zones’, addressing the last mile. Finally, given the considerable expansion of Moldova’s information technology (IT) and IT-enabled services (ITeS), implementing policies and programs to boost digital skills and digital education will have an impact on the level of technology absorption by enterprises. 19 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Digital  Adopting regulations to implement  Expanding regulatory framework to Divide infrastructure sharing include policies aimed at ensuring an  Developing financial strategies equitable digital transformation including incentives for rural  Implementing the strategies for broad broadband in ‘white zones’, connectivity addressing last-mile challenges (Ministry of Infrastructure and Regional Development and Ministry of Finance) Competition  Introducing enabling regulation to  Restructuring Moldtelecom, and increase competition in the mobile possibly privatizing it (Ministry of telephony and broadband markets Infrastructure and Regional Development and Public Property Agency) Digital Skills  Conducting gap analysis on the current  Implementing policies and programs digital education system, including to boost the digital skills and digital higher education and training education (Min. of Education) New  Expanding regulatory framework to  Implementing measures for introducing Technologies include new technologies (artificial the new technologies intelligence, blockchain, IoT) Cybersecurity  Expanding regulatory framework to  Implementing cybersecurity and data include cybersecurity policy pertaining privacy protection (Deputy Prime to threat analysis and prevention, Minister for Digitization/ State coordination mechanisms, and Chancellery/e-Governance Agency) strengthening data privacy Multimodal transport. Ensuring adequate transport connectivity and mobility is vital for the competitiveness of a small land-locked economy. However, an unbalanced funding strategy in favor of road rehabilitation and development has caused a decline in the efficiency and reliability of the country’s railways. The post-COVID-19 recovery offers new opportunities to reshape transport systems and shift to more resilient, efficient, sustainable, and equitable mobility. A restructured railway transport system in Moldova will provide not only a competitive alternative to roads but also climate benefits. Road sector management could be strengthened by enhancing the efficiency of funding for the Road Fund, as well as by improving road safety coordination in the country. 20 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Medium term Transport  Developing a new national transport  Rebalancing funding to align with and and logistics strategy new national transport and logistics Logistics strategy  Building back better by introducing resilience in transport infrastructure design and construction Railways  Adopting the new Railway Transport  Initiating the restructuring of Code Moldova Railways Company (CFM) Roads  Developing a Road Safety Strategy  Implementing the road safety strategy  Introducing mid-term and performance- based maintenance contracts  Developing a road sector financing strategy, including with direct user charges feasibility Urban  Developing a strategy for using  Promoting initiatives to increase the use Mobility alternative and more active modes of of alternative and more active modes of travel (e.g., cycling) travel (e.g., cycling) Addressing energy security and sustainability. Over the past 20 years, Moldova has significantly reformed its energy sector through cost-reflective pricing, independent regulation, and the promotion of efficient operations and investments. However, energy security continues to be a central concern due to Moldova’s high dependence on energy imports, and on single-source supply in gas and electricity, highly concentrated markets, aging power generators, unresolved issues of historical debts, and low diversification of the power generation mix. Energy security can be achieved through the strengthening of links with the European power and gas network and with the quick implementation of the Vulcanesti-Chisinau 400kV OHL and the Back-to-Back interconnection between Moldova and Romania (ENTSO-E) for the timely completion and smooth operation of the Iasi-Ungheni-Chisinau gas pipeline. This should be complemented by rationalizing markets for electricity and gas, including participation in the EU and Ukrainian markets for gas and electricity, and increasing the share of sustainable and efficient power generation, especially competitively bid private sector investments in renewables. Further implementing comprehensive reforms in the area of sustainable heating is also necessary. 21 Moldova Policy Notes 2021: SUMMARY OF POLICY PRIORITIES AND KEY ACTIONS GOING FORWARD Key Actions Area Short term Within the second year Transmission  Implementing appropriate cost  Preparing for synchronization and and recovery methodologies interconnection with the EU, including Distribution  Completing unbundling and software and capacity building for certification of the transmission system operators system operators  Rationalizing markets for electricity  Strengthening gas and power and gas including participation in EU transmission links with the EU— and Ukraine markets for gas and quick implementation of the electricity Vulcanesti-Chisinau 400kV OHL and the Back-to-Back interconnection between Moldova and Romania (ENTSO-E) for timely completion and the smooth operation of the Iasi-Ungheni- Chisinau gas pipeline  Exploring strategic options for grid resilience in preparation for renewable integration and synchronization with ENTSO-E Power  Exploring options for diversification  Increasing the share of sustainable Generation of power supply through financial and efficient power generation, and physical instruments allied with especially competitively bid private neighboring countries sector investments in renewables District  Improving energy efficiency of  Improving energy efficiency by Heating district heating through timely expanding gas procurement options, implementation of major settling of historical debts, and renovation and new combined heat promoting global “best practices” in and power (CHP) installations pursuing biofuel and waste 22 Moldova Policy Notes 2021 POLICY NOTES STRENGTHENING INSTITUTIONS AND BUILDING RESILIENCE  Strengthening the Capacity and Governance of Public Administration  Strengthening the Judiciary and the Fight against Corruption  Supporting a Resilient Recovery while Safeguarding Fiscal Sustainability  Building Fiscal Resilience at the Subnational Level with Land Administration and Property Registration and Valuation  Enhancing Labor Markets and Addressing COVID-19 Challenges  Achieving a Sustainable Social Protection System  Improving the Efficiency and Resilience of Health Service Delivery  Strengthening Environment Protection and Disaster Risk Management  Water Resource Management  Increasing the Resilience and Competitiveness of Agriculture ENHANCING COMPETITIVENESS  Enhancing the Business Environment and Market Competition  Fostering SMEs and Strengthening FDI Linkages  Enhancing Financial Sector Stability and Governance  Strengthening Education Outcomes and Skills  Expanding Inclusive Digital Development Opportunities  Multimodal Transport and Logistics  Addressing Energy Security and Sustainability 23 Moldova Policy Notes 2021: STRENGTHENING THE CAPACITY AND GOVERNANCE OF PUBLIC ADMINISTRATION STRENGTHENING THE CAPACITY AND GOVERNANCE OF PUBLIC ADMINISTRATION Strengthening Moldova’s public administration is a top priority, given that it continues to suffer from weak and poor-quality governance. Low-quality public administration and governance in Moldova is a chronic problem that has resulted in low trust in state institutions. A key priority going forward is accelerating the reform of the state-owned enterprise (SOE) sector, which is characterized by major inefficiencies, losses, rising long-term debt, poor performance in service delivery, low productivity levels, and weak governance arrangements. While public financial management (PFM), public procurement, and tax administration provide largely satisfactory, basic regulatory frameworks broadly aligned with the EU principles, there are large gaps to be addressed in terms of effective implementation. Reform of state institutions, performance evaluations and merit-based appointment of professionals in key positions are included among the main priorities of the new Government. Key Actions Area Short term Medium term State-Owned  Conducting an evaluation of SOEs  Rationalizing SOEs based on the Enterprises along key metrics (financial evaluation and endorsing formal performance, market failures, regulation on state ownership strategic sectors etc.)  Improving incentives structure for better SOE performance  Strengthening and consolidating the ownership function and board practices Public Financial  Preparing a PFM Reform Strategy  Implementing PFM reform as part Management based on the PEFA findings of the Budget 2023 Public Sector  Finalizing the development of  Updating relevant legislation, standard Accounting remaining public sector accounting setting, regulation and enforcement, standards and IT State Assets  Finalizing the development of the  Integrating and consolidating state single state assets registry assets records in a single asset registry Public Investment  Strengthening and enforcing the PIM Management framework to expand its coverage Gender Response  Implementing a gender response Budgeting budgeting as part of the Budget 2023 Tax administration  Assessing the current tax  Building IT capacity based on the administration gaps and the STS international IT management systems capacity, including IT capability and big data analytics good practices  Accelerating the digitization of tax  Developing a new mid-term tax services, and simplifying administration strategy and its procedures for taxpayers implementation road map Procurement  Preparing a roadmap of reform Implementation of the public actions based on the procurement reform roadmap recommendations of the MAPS assessment 24 Moldova Policy Notes 2021: STRENGTHENING THE CAPACITY AND GOVERNANCE OF PUBLIC ADMINISTRATION Where Moldova Stands Now 40 sectors where private participation is economically viable, compared with an OECD The Republic of Moldova suffers from weak average of just 14. Despite the significant number public administration and poor-quality of SOEs, assets are fairly concentrated among the governance. State-owned enterprises (SOEs) large ones, which engage in key network have weak governance arrangements, with some industries such as electricity networks, railways, of them involved in corruption schemes, leading road infrastructure, water, urban transport, to losses, rising long-term debt, and to the brink construction, and fixed broadband. of bankruptcy. Public financial management The ownership of SOEs is highly fragmented, the (PFM), public procurement, and tax purposes and objectives of each are not clearly set administration also display large gaps in terms of out, and the overall governance arrangements are efficiency and effectiveness. Reform of state inconsistent. Moreover, the SOE sector is institutions, performance evaluations, and merit- characterized by major inefficiencies, losses, based appointment of professionals in key rising long-term debt, poor performance in positions are included among the main priorities service delivery, and low productivity levels. of the Government. This has adverse consequences for productivity, Public Administration and Institutions. Low- technological progress, and competitiveness, and quality public administration and governance in is particularly harmful in network industries, key Moldova is a chronic problem that has resulted in inputs for the overall economy, hence dragging low trust in state institutions. Governance failures down the private sector’s productivity. Finally, of are reflected in all relevant international ratings, the sizeable state aid provided, a significant share but also national public opinion polls. Many is probably allocated to SOEs, further reducing policies have been developed in the interest of competitive neutrality, creating barriers to entry, oligarchic groups, ignoring or contrary to the and harming market competition. 6 The national interest. Usually, the policy cycle is Government has taken the first steps to address limited to drafting and approval, with major these issues by introducing basic governance implementation failures and no impact arrangements for state and municipal enterprises assessments. State institutions are weak and not through the new legal framework and through the performing their functional mandates and concentration of ownership function in the hands responsibilities well. The poor quality of of a specialized central agency that oversees government has affected the response to the SOEs. Nonetheless, far more needs to be done to COVID-19 pandemic, as shown by the improve the corporate governance of SOEs and inadequate management of the public health their operational efficiency (see also Policy Note crisis and its economic consequences. on Enhancing the Business Environment and Strengthening state institutions to better respond Market Competition). in the public interest through their functional Public Financial Management. The recent review, and applying the principles of good public financial management (PFM) reforms in governance, was included as one of the main Moldova are largely based on, and aligned with, priorities of the new Government. the requirements for the EU-Moldova State-Owned Enterprises. SOEs play a major Association Agreement, which came into force role in the Moldovan economy, as significant on July 1, 2016. The Agreement envisages a owners, operators, and employers in key sectors. number of actions to be taken by the Government They account for about 50 percent of all fixed to strengthen the administration of public assets and employ 13 percent of the working finances in the area of budgetary policy, internal population. SOEs are active in more than control, financial inspection, and external audit. 6 World Bank Group. 2019. Moldova: Rekindling Economic Dynamism. Country Economic Memorandum. World Bank, Washington, DC 25 Moldova Policy Notes 2021: STRENGTHENING THE CAPACITY AND GOVERNANCE OF PUBLIC ADMINISTRATION To assess the quality of the Moldovan PFM with that in the EU directives but leads to a large system and monitor the results achieved through number of them, many with very limited skills PFM reforms, the Government, together with and resources. Public procurement is not development partners, has undertaken regular officially recognized as a profession and, as a evidence-based assessments of the public consequence, there are no specific public financial system based on an internationally procurement positions with dedicated, matching recognized methodology. Such assessments were approaches for engagement, management, conducted in 2006, 2008, 2011, and 2015 training, evaluation, and promotion of the staff covering the central level only. In 2021, the concerned. Centralized procurement is Public Expenditure and Financial Accountability undeveloped, and its use in practice (mainly for (PEFA) assessment, led by the World Bank with medical supplies and equipment) is hampered by financial support provided by the European regulatory problems and an e-procurement Commission and in partnership with UN Women, system that lacks the appropriate functionalities. commenced an assessment for the national Public procurement data are generated in ways government and selected subnational that are not fully conducive to the easy collection, governments. The assessment will identify compilation, and analysis, with some aspects strengths and weaknesses in Moldova’s PFM (e.g., small value contracts) hardly covered at all. systems that will guide the development of the Consequently, there is no strong evidence basis Government’s new PFM Strategy planned for the available for policymaking. beginning of 2022. The recommendations and the Tax Administration. Under the World Bank- dialogue regarding PEFA findings are expected financed Tax Administration Modernization to influence the Government’s priorities in PFM Project 2016–2021 (TAMP), the State Tax areas and the design of future PFM reform Service (STS) achieved significant progress, with projects. The findings of the gender assessment improvements to taxpayer services through a are expected to contribute to discussions on the website redesign, taxpayer survey capability, and extent to which gender aspects are considered the development of a taxpayer services throughout the budget cycle and will inform procedures manual with related training. Several further reforms in this area. sustainability issues regarding the digitization of Public Procurement. While the Public tax administration have been addressed under Procurement Law provides a largely satisfactory, TAMP and by other means over the past few basic regulatory framework incorporating the years, as the STS has followed its strategy of fundamental EU principles governing the award slowly replacing or upgrading legacy systems of public contracts, the Law nonetheless requires toward the goal of having an Integrated Tax further amendments. The recently conducted Management Solution (ITMS) rather than assessment of the public procurement system tendering for a new solution. However, this based on the Methodology for Assessing migration is incomplete and there is a lack of Procurement Systems (MAPS) identified several clear understanding of the end-state of these areas requiring reforms. While the primary activities. This raises concerns about the legislation is well aligned with best international sustainability and interoperability of the practices, the corresponding secondary applications, use of available data for risk-based legislation is partly outdated and requires analysis, and additional needed applications to revision. The Public Procurement Law gives support compliance, enforcement, and taxpayer wide opportunities to select procurement service workflow. To address these concerns, a procedures and award criteria appropriate to comprehensive diagnostic is needed to assess the individual cases, but the existing e-procurement current state against ITMS international best system lacks functionalities that would allow for practice and recommend a strategy (enhance or the use of all these procedures. The definition of replace) for future actions, with cost estimates. public procurement authorities is broadly in line The same diagnostic could also help in the 26 Moldova Policy Notes 2021: STRENGTHENING THE CAPACITY AND GOVERNANCE OF PUBLIC ADMINISTRATION development of the implementation roadmap for • Strengthening and consolidating the the STS to have a full-fledged and interoperable ownership function and board practices. ITMS, including a data analytics capability. Establishing an open and competitive process How Moldova can promote better governance for identifying and appointing board and stronger public administration members based on merit and professional capability would help them effectively fulfill The World Bank is committed to supporting the SOE functions aligned with the state interest. new Government’s Program commitments related to strengthening public administration and • Preparation of the PFM Reform Strategy governance. The World Bank will continue its based on the PEFA findings, and planning for ongoing dialogue with the Moldovan authorities its implementation. and build on previous collaboration and • Implementation of the public sector analytical work to further support the reform of accounting reform by finalizing the SOEs, and the strengthening of PFM, tax development of remaining public sector administration, and public procurement. Some accounting standards, improving the relevant specific actions in these areas would include: legislation, standard-setting, regulation and • Conducting functional analysis of selected enforcement, and information technology. state institutions. The results of the functional • Supporting state assets inventory and analysis should be used for optimally registration, as well as maintenance of reorganizing the institutions to achieve their updated, integrated, and consolidated state missions and development objectives. To assets records in a single asset registry. This further monitor the performance of the will aim to strengthen the Government’s institutions, a set of relevant performance capacity to formulate and implement criteria should be defined and implemented. evidence-based policies on the management • Defining the rationale of state ownership. of state assets, leading to improved This rationale should state explicitly and accountability and efficiency of the clearly the reason that enterprises should maintenance and use of state assets. continue to be owned and how this benefits • Improving the regulatory framework for society as a whole. It should include delivery public investment management by expanding of public goods and services where the state its coverage and enforcing its application and may be more efficient or reliable; operation enhancing staff capacity to appraise and of natural monopolies where markets are not monitor public investments. efficient; and strategic goals such as the maintenance of certain industries under • Implementing mechanisms for the national ownership (see also Policy Note on enforcement of the legislative provisions on Enhancing the Business Environment and internal audit and enhancing the capacity of Market Competition). internal audit units at the central and local levels. • Improving incentives for better SOE performance monitoring, through the design • Mainstreaming of gender-responsive and implementation of a proper SOE budgeting to ensure that national compliance dashboard and the development commitments to gender equality and of an SOE performance monitoring system, women’s empowerment are adequately including performance agreements with each funded. SOE, and covering key financial and non- • Preparation of a diagnostic study of the financial performance indicators. current tax administration gaps and the STS capacity, including IT capability against 27 Moldova Policy Notes 2021: STRENGTHENING THE CAPACITY AND GOVERNANCE OF PUBLIC ADMINISTRATION international IT management systems and big international IT management systems and big data analytics good practices. data analytics good practices; and (ii) accelerate the digitization of tax services • Development of a new tax administration to reduce corruption among officials, strategy with an implementation road map, discourage abusive tax and customs aimed at improving the business climate, practices, and simplify procedures for voluntary tax compliance, and transparency taxpayers. of tax services through strengthening institutional and human resource • In collaboration with the Ministry of Finance management, and IT tax administration and the Public Procurement Agency, capacity countrywide. identification of opportunities for further reforming public procurement based on the • Supporting the development and recommendations of the MAPS. implementation of a tax administration project that would: (i) ensure a tax administration IT capability based on the This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Oxana Druta, Iryna Shcherbyna, Elena Corman, and Constantin Rusu. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: https://www.worldbank.org/en/country/moldova 28 Moldova Policy Notes 2021: STRENGTHENING THE JUDICIARY AND THE FIGHT AGAINST CORRUPTION STRENGTHENING THE JUDICIARY AND THE FIGHT AGAINST CORRUPTION Deep reform of the judiciary and strengthening the fight against corruption are much needed in the Moldovan context, not only to safeguard and recover public resources but also to establish an enabling business environment for domestic and foreign entities and rebuild the trust of Moldovans in state institutions. The efforts undertaken by the authorities should focus on filling the institutional and legal gaps that have allowed integrity issues to emerge throughout the public sector (for example, in the case of SOEs involved in corruption schemes), but also on ending the culture of impunity for high-level corruption. Reforms also need to ensure strengthening of the judiciary and the prosecution self-governing and control bodies, along with the integrity of judges and prosecutors, and the ability of the courts to deliver justice effectively and efficiently, respecting the rule of law for vulnerable populations, the private sector, and for those accused of corruption-related crimes. The Program of the new Government focuses on these key aspects, as it intends to “launch a deep justice reform and a real fight against corruption, by making more efficient the activity of the prosecutors’ offices and courts to stop public money and property theft. Key Actions Area Short term Medium term Supreme  Introducing a transparent and fair Council of mechanism for selecting and appointing Magistrates and members of SCM and SCP Superior Council of Prosecutors Human  Reviewing current HR  Launching the integrity evaluation Resources policies/management of judges, of prosecutors prosecutors, and court staff Courts  Assessing the status of courts  Aligning court consolidation with consolidation and providing a set of international good practice and recommendations on the next steps refraining from a “classic” model of organizing courts jurisdictions Specialized  Limiting the competence of the Anticorruption Specialized Anticorruption Prosecutor Prosecutor’s Office to prosecuting high- level corruption Asset  Amending the legislation on asset Declaration declarations and the National Integrity Authority to strengthen the content of the asset declaration form  Introducing a risk-based approach to verification 29 Moldova Policy Notes 2021: STRENGTHENING THE JUDICIARY AND THE FIGHT AGAINST CORRUPTION Where Moldova Stands Now In 2018, the National Integrity Authority (NIA) launched the electronic e-Integrity A weak rule of law, paired with high levels of system that enables submitting asset and corruption, is one of the main obstacles to interest declarations and their online achieving sustainable development in publication for public access. 8 Since the launch Moldova. Just under 50 percent of citizens and of e-Integrity, more than 280,000 electronic nearly two-thirds of business representatives declarations have become public. Although the consider the judiciary in Moldova to lack number of verifications is steadily increasing independence. More than three-quarters of compared with previous periods, their outcomes citizens and business representatives consider have remained limited and are not focused on corruption in the judiciary as “mainly present/ high-level and high-risk officials. In 2020, NIA present to a great extent”. However, only one out issued only 210 findings that concluded of four judges and nearly half of all prosecutors violations had been committed and there are an in Moldova share the same opinion. 7 insignificant number of cases of detected Attempts to bring about tangible change have unjustified wealth. As such, the asset declaration largely remained on paper. Meanwhile, system has much room for improvement to meet analyses conducted previously show significant its potential and public expectations in terms of variance in the resources available to judges having an impact on Moldova’s integrity across courts and regions, with the allocation of challenges. resources not being driven by demand for legal How Moldova can promote justice reform and services but based on population and economic anti-corruption conditions. Moreover, commitments to improve quality, and develop and publish clear criteria and The World Bank is committed to supporting procedures for hiring, promotions, awards, and the priorities related to justice and anti- bonuses, to increase transparency, accountability, corruption reform included in the new and thereby, trust in the system, remained largely Government’s Activity Program “Moldova unfulfilled. Buna.” This starts with immediate implementation support for the activities There has been little to no change in terms of included in the Ministry of Justice Action Plan for ending impunity for high-level corruption 2021–2022 and continues with discussions in the despite publicly made commitments. Very few context of the upcoming Country Partnership cases of high-level corruption have been sent to Framework (CPF) on a potential broader court or adjudicated. There are also serious engagement through an investment project. concerns about respect for the rule of law in cases The World Bank will continue the ongoing that have reached the verdict phase or when dialogue with the Moldovan authorities and build verdicts have been overturned through on previous collaboration and analytical work to extraordinary procedures. Moreover, very few of enhance this ambitious reform agenda. In the assets stolen during the 2014 bank fraud have particular: been recovered. Moldovan institutions with a role in protecting the rule of law and fighting • Strengthening integrity, fairness, and corruption have been affected by a longstanding accountability of justice key actors by crisis of commitment, capacity, credibility, and “introducing transparent and fair integrity, and attempts in the past to bring about mechanisms for selecting members of the tangible change have been isolated and SCM and SCP.” Both composition, selection undermined by a lack of political will. procedures, and governance structures should be reviewed and amended to facilitate independent, quality self-governing bodies 7 The World Bank’s multi-stakeholder justice perception and 8 The e-Integrity system development was funded through the World experience survey (2020). Bank lending operation Moldova e-Governance Transformation. 30 Moldova Policy Notes 2021: STRENGTHENING THE JUDICIARY AND THE FIGHT AGAINST CORRUPTION for the judiciary and the prosecution in • Strengthening the independence and integrity Moldova. of specialized prosecution bodies, by implementing transparent selection • Strengthening the integrity of the judicial procedures with the involvement of system and prosecution service, based on an independent experts, potentially including independent extraordinary evaluation international ones that can play a decisive mechanism to evaluate the integrity of judges role. and prosecutors. • Limiting the competence of the Anti- • Strengthening the quality in justice service Corruption Prosecution Service to high-level delivery by strengthening HR policies/ corruption to ensure that scarce resources are regulations for more transparency and used for the greatest impact, while also accountability, as well as professional permitting easier monitoring of progress. capacities in the judiciary and the prosecution beyond extraordinary evaluations and • Strengthening the asset and interest introducing a citizen- and business-centric declaration system, through enhancing the approach that brings lasting change on the legal framework on asset declaration to limit ground and helps to build trust in state the opportunities to legally avoid declaring institutions. ill-gotten or unjustified assets, while introducing a risk-based approach to • Enhancing access and efficiency in justice verification, including automatic cross- service delivery by re-shaping Moldova’s checks with registries and databases, and current court consolidation into a ‘smart’ abolishing integrity certificates. consolidation, while taking advantage of Moldova’s expertise and skills in digital transformation. This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Laura Pop, Eva Melis, and Constantin Rusu. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 31 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY With a 7-percent decline in GDP in 2020, the impact of the COVID-19 pandemic, combined with the devastating drought, has been one of the most severe in Europe. The shock has had a large and heterogenous impact across households, firms, sectors, and geographical areas. The economic recovery from the pandemic not only hinges on its containment and a more favorable external environment but also effective fiscal support to the private sector and households. Moreover, the recovery period represents an opportunity to steer the economy toward a more inclusive and resilient growth model, which can be achieved with a more effective and efficient fiscal policy framework. However, Moldova is confronted with the challenges of shrinking fiscal space, mounting contingent liabilities, and increasing social pressures, while it also seeks the resources necessary to support the recovery and steer the economy toward a different growth path. Achieving such a goal while ensuring fiscal sustainability will not only require the capacity of increasing revenue and re-orienting spending, but also a more efficient use of public resources and a reduction in the distortions created by public interventions. A more equitable system is also necessary to strengthen the social contract and build consensus around the reform program. This is evident from the challenge of increasing progressivity in the tax system while enhancing collection and reducing administrative complexities. Finally, given the country’s vulnerability to shocks, particularly from natural disasters, relying on a stronger countercyclical stance and more effective fiscal rules will also be necessary. Key Actions Area Short term Medium term Revenue  Reviewing and rationalizing the  Introducing a progressive personal entire spectrum of tax expenditures income tax (PIT)  Strengthening the collection of domestic VAT and excise tax regimes Spending  Introducing public expenditure reviews  Improving planning, monitoring, and with sectoral and thematic evaluations execution of public investment Resilience  Strengthening monitoring of  Revisiting the current fiscal rules to contingent liabilities including SOEs, consider the business cycle pension fund, financial and  Implementing an action plan to insurance sectors strengthen and deepen domestic debt markets Subnational  Enhancing land registry and property Finance valuation  Strengthening local tax administration Where Moldova Stands Now collections failed to keep up with the pace of spending increases, resulting in fiscal pressures. The COVID-19 pandemic resulted in a record The situation deteriorated significantly in 2020 as high deficit in 2020, but Moldova’s fiscal the pandemic and the Government’s emergency deterioration had started well before. With the response depressed economic activity, pushed up policy changes implemented in 2018 on public government spending, and reduced government wages and the pension system, fiscal deficits revenue. As a result, the fiscal deficit reached a began to widen in subsequent years. Faster 10-year record of 5.1 percent of GDP in 2020 growth in spending on wages, social benefits, and (including a 1-percentage-point increase in the subsidies resulted in a steady increase in cash balance), compared with an average of only expenditure as a share of GDP, reaching 31.9 1.2 percent between 2008 and 2019. percent by the end-2020. Conversely, revenue 32 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY Figure 8: Fiscal stance, 2010–19 Figure 10. Revenue composition, 2019 35 0.0 -1.0 30 -2.0 25 -3.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 General government revenue General government total expenditure General government net lending/borrowing Source: World Bank staff calculations, GFS. Source: World Bank staff calculations, GFS While Moldova’s tax collection is in line with The efficiency and equity of major taxes are its peers, large collection inefficiencies persist. relatively low due to a narrow base, multiple Total revenues have remained relatively flat rates, and deductions and exemptions. between 2015 and 2019 at around 30 percent of The resulting tax gap is estimated at around GDP. There were some improvements in the 5 percent of GDP. A large part of this revenue collection from CIT, which experienced the comes from VAT, which is estimated to have a largest increase (0.7 percent of GDP), followed tax gap of over 50 percent, mostly from the by VAT, excise tax, and health insurance (0.4). application of reduced rates, exemptions, and the The tax revenue structure remains skewed toward non-taxability of some final consumption taxes on goods and services (43 percent of total components. revenues), followed by social and health Figure 11. Tax capacity and gap (% of GDP) insurance (28 percent), and personal income tax (12 percent). Despite the recent performance of 30 corporate income tax (CIT), Moldova’s revenues 25 20 from income, profits, and capital taxes remain 15 about 2.1 percentage points of GDP below its 10 peers’ average. Social contributions revenues 5 (8.8 percent of GDP) are also below its peers’ 0 average by about 1.3 percentage points of GDP. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Finally, VAT collections are roughly in line with its peers. However, the overall performance is Tax_Revenue Tax_Capacity Tax_Gap mainly driven by the collection from imported goods, with VAT on domestic goods lagging Figure 12. VAT policy and compliance gap behind. (% of the VTTL) Figure 9. General government revenues and GDP (%), 2018 80 60 40 20 0 Bulgaria Romania Ukraine Moldova (2018) (2018) (2015) (2019) Policy Gap Compliance Gap Source: World Bank staff calculations, GFS. 33 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY Moldova continues to struggle to strike the 5 -1.6% 3.8% right balance between the principles of tax 6 -2.2% -4.5% simplicity, efficiency, equity, and 7 -3.4% -14.2% progressivity. A typical example is the flat rate 8 -4.3% -19.8% of the personal income tax, which was originally introduced to reduce administrative complexities 9 -5.8% -29.9% and increase collection. However, over the years, 10 -7.9% -39.7% a number of personal deductions and exemptions Note: Positive (negative) numbers mean the income decile is a net were introduced to inject progressivity and receiver (contributor) of the fiscal system. equity. These measures have created layers of complexity, moving the system far from its Figure 13. Poverty-reducing effect of the fiscal original objective, and making it inefficient and system cumbersome. Similarly, unnecessary Poverty headcount complexities also exist in terms of tax preferences across sectors and labor taxation, constraining the 0.3 27.3% business environment. 0.25 20.7% 0.2 15.4% Overall, the fiscal system in Moldova is 0.15 relatively pro-poor, with the poorest 0.1 0.05 50 percent of the population being net 0 recipients of fiscal policy (that is, receiving Market income Disposable Consumable more in transfers and benefits than they pay in (before all taxes income (after income (after taxes and contributions). The redistributive and transfers) direct taxes and direct and direct transfers) indirect taxes, effect of fiscal policy is particularly high for transfers and households at the very bottom of the income subsidies) distribution, which receive as much as 81 percent of their final incomes through transfers and Source: World Bank staff calculations on HBS 2019. benefits. Indeed, public transfers have in recent years been the main driver of income growth for Although the fiscal system in Moldova the poorest 40 percent of the Moldovan substantially reduces poverty, it does so at a population. As a result, the fiscal system has relatively high cost. While means-tested social strong poverty-reducing and equalizing effects. programs such as Ajutor Social have the lowest Similarly, the overall tax system has been leakage rates (the share of beneficiaries that progressive. The regressive nature of indirect receive the transfer but are non-poor) and the taxes has been offset by large tax expenditures. highest cost-benefit ratio (that is, they achieve the While direct taxes have been more progressive, highest reduction in the poverty gap for a unit the redistribution power has been small, with the spent on the program), they are currently too top decile paying less than 8 percent of its final small in both coverage and generosity to make a income. significant dent in overall poverty. By virtue of their size, contributory pensions account for the Table 1. Distribution of benefits/burdens of the bulk of the reduction in poverty achieved through fiscal system, by decile of market income the fiscal system, even though their cost-benefit Taxes/Transfers As a % of Final Income ratio is, logically, lower than that of means-tested Decile Direct Taxes Total programs. Categorical benefits have high leakage rates and the lowest cost-benefit ratios, and their 1 0.0% 81.0% size should be further scaled down to finance a 2 0.0% 49.3% scale-up of means-tested programs. 3 -0.3% 28.9% 4 -0.9% 15.2% 34 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY Table 2. Leakage and cost-benefit ratios of Figure 15. General government spending by economic classification, 2019 social programs Leakage Benefit- (# of Cost beneficiaries) (dPG0/X) All social protection 32.4 0.71 All social insurance 24.1 0.70 Old-age pensions 24.2 0.70 Unemployment benefits 0.0 0.86 All labor market n.a. n.a. programs All social assistance 52.8 0.67 Source: World Bank staff calculations, GFS. Social pensions 48.8 0.74 Aging and parametric changes in pensions are Child benefits 66.8 0.52 expected to increase fiscal pressure and Ajutor social 12.5 0.92 budgetary rigidity. Rigid expenditures, Categorical benefits 52.5 0.65 including wages, interest payments, social Other means-tested benefits, and goods and services, amount to 21.2 0.82 almost 60 percent of overall expenditure, which benefits Note: Leakage is defined as the share of individuals who receive is relatively low compared with peer countries. a transfer but are non-poor. The cost-benefit ratio is the poverty When accounting for intergovernmental transfers gap reduction in a unit of local currency for each 1 unit spent on and spending financed by earmarked resources, the social program. and subsidies to state-owned enterprises (SOEs) Source: World Bank staff calculations and 2019 HBS. and the Road Fund, the share of flexible and Spending remains relatively high for disposable budget only amounts to about Moldova’s level of development, with social 12 percent of the total. Furthermore, by far the protection and education constituting the two biggest spending item—social expenditures—is biggest items. At 31.4 percent of GDP, general expected to further increase in the future. government spending is among the lowest in the The reduction of the retirement age from 63 years region. However, it is about 2 percentage points to 57/62 years old for women/men, the higher than predicted by its income per capita introduction of “double indexation” of pensions, level. Moldova spends almost 70 percent of total and the proposal to increase the minimum general government spending on social sectors: pension to MDL 2000 are expected to increase 35 percent on social protection, 18 percent on the fiscal pressure to about 5.6 to 5.9 percent of education, and 13 percent on health. GDP, reducing, even more, the budget available for reallocation in case of emergencies or priority Figure 14. General government spending and changes. GDP per capita, 2019 Figure 16. General government expenditure rigidities (% of total expenditure), 2019. 35 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY Table 3. Budgetary rigidities and revenue of the permanent nature of social spending. earmarking (% of total expenditure), 2015. For these reasons, procyclicality accompanied by an increased budgetary rigidity would reduce the space for investment during an economic expansion and the ability to adjust during an economic downturn or crisis. In this context, the current fiscal rule under the Fiscal Responsibility Law (FRL), which simply limits the overall deficit excluding grants to 2.5 percent of GDP, with an escape clause for public capital investment funded by external concessional Source: World Bank staff calculations, BOOST. sources, fails to help. Public investment is falling short of Moldova’s Figure 17. Fiscal procyclicality across countries, needs. Public investment in Moldova is primarily 2000–19 financed from external resources and is usually under-executed due to limited capacity. Since the collapse in investment following the 2014 banking crisis in Moldova, public investment spending has recovered somewhat but remains depressed. Although its efficiency score for physical infrastructure is relatively high, except for electricity and telecommunications, Moldova performs poorly compared with peer and neighboring countries. Public capital spending is concentrated in a few areas, with roads utilities, and agriculture absorbing half of the resources. Recently, energy investments have been spurred by the interconnection projects with Romania. Figure 18. Drivers of procyclicality in Moldova Also, the repair needs in municipal water and 0.8 0.64* sanitation systems are considerable, as are the Correlation between cyclical component of 0.51 0.49 0.6 costs associated with maintaining and developing 0.4 0.45 0.49* real spending and GDP 0.21 the Moldovan railway system. 0.2 0.31 0.10 0.37 0.12 The increase in budget rigidities, coupled with 0.0 -0.13 -0.15 -0.23 a traditionally procyclical stance, raises -0.2 -0.26 concerns about the Government’s ability to -0.4 -0.39* -0.28 -0.29 support development in a small open economy -0.6 Total Wages Social Gs&Ss Interest Aq. Non prone to external shocks and natural disasters. Spending Benefits Fin 2010-2019 Assets While procyclicality is mild compared with its 2000-2019 2000-2009 peers, fiscal policy tends to increase Source: World Bank staff calculations, GFS. macroeconomic volatility, amplify the business cycle, reduce potential growth, and, Moreover, widespread inefficiencies lead to consequently, affects the poor that are less able to poor performance, particularly in social cope with income volatility and job losses. protection, education, and health. Overall, Capital spending, together with goods and Moldova could achieve the same outcomes that it services, has been the main driver of the country’s currently achieves, but with only 60 percent of the procyclical fiscal policy in the 2000–19 period, resources it currently spends. Spending on but more recently the increase in social spending education is higher than in peer countries but in a procyclical manner raises concerns because outcomes, measured in terms of net enrolment 36 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY rates across all education levels and PISA scores, small size of the country, its population, and the are low, suggesting low efficiency. Health potential for economies of scale for public spending is on a declining trend, but performance services. When looking at local revenue, about measured in terms of life expectancy, infant three-quarters of local spending is financed by mortality rate, and the number of physicians, central government transfers/revenue-sharing remains weak. In agriculture, a key economic arrangements (suggesting vertical imbalances), sector for the country, direct budget spending is which is similar to structural peer countries but high and higher than in peer other countries, yet a much higher than aspirational ones. Apart from monitoring and evaluation mechanism is not in Chisinau and Gagauzia, most of the municipal place. governments depend heavily on transfers from the central government with a limited capacity to Figure 19. Efficiency frontier in health, 2018 collect compared with their needs (horizontal imbalances). The share of local expenditures financed by transfers to municipalities ranges from 59 to 85 percent, while the shares for Chisinau and Gagauzia are instead 45 and 38 percent, respectively. These large imbalances are primarily due to the legacy of the former Soviet Union, which has led to a highly fragmented local administration. There are 35 top-tier local administrative jurisdictions (including two cities, 32 raions [districts], and the Autonomous Territorial Unit, Gagauzia) and 896 bottom-tier jurisdictions with a median land area per municipality of only about 3 km². Half Figure 20. Efficiency frontier in education, 2018 the rural bottom-tier municipalities have fewer than 2,000 residents, and more than one-quarter have fewer than 1,500 residents. Figure 21. Vertical fiscal imbalances, 2019 (Share of central government transfers in local government spending) Source: World Bank staff calculations, WDI 2018. At the local level, government spending is relatively high, while revenue generation capacity is low. Local government spending represents one-quarter of total spending, corresponding to 8 percent of GDP, and 4 percentage points higher than the peer average. This is a particular concern, given the relatively Source: World Bank staff calculations, GFS. 37 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY Figure 22. Horizontal fiscal imbalances, 2018 growth will continue in the medium term to be just above potential, although the output gap will remain negative due to the sharp decline in GDP in 2020. Enhancing the quality of public spending is key to maximizing short- and long-term benefits in terms of growth and poverty reduction and taking advantage of the opportunity provided by the economic recovery. Regarding the short-term impact, the different fiscal multipliers of each fiscal instrument and their impact on the poor and vulnerable are important elements to consider. Regarding the medium term, the ability to reduce Source: World Bank staff calculations, BOOST. rigid expenditure will be key for sustainability. Devoting such a large share of the budget Both public debt and external debt have envelope to rigid current expenditure limits the increased. Both public and external debt fiscal space for discretionary spending in other increased significantly (by 8 percentage points of priority areas, such as human capital, or growth- GDP) in 2020, reaching, respectively, 35.2 and enhancing capital investments. It also raises 70.1 percent of GDP, of which more than half is concerns about the medium-term sustainability of private external debt. While the fiscal deficit is public finances, especially during an economic projected to expand over the medium term, total downturn. Regarding long-term sustainability, public debt is envisaged to remain below the growth-enhancing expenditure and non- threshold for debt distress—peaking at more than distortionary taxes are key. There is a need to re- 42 percent of GDP in 2024 before stabilizing. orient spending but also to make more efficient Given Moldova’s significant vulnerability to use of public resources and to reduce the exogenous developments and the persistent distortions created by public interventions to steer problems in the financial sector, institutional the economy toward a more inclusive and weaknesses, and possible state-owned enterprise resilient growth model. To be effective in terms (SOE) contingent liabilities, fiscal discipline, and of supporting short-term recovery and long-term advancing structural reforms are critical to growth, as well as poverty reduction and shared ensuring that debt remains sustainable. prosperity in a sustainable manner, the authorities Moreover, financing comes primarily from will need to strike a balance on a number of external sources, increasing the potential aspects: vulnerability. 1. A comprehensive tax reform is needed How Moldova can support a resilient recovery to improve equity and efficiency while raising while safeguarding fiscal sustainability revenues to create sufficient fiscal space and The expected fiscal impulse in the medium ensure sustainability. This includes: raising the term—reflecting the support by the IMF and productivity of major taxes; streamlining taxes on other development partners to the income, wealth, and social security; Government’s reform program—represents strengthening the VAT and excise tax regimes, an opportunity but also a risk for economic and rationalizing tax expenditure. Introducing recovery and fiscal sustainability. Under the progressive personal income taxation and assumption that the pandemic will be contained, reducing the reliance of the system on deductions the adoption of a broad-based reform program and exemptions to inject progressivity would also and sustained fiscal support, we expect that make it simpler to administer. Taxation on high- wealth individuals could be introduced to help 38 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY mitigate rising income inequality. Taxpayer 3. A shift toward a more countercyclical compliance should be further strengthened, fiscal stance, including through the revision of particularly for high-wealth individuals. As the the fiscal rule, is expected to favor a more corporate and personal income tax rates have stable and growth-friendly environment. been harmonized at 12 percent and are now Moldova is highly exposed to volatility due to among the lowest in the region, the tax base continuous discretionary policy changes along would need to be broadened by closely reviewing the political cycle, external shocks, lack of access and eliminating the multifarious tax exemptions to capital markets, and high reliance on external and incentives. A cost-benefit analysis of the financing on top of demographic and incentive regimes in place would help assess environmental challenges. The fiscal rule whether the system is generating any benefits. introduced in Moldova in 2014, which does not For the reform of the VAT regime, the list of adjust to the business cycle, neither improves exemptions and zero rates should be closely fiscal sustainability nor promotes counter- reviewed and shortened. cyclical fiscal policy. Even if Moldova has improved its fiscal stance since the financial 2. Re-orient public spending toward crisis, it remains procyclical. Going forward, it is growth-generating items and improving the paramount to strengthen the fiscal rule and to efficiency of public finance is key to keep contingent liability risks under control, supporting the recovery and steering the namely SOEs, and the pension, financial, and economy toward a different growth path. insurance sectors. Development of the domestic Spending should be directed toward growth- debt market could also support debt generating items, in particular social transfers and sustainability, especially considering the public investment, with the latter characterized country’s developmental needs and significant by the highest and lasting growth impact. Given dependence on foreign assistance in the form of the country’s geographical location, closing the grants and concessional loans. Continuous efforts infrastructure gap in connectivity is paramount. to lengthen the average maturity of domestic debt However, this can only be achieved by containing and deepen the secondary market would help fiscal pressure and budgetary rigidity from aging reduce the debt roll-over and interest rate risks. and pensions, while also executing investments with higher social and economic returns. Another 4. Finally, it remains important to challenge for the medium term is to make public increase local government own-source spending more efficient. Authorities should revenues and improve intergovernmental introduce public expenditure reviews with transfer formulas. To reduce dependence on sectorial and thematic evaluations that could help intergovernmental fiscal transfers, local distill specific improvement mechanisms. governments should strengthen their own-source Sectoral reports and auditing could be done in tax revenues through property taxation. This will cooperation with the Courts of Account. require enhancing land registry and property In general, efficiency gains might come from valuations, as well as strengthening tax collection improvements in planning, monitoring, and at the local level. It is also important to improve evaluation of public investments. Public the efficiency and equity of intergovernmental procurement could be improved through the transfer formulas. implementation of digital tools and procedures. 39 Moldova Policy Notes 2021: SUPPORTING A RESILIENT RECOVERY WHILE SAFEGUARDING FISCAL SUSTAINABILITY This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Stefano Curto, Natasha Rovo, Marcel Chistruga, Tom Bundervoet, Kristina Noelle Vaughan, and Mikhail Matytsin. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 40 Moldova Policy Notes 2021: BUILDING FISCAL RESILIENCE AT THE SUBNATIONAL LEVEL WITH LAND ADMINISTRATION AND PROPERTY REGISTRATION AND VALUATION BUILDING FISCAL RESILIENCE AT THE SUBNATIONAL LEVEL WITH LAND ADMINISTRATION AND PROPERTY REGISTRATION AND VALUATION Moldova has a relatively well-functioning land market and land administration system, which serves transactions and mortgaging of registered property rights well. The cadaster in Moldova offers efficient, transparent, and cost-effective services, including free access to the registry through electronic services, namely e-cadastru. However, an incomplete land register in rural localities especially for local land separate ownership of land and buildings, and weak administration of state, municipal, and public land, continue to hamper market activity. The property valuation system is incomplete and properties that are included in the system are not regularly re-evaluated. Both of these factors contribute to a significant loss of taxation revenue, especially at the local level. The contribution of recurrent property tax revenue to GDP in Moldova is less than 20 percent of the EU average, which indicates significant potential for improvement. Key problems depressing property tax revenue are incomplete coverage of properties, lack of up-to-date market-based property valuations, absence of links between property valuation and taxation, and the high cost of collection and enforcement. Publicly-owned land and property are an extremely valuable resource because they enable the delivery of public goods and services, as well as generate public revenues. A major impediment to the effective management of Moldovan public land is incomplete registration and the lack of inventory. Lack of registration has also caused disputes in Moldova between central and local governments. Finally, Moldova has an incomplete cadaster, as property assessments are not valued based on up-to-date market values. This directly affects overall property taxation efficiency. Key Actions Area Short term Medium term Property  Conducting public and private property  Conducting public and private property Registration delineation and registration in 12 rayons delineation and registration in an as planned additional 20 raions Property  Developing and adopting a new and  Introducing new valuations for Valuation cost-effective model for property property taxation valuation Where Moldova Stands Now they broaden the tax base to embrace wealth, as Registering all properties in the cadaster is well as incomes and consumption. Imposing critical for local economic growth. Registered value-based taxes helps to produce a fairer, more property rights are necessary to support equitable, and efficient property tax system. investment, productivity, and growth. Registered Recurrent property taxes are typically local owners are more secure about their land and are taxes. However, central and local government more likely to invest in it and support the local budgets are inextricably linked through inter- economy. Conversely, unregistered land is less governmental fiscal transfers, which means that likely to receive investment and is at a higher risk failure to maximize the revenue potential of local of raiders’ attacks and fraud. taxes has consequences for national budgets and Linking the cadaster/land registry to the fiscal sustainability. Moldova raises only taxation system improves the coverage of, and 0.16 percent of GDP from recurrent expands, the property tax base. Value-based (annual)property taxes, while the EU average is recurrent property taxes are important because 0.8 percent. 9 9 The World Bank-financed Land Registration and Property market values can support such purposes as property taxation and Valuation Project aims to complete first registrations to increase real estate market analysis. coverage and update the property valuation system so that accurate 41 Moldova Policy Notes 2021: BUILDING FISCAL RESILIENCE AT THE SUBNATIONAL LEVEL WITH LAND ADMINISTRATION AND PROPERTY REGISTRATION AND VALUATION To maximize property tax revenues, it is some households were allocated larger areas than essential to require the updating of property they were entitled to but have had peaceful valuations in Moldova’s property tax policy. enjoyment of these properties for long enough Moldova has impressively high rates of that they could reasonably claim ownership by compliance with property taxes: it brings in virtue of adverse possession. 99 percent of the land tax payable by individuals, In Moldova, the World Bank Land 96 percent payable by legal entities, 95 percent of Governance Assessment Framework (LGAF) property tax on individuals, and 90 percent identified a number of issues with the payable by legal entities. However, the property management of state land. Some assets were valuations used are old, and currently, there are privatized on disadvantageous terms, land no plans to update valuations for taxation belonging to state companies was illegally purposes. Updating valuations without also alienated, bankrupt companies used state land to reviewing property tax policy at the central level pay creditors, and civil servants representing the could cause average losses in property taxes of state on company boards had severe conflicts of US$2.3 million to US$5.4 million a year. interest because of their association with multiple This amounts to 7.2 to 16.9 percent of annual companies. These management deficiencies need property tax collections and 1 to 2 percent of to be addressed. annual own-source government revenues. The cadaster is incomplete, preventing proper The cost of collection of property tax seems mass valuation. A decade ago, Moldova was a very high, depressing net tax yields. The World leader in Europe in the development of mass Bank Land Governance Assessment Framework valuation to generate up-to-date market-value estimated that Moldova’s tax administrative cost assessments in an efficient manner, with plans to is 43 percent of the tax collected. Collection costs expand the process to different types of should be less than 3 percent. The high properties. However, this project was abandoned administrative cost is in part explained by the lack for several reasons, notably the lack of systematic of updating of property values. first registration, which left many properties out About 45 percent of the land in Moldova is of the cadaster. publicly owned and mostly unregistered. How Moldova Can Bolster Land Management Of this, about 25 percent is believed to be owned and Property Taxation by the state and 75 percent by local public authorities (LPAs). One of the biggest To mobilize more property tax revenue, impediments to effective management of state Moldova can use a three-pronged strategy. land is the lack of inventory, which is exacerbated A country’s property tax revenue performance is by incomplete registration. An estimated a function of the coverage ratio, the valuation 93 percent of publicly-owned land in Moldova is ratio, the tax liability ratio (tax rates and relief), unregistered—about 25,000 parcels are believed and tax collection and compliance (including to have been registered but another 330,000 collection and enforcement). parcels are not. Often, there is no clear • Improve the coverage and increase the delineation between public and private land, number of properties in the tax base and especially in rural areas. update their values to current valuation Lack of registration can create disputes. standards. Properties not yet captured in the Moldova has seen disputes between different system need to be evaluated. By supporting levels of government and questions related to coverage and valuation, the country’s how the property was acquired, whether property tax revenue performance should expropriated or privatized. In rural areas improve. Updated valuations would also privatization was not based on accurate surveys; 42 Moldova Policy Notes 2021: BUILDING FISCAL RESILIENCE AT THE SUBNATIONAL LEVEL WITH LAND ADMINISTRATION AND PROPERTY REGISTRATION AND VALUATION result in a more fair and equitable tax burden utilization of public land, Moldova can reinforce in line with market values. state land management in several ways: • Assess the effectiveness of current tax rates • Both national and local governments must and the tax relief regime. This would be have an accurate record of the properties they particularly prudent when the valuations are own, and the rights associated with them. updated. The Government may wish to revise Delineation and registration both provide tax rates and relief policies in line with the essential protection from encroachment and an updated values. Participation of LPAs in such accurate record of what is owned. This is the an initiative would be important to the design first step to an effective program for managing of a system that considers the local revenue public assets. The World Bank-financed Land and equity effects and gives the process more Registration and Property Valuation Project legitimacy. The expected impact of such an will fund the delineation and first registration initiative would be higher property tax yields of public land and its valuation, which is an for local governments potentially. reducing essential first step in developing a national the burden of inter-governmental fiscal policy for efficient management of state land. transfers. • It is necessary to resolve outstanding disputes • Subsequently, prioritize property tax about who owns public land. Some disputes collection and enforcement while reducing are likely to emerge during the delineation and the high tax administration cost. The results registration process, the Public Property of the first two strategies would be Agency may need to create a fast-track undermined by poor collection and mechanism to resolve them, particularly enforcement. While Moldova has high rates between central and local governments. of property tax collection, the administrative • Publicly owned properties need to be valued so cost of collection is also high. Assessing the that their rental and lease values can be set with bottlenecks that confront LPAs would confidence. It is necessary to determine improve collection efficiency. Enabling whether properties are being used to best effect mobile payments over the mCloud platform or whether they could serve a better purpose could reduce the administrative burden. and functions. Publicly owned land and property are extremely valuable resources for any country. • State land management policy will require It is needed to enable the delivery of several building capacity at both the central and local public goods and services, and it can also government levels, to better equip officials to generate significant revenues for the state and make decisions and optimize the utilization of local governments. In order to optimize the state land and property. This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Olivera Jordanovic. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 43 Moldova Policy Notes 2021: ENHANCING LABOR MARKETS AND ADDRESSING COVID-19 CHALLENGES ENHANCING LABOR MARKETS AND ADDRESSING COVID-19 CHALLENGES An aging population and a shrinking labor force may be dampening Moldova’s prospects for sustainable growth. Low rates of both labor force participation and employment, which have further decreased due to the COVID-19 pandemic, accentuate the demographic risks. To respond effectively to the demographic challenge, Moldova needs a steady increase in both labor force participation and labor productivity. To increase participation, aside from adopting policies to promote competitiveness and job creation, the country must also review and perhaps revise its labor regulations, taxation, and the productive use of remittances. Investing in education and skills formation is at the core of improving job quality and preparing Moldovans for productive jobs. Key Actions Area Short term Medium term Labor Code  Reforming the Labor Code to reduce rigidities and facilitate flexible work arrangements while ensuring social protection Facilitate  Implement regulations and tax  Earmark funds for programs to employability treatment of internships and promote the reintegration of for apprenticeships for youth marginalized minorities and people vulnerable  Revisit the rules for maternity and with disabilities into the labor market groups parental leave  increase the availability of quality,  Continuing the implementation of the affordable childcare services for pilot for the recognition and validation children under 3 of non-formal and informal learning,  build the capacity to monitor and particularly for returned migrants evaluate these programs COVID-19  Extend support to informal, seasonal, and part-time workers  Provide funding for the National Employment Agency for adequate unemployment assistance and active labor market policies Where Moldova Stands Now increase from 12.5 to 30.2 percent. Moldova’s An aging and shrinking population are serious old-age dependency ratio, as measured by the threats to the country’s development. ratio of the number of people over the age of 65 Moldova, one of the most rapidly aging countries for every 100 working-age persons (15–64 in Europe, has been suffering losses of population years), is projected to triple by 2060, from 17.4 in and labor force because of low and decreasing 2020 to 53 in 2060. fertility, and losses due to high net emigration. Moldova’s labor force participation and According to the UN World Population Prospects employment rates have been very low over the 2019, 10 the population of Moldova is expected to past two decades compared with countries in shrink by over 24 percent during the period from the region. In 2020, only 39.6 percent of the 2020 to 2060, or a loss of 975,000 people, and the Moldovan population over 15 years of age were share of people 65 and over is expected to in the labor force, and only 37.8 percent of them 10 United Nations, Department of Economic and Social Affairs, Population Division (2019). World Population Prospects 2019, Online Edition. Rev. 1 (https://population.un.org/wpp/). 44 Moldova Policy Notes 2021: ENHANCING LABOR MARKETS AND ADDRESSING COVID-19 CHALLENGES were employed, compared with 56.7 percent in According to the ILO, 13 percent of all the labor force and 52.2 percent employed in working hours were lost in Moldova in 2020, Europe and Central Asia, excluding high-income compared with the last quarter of 2019, and countries. 11 The main reasons for the inactivity of most of these losses were translated into Moldovans aged 25–64 years during 2019–20 reduced employment rather than into shorter were pensions, family responsibilities, and hours worked while still being under working abroad, with the latter reason being the contract. 15 However, the character of the most popular among males of working age. 12 COVID-19 impact on employment changed Despite expectations related to COVID-19 throughout 2020. For example, interruption or containment measures in the main destination cessation of activities, and therefore job losses, countries for labor migrants from Moldova, the prevailed at the outbreak of the pandemic, as number of males and females (aged 15 and over) reported by over 60 percent of all affected who were inactive because they had, or were workers in the first and second quarters of 2020. 16 looking for, a job abroad rose from 140,600 to The share of affected workers reporting reduced 151,100 during 2019–20. 13 working hours increased from 25.5 percent in the The COVID-19 pandemic exacerbated the first quarter to 48 percent in the fourth quarter. underlying problems of the Moldovan labor Remote work that was relatively less widespread market observed before the pandemic. at the outbreak of the pandemic gained popularity An employment rate that was already very low in by the end of the year (reported by 40.5 percent 2019 has since declined further (Figure 23). of all affected workers in the fourth quarter of The largest decline in employment was between 2020). the second quarter of 2019 and the second quarter Moldova is one of the few countries in the of 2020: by about 80,000 persons previously region where the decline in employment in employed, or 8.8 percent of the initial value in the 2020 did not lead to an increase in second quarter of 2019. Employment recovered unemployment compared with the pre- by the end of 2020, reaching almost the same pandemic year 2019 (Figure 24). level as in the previous year. According to round The unemployment rate was 3.8 percent in 2020 3 of the follow-up Enterprise Survey conducted (women: 3.2 percent; men: 4.3 percent), in Moldova from May to June 2021, 56.5 percent compared with 5.1 percent in 2019 (women: 4.4 of firms reported a decrease in the number of percent; men: 5.8 percent). As lockdowns and permanent workers since December 2019, with a other containment measures suppressed local total reduction in permanent full-time workers of labor demand, many workers who lost their jobs 27.7 percent compared with December 2019. 14 transited directly into inactivity. And some of Figure 23. The employment rate (% of total them, especially men, withdrew from the local population, 15+ years), Q1 2019 – Q1 2021 labor market to search for jobs abroad. Unemployment among youth aged 15–24 is a more pressing problem, exceeding 10 percent in three quarters of 2020 and reaching 13.4 percent in the first quarter of 2021. Over 18 percent of youth in Moldova are classified as neither employed nor in education or training (women: 20.7 percent; men: 15.9 percent). Source: NBS. 11 World Development Indicators (ILO modelled estimates). 14 World Bank. 2021. Enterprise surveys follow-up on COVID-19. According to the National Bureau of Statistics (NBS), respective What businesses experience. Moldova 2021 – Round 3. indicators for usual resident population are 39.6 and 38.8 percent. 15 https://www.ilo.org/budapest/countries- 12 The NBS classifies international short-term migrants as inactive covered/moldova/WCMS_433690/lang--en/index.htm individuals when calculating key labor market indicators based on 16 NBS. 2020. Impact of COVID-19 on labor market indicators, the Labor Force Survey (LFS). available in Romanian at: 13 According to the NBS statistics based on the LFS. https://statistica.gov.md/newsview.php?l=en&idc=168&id=7006. 45 Moldova Policy Notes 2021: ENHANCING LABOR MARKETS AND ADDRESSING COVID-19 CHALLENGES Figure 24. Unemployment rate (% of total labor Figure 25. Quarter-to-quarter change in force, 15+ years), Q1 2019 – Q1 2021 employment rate by gender and type of settlement (percentage points), 2019–20 8 1 7 -1 6 -3 5 -5 4 -7 3 Q1 Q2 Q3 Q4 Annual average Q1 Q2 Q3 Q4 average Annual Women Men Urban Rural 2019 2020 2021 Source: NBS. Source: NBS. The impact of the pandemic through the labor Similar to in many other countries in the channel in the form of job losses has the world, women and urban residents were more greatest effect on the poverty rate, especially in affected by the COVID-19 pandemic and the absence of direct COVID-19-related social containment measures than male workers and interventions for workers, returning migrants, rural residents. Employment losses were larger and households. 18 Moreover, working-age among women and urban workers, especially in employees who were employed in the services the second and third quarters of 2020 (Figure 25). sector prior to the pandemic, many of whom live Moreover, according to the survey conducted by in the capital city Chisinau region and have high the National Bureau of Statistics (NBS), a much educational attainment, are at high risk of falling larger share of women and urban residents into poverty as a result of the pandemic. reported a negative impact from the pandemic on This segment of the labor market is likely to their employment. 17 For example, in the second become the “new poor”, in addition to the quarter of 2020, the share of affected female “traditionally” or existing poor. workers was 30.9 percent compared with Poverty (based on the national poverty line) 18.5 percent of male workers, and the share of increased from 25.2 percent in 2019 to affected workers among urban residents was 26.8 percent in 2020—the second consecutive almost twice as high as that of rural residents year in which poverty increased. The increase (33.3 and 17.4 percent, respectively). This is mainly occurred in urban areas (an increase of mainly due to lockdowns and their impact on 3 percentage points), though rural areas remain sectors in which many women and urban much poorer (rural poverty rate of 35.3 percent vs residents work (retail trade, accommodation, and urban one of 14 percent). The highest increase in food service activities, arts, entertainment and poverty was among households whose main recreation, and personal services). Conversely, income source is remittances (close to a jobs in male-dominated sectors and occupations 10-percentage-point increase), as well as for were more resilient to the pandemic, more single-parent families. In addition, women- flexible, and more amenable to remote work. 17 NBS. 2020. Impact of COVID-19 on labor market indicators, 18 Cojocaru, Alexandru, Vaughan, Kristina, and Seshan, Ganesh available in Romanian at: Kumar. 2021. Welfare impacts of the COVID-19 pandemic in https://statistica.gov.md/newsview.php?l=en&idc=168&id=7006. Moldova through the labor and migration channels. 46 Moldova Policy Notes 2021: ENHANCING LABOR MARKETS AND ADDRESSING COVID-19 CHALLENGES headed households experienced a larger increase (65.7 and 64.9 percent, respectively, in 2020), in poverty. 19 and these are the only sectors in which the share of informal jobs increased between 2019 and The gender gaps in business ownership and 2020. entrepreneurial activity were already wide before the pandemic but increased due to the Labor outcomes for marginalized ethnic negative impact of the pandemic on women- minorities and people with disabilities are owned businesses. Women are losing ownership worse, as they face barriers to employment. and control over businesses to men who are The latest available labor market statistics date expanding their firms, probably because of back to 2013 (collected in 2011 by UNDP) and indebtedness, poor access to equity capital, and show a significant gap in the unemployment rate lack of knowledge on how to expand their between Roma and non-Roma populations (with businesses. 20 unemployment in the Roma population at 37 percent) and a lower labor force participation Among the reasons why productivity in rate, at 27 percent. Low levels of employment for Moldova is among the lowest in the region are Roma people are due to several factors, including an economy dominated by agriculture, high low educational attainment, poor housing, which informal employment, and education and is often in remote areas, and pervasive skills shortfalls. Despite a gradual increase in the discriminatory attitudes toward Roma people. urban share, over half of all Moldovans still live Two Action Plans, running from 2011 to 2015, in rural areas (57.2 percent), and over 20 percent focused on integration efforts in employment, of the workforce are employed in agriculture,21 a social protection, health care, and participation in sector where productivity is lower than the decision-making structures. These had some national average and those of peer economies. 22 success in allocating funding for recruiting 48 More efficient firms are raising productivity by community facilitators to serve as a bridge shedding rather than creating jobs. While between the Government and Roma productivity is increasing somewhat, a growing communities. However, a shift in financing to share of jobs is found in less-productive firms. In local authorities meant that there were only general, firms find it very difficult to both create 11 active facilitators in 2016, while the Action decent jobs and improve productivity. 23 Plan for 2016–2020 was underfunded. On a Although indicators of informal employment positive note, there has been an increase in the somewhat improved between 2019 and 2020, number of Roma persons registered in informal employment remains an important employment programs run by the National segment of the Moldovan labor market, Employment Agency (NEA), which increases the especially in rural areas. In 2020, 22.4 percent possibility of their participation in vocational and of all workers were employed informally, and other labor market integration programs. nearly 80 percent of the workers informally The medical model of disability in Moldova employed lived in rural areas. 24 Agriculture and has created a legacy of limiting societal construction have the highest informality rates stereotypes regarding the potential for 19 NBS, Absolute poverty measures by areas, available at: 23 World Bank. 2016. Moldova Poverty Assessment. A Jobs https://statbank.statistica.md/PxWeb/pxweb/en/30%20Statistica%2 Diagnostics for Moldova. 0sociala/30%20Statistica%20sociala__04%20NIV__NIV070/NIV 24 Informal employment comprises all persons who during the 070100.px/?rxid=b2ff27d7-0b96-43c9-934b-42e1a2a9a774 survey reference week had any of the following types of job: 20 World Bank. 2018. Supporting Women’s Entrepreneurship in (1) Own account workers or employers in informal sector Moldova. enterprises; (2) members of cooperatives of informal producers; 21 According to the LFS in 2020, 175.9 out of 834.2 thousand (3) contributing family workers, whether employed in formal or workers were employed in agriculture. informal enterprises; (4) employees in the formal and informal 22 World Bank. 2018. Promoting Market Competition for sector or as paid domestic workers in households, who were in one Productivity Growth, background paper for the Moldova Country or more of the following situations: their employer did not pay social Economic Memorandum. contributions for them; or they did not benefit from paid annual leave or paid sick leave (NBS, 2020). 47 Moldova Policy Notes 2021: ENHANCING LABOR MARKETS AND ADDRESSING COVID-19 CHALLENGES disabled people to contribute fully and reducing the cost of hiring and firing, and productively to society. Moldova has taken steps simplifying the rules for internships and part-time to significantly improve its legislation and create work could help increase labor engagement, an enabling legislative environment, with non- especially for youth and women. Given that low discriminatory provisions included in the Labor labor force participation may stem in part from Code. The National Employment Strategy 2017– higher reservation wages in the households of 2021 and the National Program for Social emigrants, measures to support the productive Inclusion of Persons with Disabilities 2017–2022 investment of remittances and enhance contain important public policy measures and entrepreneurship among returning emigrants or programs, such as raising awareness about the members of emigrant households could help keep existing skills of people with disabilities, them in the labor market. These measures should employer subsidies for workplace adjustments, include business training, and advisory and and vocational training courses and mediation support services. Given that such programs services conducted by the NEA. Such programs already exist, it would be important to evaluate remain underfunded and underutilized. them and scale up those demonstrating good For example, only two companies benefited from performance and outcomes. the legally mandated 50 percent cost-sharing for To increase labor force participation and disability-adaptation measures in 2019, and six employment for women, it is important that applied in 2020. Despite promising efforts, they have access to quality and affordable according to a Labor Force Survey carried out in childcare and after-school activities. It will also 2019, the labor force participation of people with be necessary to revise the system of maternity and disabilities stood at 17.2 percent, including parental leave in terms of duration, replacement 16.9 percent for men and 17.5 percent for rate, and the share of leave for fathers. Flexible women. work arrangements and remote work, currently in How Moldova Can Enhance Its Labor Market place in many firms in response to the COVID- Outcomes 19 pandemic, should continue beyond it. But to To compensate for its shrinking labor force reduce the increased burden of childcare, unpaid and achieve sustainable growth, Moldova will housework, and remote work at home on working need to steadily increase labor force mothers, a new model of shared responsibilities participation and productivity. Among other within households should be promoted. things, this will require bringing idle youth and To reduce informal work, there is a need to adults into jobs, encouraging more internal clarify and publicize the benefits of migration and the professional mobility of formalization. Two-thirds of informally workers, and better utilizing their knowledge and employed wage earners do not want to change skills. their current jobs. Thus, while there is a role for Increasing labor force participation will inspections, some reforms could reduce the cost require not only policies to promote of formalization by simplifying administrative competitiveness and the creation of decent procedures, and expanding and publicizing its jobs, but also rethinking labor regulation, benefits, such as access to credit. Enforcement taxation, and ways to use remittances more and inspection capacities (including occupational productively. Also important for increasing firm health and safety) need to be strengthened as well. entry and job creation will be improving In particular, the authorities will need to ensure competitiveness and transparency and the effective functioning of the current labor strengthening the rule of law and accountability inspection system in line with relevant ILO of public institutions. 25 On the supply side, conventions, including by strengthening its capacity. 25 World Bank. 2016. Moldova Poverty Assessment. A Jobs Diagnostics for Moldova. 48 Moldova Policy Notes 2021: ENHANCING LABOR MARKETS AND ADDRESSING COVID-19 CHALLENGES Investing in education and skills formation for NEA and cut its staff by 25 percent. all Moldovans, women, and men, is necessary This significantly increases the risk that the if they are to achieve full, productive policy reform objectives will not be reached. 27 employment, and find decent work. The skills The NEA needs to implement the reform gap is attributable to the fact that education is not strategy, but it needs to be supported both relevant to labor market needs and seems unable operationally and technologically to ensure to equip future workers for new job opportunities. more efficient service delivery. After the For education to become relevant, this will organizational change, the NEA should revisit its require changes in the formal education system operational model for supporting the delivery of (see Policy Note on Strengthening Education existing and new gender-responsive services. Outcomes and Skills) and the more active The revised model should aim at delivering more involvement of the private sector in skills integrated, beneficiary-oriented business formation. Private sector engagement in shaping processes and information management in the education programs and policies should be administering the services. Moreover, greater sought to improve the relevance and alignment of focus is required to monitor ALMPs’ education outcomes to labor market needs. implementation results. The goal would be a The current workforce would benefit from continuous adjustment to increase the efficiency investment in both skills formation and and cost-effectiveness of ALMPs and improve retraining. Training providers that serve the the balance between various programs and adult population can: (i) provide remediation for measures. those who did not acquire sufficient skills in Labor market policies can play an important formal education; and (ii) offer skills upgrading role in supporting the re-employment of for those seeking promotion or a change of career. workers displaced due to the COVID-19 The Government can promote and support a pandemic and mitigating the rise in (long- system of lifelong learning, strengthen policies term) unemployment and poverty. But it is and regulations to motivate and facilitate training necessary to increase funding of the NEA to scale providers to improve their services, and better up its policies (unemployment benefits, as well as align training with market needs. ALMPs) and improve its effectiveness in the The NEA can do a great deal to facilitate reintegration of job seekers into the labor market jobseekers’ access to decent jobs. It should in the post-COVID-19 recovery phase. collect and track information on jobseekers and Investment in the digital infrastructure of vacancies to provide more effective skills- and employment services and the development of job-matching services. NEA interventions are comprehensive e‑services for clients, training of also critical in helping vulnerable women and NEA staff and job seekers in the use of digital men to enter or return to the labor market. tools, adjustments to classroom-based training The Government has already launched an (with additional online training solutions ambitious employment policy reform, 26 an offered), and targeted private sector employment essential component of which is to revamp incentives, are some of the practices used in current and launch new active labor market developed countries to address the new needs programs (ALMPs) to make NEA services more emerging as a result of the COVID-19 crisis. 28 efficient and relevant. However, the current The alignment of education with the labor public administration plans to reorganize the market should be grounded on solid evidence. 26 The key principles of the reform are stipulated in the recently 28 See, for example, OECD. 2021. Scaling up policies that connect approved Law on Promotion of Employment and Unemployment people with jobs in the recovery from COVID-19; OECD. 2021. Insurance. Designing active labor market policies for the recovery; OECD. 27 ILO. 2017. Assessment of the delivery of employment services 2021. Active labor market policy measures to mitigate the rise in for youth by the National Employment Agency of the Republic of (long-term) unemployment A summary of country responses to the Moldova OECD-EC questionnaire. 49 Moldova Policy Notes 2021: ENHANCING LABOR MARKETS AND ADDRESSING COVID-19 CHALLENGES Poor labor outcomes stemming from skills and already aligned to the national policy agenda spatial mismatches may be addressed in part through the Strategy to Ensure the Equality through better labor market information. With between Women and Men 2017–2021. comprehensive, timely, relevant, and gender‐ Interinstitutional cooperation and active civil disaggregated information, it will be possible to society participation will help to implement the more quickly identify employment barriers and strategy. adjust related policies, incentivize formal work, To promote the inclusion of marginalized and support the education and employment groups and people with disabilities, the choices of individuals. Having gender‐specific Government should further strengthen and information on the returns to education and systematize its data collection on marginalized occupational wage differentials has the potential groups by age, gender, and ethnicity, to ensure to change the occupational aspirations of girls that the policies and programs are developed and and reduce gender labor market disparities. It is, based on regularly updated statistics. therefore, crucial to support the new Labor The Government should also ensure that the Market Observatory and ensure that it becomes programs it develops to address marginalized fully operational. groups are fully funded. Finally, the consultation To ensure women’s full and effective of marginalized groups and their representatives participation and equal opportunities for both in the development, monitoring, and leadership at all levels of decision-making in evaluation of public programs should be codified political, economic, and public life, the in the existing legislation to ensure that their Government should strengthen policies and views are heard and taken into account for the regulatory mechanisms 29 to achieve the targets of following policy cycles. SDG 5. This includes target SGD 5.5, which is This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Roman Zhukovskyi and Olga Kupets. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 29 According to the Moldova 2030, there is a range of policy specific policy document covering almost fully the fifth SDG area documents approaching different aspects of gender equality and one (Strategy to ensure equality between women and men 2017–2021). 50 Moldova Policy Notes 2021: ACHIEVING A SUSTAINABLE SOCIAL PROTECTION SYSTEM ACHIEVING A SUSTAINABLE SOCIAL PROTECTION SYSTEM Moldova’s social protection system has been helping the country to reduce poverty and advance shared prosperity. It will continue to be central to mitigating the adverse impacts of growth-promoting reforms on poor and vulnerable households. The 2009–17 social assistance reforms achieved important results but remained incomplete. Improvements in policies and service delivery need to continue to reduce fragmentation and better target social assistance benefits. Furthermore, the 2016 parametric reform put Moldova’s public pension system on the path to fiscal and social sustainability, but its benefits have been undermined by subsequent policy measures such as the reduction in the social contribution rate. The fiscal impact of the contribution rate cut is non-trivial and permanent, and should either be reversed, or adjustments should be sought on the expenditure side. Key Actions Area Short term Medium term Social  Adjusting eligibility criteria, including income  Consolidating the Assistance threshold, for means-tested programs in line with other categorical benefits and social programs (e.g., minimum pensions) focusing more on  Reviewing the list of documents required to apply for targeted cash transfers targeted benefits programs Pensions  Canceling the reduction of the retirement age to 57/62  Revisiting preferential years for women/men and reinstate retirement age of contributions treatment 63 years for men and gradual increase to 63 years for for various groups of women contributors  Abolishing ad hoc pension increases and the double indexation Where Moldova Stands Now 91 percent because pensions and other social Social transfers such as pensions and social insurance benefits covered 37 percent of the assistance benefits are an important source of population and 75 percent of the poorest quintile. income for the bottom 40 percent of Social assistance transfers covered 41 percent of Moldovans and have contributed to their the population and 73 percent of the poorest income growth more than to that of the top quintile. 60 percent. In 2019, multiple social protection Moldova’s spending on social safety nets is low programs covered 53 percent of the population. in regional comparison and benefits often do not Coverage of the bottom quintile reached allow the beneficiaries to cross the poverty line. Figure 26. Expenditures on social safety nets 51 Moldova Policy Notes 2021: ACHIEVING A SUSTAINABLE SOCIAL PROTECTION SYSTEM There is a growing disparity between rural transfers leak about 37 percent of the total social and urban poverty, 30 and children in Moldova assistance spending of about 2 percent of GDP are still disproportionately poor. The most (excluding social pensions) to people in the top recent Commitment to Equity (CEQ) analysis 31 three quintiles. confirmed that Moldova suffers from a high rate However, gains in targeting and efficient anti- of poverty (18.6 percent), especially in families poverty measures deteriorated over time. with three or more children (38.3 percent). The relatively small main anti-poverty program, Coverage of the most vulnerable, especially those Ajutor Social, covered 7 percent of the total in the poorest income quintile, is limited.32 population in 2017, but gradually its coverage To be socially and fiscally sustainable, the was suppressed because of various policy social protection system needs to continue measures (such as accelerated indexation of reforms to better target social assistance pensions, ad-hoc top-ups, and increases in public spending and improve the adequacy of pensions, sector wages). Moreover, since 2018, there has while keeping their fiscal cost manageable. been a rise in the number and cost of categorical benefits and ad-hoc pension increases that divert Social Assistance budget resources from expanding and sustaining After major reforms, non-contributory social the adequacy of the means-tested benefits. assistance achieved important results. In 2010, Conversely, while families with children the Ajutor Social program (as well as an add-on accounted for 52 percent of Ajutor Social, their Heating Allowance program) was introduced, share dropped to 35 percent by 2021. targeting social benefits to the poorest and Erosion of coverage is worrisome. The income replacing some inefficient entitlement-based eligibility threshold of Ajutor Social is low, 33 and (categorical) benefits. Elimination in 2012 of the very often beneficiaries remain poor. However, costly and poorly targeted Nominative the program still provides some support and can Compensations, and 2017 of categorical benefits be scaled up in times of crisis—as happened from the Fund for Social Support of Population, during the emergency period announced in April improved the spending efficiency and 2020 due to the COVID-19 pandemic. 34 Ad-hoc sustainability of the social safety net. A gradual measures mentioned above lead to the erosion of expansion of targeted cash transfers helped the beneficiary base, pushing many poor double the share of social assistance benefits households out of the social safety net. This leads going to the poorest 20 percent of the population, to a reduced probability of re-applying and from 40 to 86.7 percent by 2020. Ajutor Social diminished possibilities for the state to provide also has the lowest leakage, estimated at efficient support to the vulnerable, especially 8.3 percent. However, fragmented programs and during shocks. Recuperation of the program’s targeting errors persist. Existing categorical 30 The population below the poverty line is predominantly rural, less 0/pdf/Fiscal-Incidence-in-Moldova-A-Commitment-to-Equity- educated and older and self-employed in agriculture. Based on the Analysis.pdf 2019 HBS data, over 82 percent of the poor live in rural areas. 32 Cash-based social protection for children in the Republic of Chisinau, while accounting for 23 percent of the population, Moldova, UNICEF, 2018; “Strengthening the effectiveness of the accounted for only four percent of the poor. In addition, inequality social safety net project: Consultancy for Ajutorul Social evaluation of opportunity in Moldova is mainly driven by location. This implies and design”, Oxford Policy Management, 2017; SWOT analysis of that even individuals living above the income poverty line may still Child Protection System, Government of Moldova, 2014 concluding suffer deprivations in health, education, and/or standards of living. that “the existing social benefits do not adequately support families Big gaps in service delivery in rural areas and certain regions result with children”. in people from these areas being less able to accumulate human 33 Current threshold of 1157 lei is only about half of the average capital and hence less likely to acquire the skills necessary for subsistence minimum of 2088.4 productive employment and upward mobility. Rural vs urban 34 COVID Emergency Response project supported the temporary location is the biggest dis-equalizer, accounting for between 34 and expansion of Ajutor Social coverage achieved by increasing the 52 percent of the gap in access to the opportunity as measured by income threshold from 1107 to 1300 lei. This led to an almost 50% the Human Opportunity Index. increase in coverage and a 34% increase in the benefit amount. 31 https://documents1.worldbank.org/curated/en/93240156864334769 52 Moldova Policy Notes 2021: ACHIEVING A SUSTAINABLE SOCIAL PROTECTION SYSTEM coverage in the past required considerable time of the effect in the short term); and (ii) a reduction and concerted efforts. The minimum pension in the replacement rate due to the shorter-than- increase planned from October 2021, without an expected length of service (especially for adequate increase in the minimum income women). threshold for the targeted cash transfer program, Moreover, in March 2021, Parliament approved will lead to a significant decrease in beneficiary “double indexation” of pensions (three-year numbers. 35 average CPI for April and the first half current Pensions year CPI for October). The 2016 parametric policy measures put Both of these most recent measures have a Moldova`s public pension system on the path considerable negative and permanent impact to sustainability. With those reforms, it was on balance, estimated to increase the deficit by projected that by 2030 the system’s deficit should 1 percent of GDP until 2100, of which 0.6 percent be almost negligible and stay so for the next two of GDP is due to the reversal of the retirement age decades. The changes helped ensure system increase, and 0.4 percent of GDP due to the stability over the longer term. Critically, the biannual indexation formula. The overall deficit system was positioned to provide basic social of the pension system is projected to be 2 percent security to its recipients. Instead of sliding below of GDP, on average, until 2100, with a significant 15 percent, the average pension replacement rate short-to-medium-term spike. The short-term would stay in the range of 25 to 30 percent. impact will be even greater, with deficits Unfortunately, the benefits of the reform have exceeding 3 percent of GDP. been undermined by several subsequent waves The Government is set to increase the of policy actions. Several policy changes minimum pension to MDL 2000 compared with occurred shortly after the reform: the current MDL 1,188.05. As with many (i) a contribution rate reduction from 23 to previous measures, the bulk of the effect is going 18 percent for the real sector, as well as higher to be relatively short-term, but still very education and medical institutions; (ii) a reversal substantial. If implemented, this measure will in aligning the judiciary pension with the general deepen the deficit spike to 3.6 to 3.9 percent of one; (iii) acceleration in the valorization GDP (depending on the treatment of pensioners schedule; (iv) the recalculation of pensions for with less than the full length of service). working pensioners and acceleration of the Figure 27. Effect of waves of measures on the process from 2017 to 2023; (v) a 10-percent financial balance of the pension system of Moldova increase of social insurance pensions below the subsistence minimum; and (vi) the provisions of indemnity for surviving spouses. The contribution rate cut alone created a permanent deficit of 0.7 percent of GDP and, together, the above-mentioned measures will cost about 0.84 percent of GDP, on average, until 2100. More recently, the authorities have enacted a reversal of the retirement age increase (reducing it to 57/62 years old for women/men from 63/63 years old) entering into force on January 1, 2022. This reversal will have a twofold impact: (i) further deterioration of the deficit (with most 35 Preliminary calculations show immediate reduction of coverage by 21 percent 53 Moldova Policy Notes 2021: ACHIEVING A SUSTAINABLE SOCIAL PROTECTION SYSTEM Finally, there is a still small but growing Significant divergence of social standards could number of people who reach retirement age create unintended effects, such as making without having enough of a contributory working parents with many children relatively period to earn an old-age pension. poorer. In fact, one of the findings of the CEQ This category mostly consists of farmers, whose was that, while Moldova’s fiscal system participation in social insurance was made substantially reduces poverty on average, it voluntary in 2009. This led to a rapid exit from increases poverty for families with children the social insurance system of 99 percent of (poverty rates based on post-fiscal income are farmers. Simulations show that over time this will higher than poverty rates based on market lead to nearly half of all people over the income). retirement age being ineligible for old-age As for the delivery of benefits, the Government pensions due to lack of contributions. should continue to enhance access of the poor Figure 28. Eligibility of the elderly for the old-age to social assistance. With the World Bank’s pensions support, the Government has built a modern information system that has helped reduce benefits processing time and enabled cross- checks with public registries to verify beneficiary information. But applicants are still required to submit numerous documents, which discourages some poor households from applying. The Government should revisit the list of documents required to confirm applicants and use data from public registries. The system should also advance to telephone and online applications. The World Bank-financed project How Moldova Can Make Its Social Protection also drafted service delivery standards for local More Sustainable welfare offices, and a new operational model to Social Assistance enhance client focus and efficiency. To help build local capacities, a National Social Assistance Focusing on efficient ways to support the Agency has been created. However, the vulnerable while maintaining the right innovations have yet to be fully implemented. incentives is key. We recommend the The Government needs to make the Agency fully Government return to consolidating categorical operational and allocate enough resources to benefits and focus more on targeted cash transfer support enhancements in the delivery of benefits programs. Ad-hoc measures and expansion of the and services by local social assistants. categorical approach point to the lack of alignment between the current Ajutor Social Adequate training and capacity of social program design and the priorities of the current workers has been an area of attention since the social policy. However, these concerns could be creation of the role of community social workers, addressed by a design enhancement, rather than and considerable investment is being made in switching to a less efficient categorical approach, training. The National Social Assistance Agency which leads to much more leakage. This also has the specific task to develop and provide relates to maintaining some consistency between continuous training for social workers. By social standards such as the income threshold for strengthening institutional roles and capacities of means-tested social assistance programs, the the Agency, the Government will strengthen the minimum pension, and the minimum wage. There capacity of the implementation institutions and is a strong rationale for setting the minimum improve through this the living conditions and pension and the minimum income threshold in social inclusion of the most some relationship to the cost of basic needs. disadvantaged/vulnerable people in Moldova. 54 Moldova Policy Notes 2021: ACHIEVING A SUSTAINABLE SOCIAL PROTECTION SYSTEM Successful practices to combat benefit fraud 0.7 percent of GDP to the cost of the national and error should be further exploited and pension system. The pension reform of 2016 expanded to prevent leakage of social assistance provided a basis for greater transparency and to better-off households. The Social Inspectorate, better governance of the military pension established in 2011 to identify fraud and error in program. 36 However, the Government should targeted benefits, has proved to be highly continue to streamline military pensions by: effective. Due to its strong risk-based inspection (i) determining the military pension based on the methodology, benefit irregularities were detected remuneration from which contributions were in 79 percent of the cases inspected in 2017. paid, and using the entire contribution period for The Government should support the institutional the calculations; (ii) increasing the required development of the Social Inspectorate to length of service or introducing and/or increasing strengthen its authority to enforce its decisions the retirement age for the military to improve the and recover over-payments identified and expand military fiscal balance; (iii) making a clear its mandate to cover more social benefits. distinction between military and non-military occupations, and reducing or even excluding so- Pensions called civil activities related to the military; and Solutions are needed to ensure that the (iv) removing the provisions that allow military pension system is fiscally sustainable. While pensioners to retire for sickness reasons, or additional financial pressure can be minimized if unifying military sickness and disability pension the increase of the minimum pension to eligibility and having it determined by the MDL 2,000 is complemented by restoring the National Council for Determining Disability and retirement age to that envisaged by the reform Work Capacity. (63 years old for both genders) and switching In addition, the Government could enhance the from double indexation to a regular indexation by pension system revenue base by revisiting CPI, additional measures will be needed to put the preferential contribution treatment, for example system back on a sustainable path. abolishing flat contributions or reduced Clearing the pension system of a variety of contribution rates; defining adequate contribution privileges could help generate additional bases; and introducing flexible arrangements for revenues and improve transparency. Pensions self-employed and agricultural businesses to pay of military and para-military personnel add about contributions. This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Roman Zhukovskyi, Oleg Grigoroi, and Alexandru Sinchetru. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 36 The reform introduced social insurance contributions for the military and transmitted the administration of their pensions from line ministries to the National Social Insurance House. 55 Moldova Policy Notes 2021: IMPROVING THE EFFICIENCY AND RESILIENCE OF HEALTH SERVICE DELIVERY IMPROVING THE EFFICIENCY AND RESILIENCE OF HEALTH SERVICE DELIVERY Although Moldova’s spending on public health compares reasonably well with that of other countries of similar income levels, its health outcomes are not as good as would be expected for the amount that it spends. With the population aging, the rise of noncommunicable diseases (NCDs), the advent of new technologies, and Moldova’s dilapidated hospital infrastructure, the cost of health care is likely to grow if preventive and low-cost technologies are not expanded. Key Actions Area Short term Medium term Efficiency  Improving strategic purchasing and  Redesigning the hospital system to selectively contract health care increase efficiency and quality providers  Redirecting resources towards primary  Introducing managed entry health care services agreements for single-source expensive and innovative medicines Non-  Introducing health taxes to a broad  Supporting integration of primary health Communicable range of products to prevent and care, specialized care, and social services Diseases reduce the prevalence of NCDs for the management of patients with NCDs and multi-morbidity Preparedness  Strengthening and harmonizing  Strengthening pandemic preparedness health information and the eHealth and resilience of health system based systems on COVID response assessment Where Moldova Stands Now to 1.2 million, and the share of older people will The shrinking of the labor market and the triple to 30 percent. Although the old-age aging of the population raise concerns over mortality rate is high, improvements in longevity whether the health system can remain fiscally will accelerate the aging of the population. sustainable. The population is shrinking due to The concern is that the demographic dividend low birth rates and continuous emigration of the will be over before Moldova has reaped its working-age population. Decreasing fertility, economic benefits, given that an aging society high net emigration, and longer life expectancy with a shrinking working-age population may mean that, in a smaller population, the share of have a lower production capacity. Despite robust elderly people will increase. Meanwhile, economic growth and poverty reduction over the Moldova is undergoing an epidemiological past decade, Moldova has fallen short in its transition. The long-term trend is toward a rise in aspiration to achieve faster convergence toward chronic diseases as a major contributor to EU income levels. Moreover, the economic mortality and morbidity, while the COVID-19 model continues to rely on remittance-financed pandemic highlighted the need for a resilient consumption growth. The COVID-19 pandemic system to absorb shocks. In the COVID-19 crisis, has brought to the fore the limits of an economic this came in the form of a spike in patients with model reliant on remittances and consumption an infectious disease that affected the elderly and growth, exacerbating the impact of the crisis. chronic patients disproportionately. Given the The slower economic growth that ensues will combination of an aging population, a growing have negative impacts on resource availability, disease burden, and declining national resources, even as the Government and society feel more the national authorities can expect significant pressure to provide pensions, health care, and the challenges in the coming years. By 2060, the social services older people require. population is projected to decline by 29 percent, 56 Moldova Policy Notes 2021: IMPROVING THE EFFICIENCY AND RESILIENCE OF HEALTH SERVICE DELIVERY Although Moldova’s public spending on consumption. health compares favorably with that of Increasing efficiency of public spending is a neighboring countries, a high level of out-of- priority in order to free up fiscal space for pocket (OOP) payments undermines financial health in the medium term. Moldova’s protection, affecting the poorest allocations to health care are adequate and disproportionately. The Government devotes unlikely to grow in the medium term. With public adequate resources to health within the funding on a par with countries at a similar stage constraints of its economic development, but of economic development, Moldova allocates a public spending on health has been stagnating. high share of its GDP to health, at close to Between 2015 and 2020, the share of the national 10 percent. Moldova now needs to prioritize budget allocated to health slightly decreased from more efficient use of those public resources. 13.7 to 13.1 percent. OOP payments accounted To support the Government’s efforts to increase for about 40.1 percent of total health spending in the efficiency of health spending, the World Bank 2018. Despite a recent improvement, it remains at is conducting a fiscal space analysis and a very elevated level for the region (Figure 29). supporting the institutionalization of a Health Pharmaceutical spending is by far the main Technology Assessment, with the Towards source of OOP health spending (73 percent) and Universal Health Coverage project. improving drug coverage is crucial to achieving The technical efficiency of public spending on universal health coverage. Lack of financial health is low, largely because of inefficiencies in protection is mainly driven by OOP payments for hospital and specialized outpatient care, which outpatient medicines for all income groups, and outside the capital city is usually attached to especially for poorer households. These groups hospitals. Oversupply of hospital infrastructure are particularly at risk during the ongoing absorbs considerable public resources because COVID-19 crisis. much of the infrastructure is not optimally used. Figure 29. Out-of-pocket health spending, 2018 A long-postponed rationalization of Moldova’s hospitals is one reason for a delay in efficiency gains. Improvements in the efficiency of inpatient care are mostly expected to come from reducing the length of hospital stays and providing more day-care services. Meanwhile, the system can expect higher demand to provide care to chronic patients, which can be mostly provided without requiring an overnight stay. The COVID-19 pandemic has shown that, beyond the number of beds or hospitals, it is the capacity to treat patients that matters, with an adequate mix of human resources, equipment, and enabling environment. Access to health services for the poorest The COVID-19 crisis has reinforced the need to 20 percent of Moldovans has deteriorated redesign the hospital system, with a strategic plan since 2012. The decline in access was most to guide future investment to maximize value for evident in primary health care (PHC) and hospital patients. services, which led to a sizable reduction in health The authorities need to make outcomes, as well benefits for the poorest Moldovans. as access, a health care priority. In 2020, the While inequalities in healthcare services were infant mortality rate (IMR) was 8.7 per 1,000 live somewhat reduced, utilization rates for both births and the under-5 mortality rate (U5MR) was outpatient and inpatient services continued to be 10.4. Both are more than twice the EU averages strongly and positively correlated with household of 3.5 IMR and 4.1 U5MR, respectively. 57 Moldova Policy Notes 2021: IMPROVING THE EFFICIENCY AND RESILIENCE OF HEALTH SERVICE DELIVERY The maternal mortality rate of 15.6 per 100,000 37 marriages and early childbearing. Among live births was almost double the EU average of teenagers, 12.5 percent are overweight, and 8. An estimated 20 percent of child deaths, which 20 percent have a body mass deficit. 41 In 2016, are preventable if health care is sought and is Youth-Friendly Health Services (YFHS) were timely, still occur at home or within 24 hours of established, and 41 centres were set up across the hospitalization. Health insurance coverage has country. The number of Moldovans aged 10–24 held relatively steady at 87.8 percent and is lower who benefited from them went up from about than EU averages of 93 to 100 percent. 38 Between 134,000 in 2016 to 163,000 in 2017. However, 2017 and 2020, vaccination for measles, mumps, YFHS still reaches just 25 percent of all and rubella (MMR) slipped from 87 to 84 percent. adolescents, and those only 18 percent were from Access of women and girls with locomotor the most at-risk and vulnerable groups. disabilities to health-care facilities and adapted Moldova has a relatively good capacity for gynaecological chairs remains challenging. surveillance, early warning systems, A continuing major hurdle to providing quality laboratory diagnosis, and treatment. However, maternal, child, and adolescent health care is the the country needs to establish a resilient limited availability and high turnover of medical emergency preparedness cycle for health professionals. emergencies, which will enable Moldova to Non-communicable diseases (NCDs) are a better align its existing capacities for a timely and major health challenge, especially among the effective response, identify gaps, and channel working-age population, with significant welfare resources to address the gaps, and remove and economic costs. Widespread NCD risk bottlenecks to strengthen emergency factors include tobacco and alcohol consumption, preparedness and response. The Global Health unhealthy diet, hypertension, and obesity. Security Index published in 2019 highlights key In addition, people with underlying health constraints, especially in the areas of rapid conditions, such as cardiovascular diseases, response, health system capacity, and detection diabetes, and cancer, have a higher risk of severe and reporting, ranking Moldova at 78 out of COVID-19 symptoms and death. Risk factors for 195 countries. A 2018 Joint External Evaluation NCDs can make people more vulnerable to (JEE) identified significant vulnerabilities becoming severely ill with COVID-19. 39 regarding pandemic preparedness and financing, with particular challenges in the areas of Adolescent reproductive health requires laboratory systems, surveillance and case greater attention. Although it is gradually detection, response coordination, personnel decreasing, the rate of sexually transmitted deployment, and risk communication. First steps infections (STIs) among youth in Moldova is four in this regard have already been taken in response times that of EU countries. The youth birth rate to the COVID-19 pandemic. As part of a World was 27 per 1,000 adolescent girls, 2.5 times Bank-supported project, the Government has higher than the EU average of 10.5. From 2000 to strengthened disease surveillance systems and the 2017, HIV incidence among young people aged capacity of the public health laboratories to 15–24 has almost doubled, from 12.2 to 21.4 per confirm cases with new medical supplies and 100,000 population, slightly decreasing in 2020 equipment. to 20. 40 Moreover, one-third of young people aged 15–24 were subject to physical, sexual, or How Moldova Can Strengthen Its Health psychological violence by a current or former System Efficiency intimate partner in the past 12 months. Roma girls Improving the efficiency of hospitals can be in particular continue to be forced into child undertaken through rationalization, together 37 MHLSP, 2017. 40 National Agency for Public Health. 38 National Health Insurance Company, 2017 and OECD, 2013. 41 WHO, 2014. 39 PAHO, 2021. 58 Moldova Policy Notes 2021: IMPROVING THE EFFICIENCY AND RESILIENCE OF HEALTH SERVICE DELIVERY with strategic purchasing to reduce waste and improve purchasing mechanisms for all types of create fiscal space. Savings on unwarranted care. The options include age-adjusted capitation hospital services can be reallocated to increase in PHC, case-mix funding for hospitals, and funding for population-based public health performance-based financial incentives. Within services and primary health care (PHC). Because the World Bank-financed project “Health the Government has been giving hospital services Transformation Operation”, CNAM designed an priority, their share of public spending on health incentive scheme for hospitals, which will be has been growing. In Chisinau, due to their piloted by the end of 2021. As these programs political influence, republican, municipal, and continue, more attention is needed to ensure that some private providers draw almost 20 percent of all providers meet performance indicators. Compania Naţională de Asigurări în Medicină Adoption in PHC of revised performance-based (CNAM) resources, which reduces the funds incentives could help bring more attention to available for facilities in other parts of the prevention and effective management of NCDs. country. Adequate funding for public health and Benchmarking hospital care providers by the PHC interventions is necessary if Moldova is to achievement of efficiency and performance effectively manage and prevent NCDs and indicators would better inform CNAM’s strategic improve the resilience of the health system. purchasing decisions. However, this would This needs to be coupled with a reduction of require both the passage of regulations to behavioral and other risk factors. Raising the empower CNAM and full political support. efficiency of hospital service use by reducing Otherwise, underfinancing of healthcare services unnecessary hospitalizations and managing will shift even more costs onto patients, and NCDs on a PHC level could significantly increase the financial and other barriers for health improve healthcare spending, with the savings care. used to provide more services to the public. The Government needs to give a higher The Government should therefore develop its priority to PHC services and a larger share of strategy to rationalize the hospital sector, which public spending on health to address the needs will have positive results over the medium to long of patients and improve financial protection. term. Meanwhile, it is important to empower Demographic and epidemiological transitions to CNAM to become a strategic purchaser in the NCDs and comorbidities call for better-resourced healthcare market and facilitate selecting and PHC services and public health interventions to contracting the most efficient providers. Unless reduce the disease burden. The COVID-19 efficiency improves, the Government may not be pandemic has highlighted the important role that able to secure the resources necessary to meet the PHC should play during a health emergency, in healthcare needs of the nation. To strengthen all countries, through measures such as CNAM’s capacity as a strategic purchaser, the surveillance, testing, and contact tracing, and in World Bank is implementing the “Towards keeping hospitals from overflowing with Universal Health Coverage in Moldova” project critically ill patients. Strong PHC systems are jointly financed with the Swiss Cooperation also key to the efficient delivery of crucial health Office in Moldova. This project also aims to services, including vaccinations. Strengthened improve the capacity of the Ministry of Health, prioritization should be placed in investing in Labor, and Social Protection (MoHLSP) to immunization to reduce the child mortality risk monitor the performance of the PHC system and and the cost of hospitalization when there are improve its coordination with other levels of care. crises such as the measles outbreak in 2018. Selectively contracting healthcare providers This will require: (i) effective public health based on predefined criteria helps optimize interventions reinforced by cross-sectoral resource use, as well as increase the technical coordination; (ii) well-resourced and high- efficiency of public spending. Moldova, with capacity PHC to deliver both preventive and World Bank support, has been working to curative services; and (iii) good coverage in the 59 Moldova Policy Notes 2021: IMPROVING THE EFFICIENCY AND RESILIENCE OF HEALTH SERVICE DELIVERY benefits package of essential services, such as intake through the reformulation of food medications and vaccines. Spending on various products. inputs necessary for care, especially for PHC, The process for strengthening emergency does not appear to be adequate and responsive to preparedness should follow an iterative cycle. the needs. This may contribute to lower This should start with assessing the risks and utilization levels for these cost-effective services, capacity, establishing coordinating mechanisms, especially for the poorest sections of society. planning, financing, and implementing capacity, Giving PHC a higher priority would improve the to conducting simulation exercises, evaluation, efficiency and cost-effectiveness of health care, and taking corrective actions. The results of the improve its resilience, and give the poorest capacity and strategic risk assessment can be used Moldovans better financial protection. Finally, to guide risk-informed programming that will diversifying procurement mechanisms, and catalyze actions to prevent, prepare for, and increasing transparency and efficiency in reduce the level of risk associated with a purchasing medicines and medical devices, particular hazard and its consequences on health. including for modern methods of contraception, The lessons learned from the response to the would improve cost efficiency, as well as health COVID-19 pandemic can inform the assessment outcomes. The Government can inform the of the resilience of the health system more reforms to strengthen PHC with the findings of broadly and guide reforms to improve its capacity the ongoing assessment carried out with the to prepare, respond, adapt, and build back better support of the World Bank and the Swiss to shocks. Development Cooperation, and the resources available through the consortium of partners of Additional resources are also necessary to the Primary Health Care Performance Initiative improve the health information system, reduce (PHCPI), which Moldova joined in 2019. network fragmentation, and promote cooperation among institutions in exchanging health Reducing the prevalence of NCD risk factors information. Establishing an effective and well- with public health interventions, including functioning eHealth system needs to be health taxes. Emphasizing prevention, for accelerated to generate timely data for decision- example, through targeted work with parents, making. children, adolescents, and patients at risk of major NCDs may help manage cases without any Continuing to manage the COVID-19 need for inpatient care. This work should be outbreak, while also improving health system supported by programs for the entire population resilience promoting a healthy lifestyle. These should More than 18 months after COVID-19 was first address vaccine-preventable diseases, antenatal declared a pandemic by WHO, Moldova is still and perinatal care, smoking, alcohol among the most severely affected countries in the consumption, adolescent reproductive health, Europe and Central Asia region. The COVID-19 healthy nutrition, and improved physical activity. pandemic has had a severe impact on the Reduction of NCD risk factors would contribute economic, social, and health situation of the to a substantial improvement of health status. country. The NBS data reveal that the GDP These interventions include, but are not limited contracted by 7 percent (in gross series) in 2020. to, increases in excise taxes and prices on tobacco, alcoholic and sugar-sweetened The pandemic has also seriously challenged beverages, enacting and enforcing health systems and created a high risk of losing comprehensive bans on tobacco advertising, previous gains in health outcomes. promotion and sponsorship, enacting and Unfortunately, in the absence of herd immunity enforcing bans or comprehensive restrictions on due to slow global vaccinations, strengthening exposure to alcohol advertising, and reducing salt surge capacity and implementing mitigation measures will remain critically important in 60 Moldova Policy Notes 2021: IMPROVING THE EFFICIENCY AND RESILIENCE OF HEALTH SERVICE DELIVERY fighting the pandemic. Public health measures Government and other agencies. In this context, will need to be reviewed regularly to minimize as an urgent measure to mitigate the COVID-19 transmission. In addition, health epidemiological situation in the country, and to systems need to prepare to handle the increased support government efforts, the World Bank demand for hospitalization and the critical care of launched the “Moldova COVID-19 Emergency COVID-19 patients, while also ensuring at least Preparedness and Response Project” with the basic services for non-COVID-19 patients. objective of preventing, detecting, and Recognizing the severity of the outbreak, the responding to the threat posed by the COVID-19 Government mobilized a COVID-19 pandemic in Moldova. Besides supporting preparedness response. The MoHLSP took on the COVID-19 preparedness and response in the leading role and is acting quickly on all aspects health sector, the project also includes a response related to the COVID-19 outbreak. Development in the social protection sector through mitigation partners mobilized and joined efforts to measures to help the poor and vulnerable cope strategically contribute to the most urgent needs. with the immediate impact of the pandemic. In addition, the World Bank is supporting the The World Bank Group (WBG) remains vaccination process, which enables affordable committed to providing a fast and flexible and equitable access to COVID-19 vaccines and response to the COVID-19 epidemic, utilizing all ensures effective vaccine deployment in Moldova WBG operational and policy instruments, and through vaccination system strengthening. working in close partnership with the This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Volkan Cetinkaya, Adrien Dozol, and Ilie Volovei. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 61 Moldova Policy Notes 2021: STRENGTHENING ENVIRONMENT PROTECTION AND DISASTER RISK MANAGEMENT STRENGTHENING ENVIRONMENT PROTECTION AND DISASTER RISK MANAGEMENT In 2020, Moldova was hit by one of the most severe droughts experienced over the past two decades, causing a decline in agricultural production of almost 30 percent, with significant spillover effects throughout the economy. Other natural hazard events, such as earthquakes and floods, could also significantly impact Moldova’s development trajectory, and disproportionately affect the poor and most vulnerable. Climate change is expected to further intensify the severity and impact of hydrometeorological hazards. Agriculture is periodically affected by severe droughts and other extreme weather events. Moldova has rich soils, but continuous land degradation is eroding the productivity of its agriculture. Low forest cover magnifies soil erosion, floods, and landslides, and results in large areas of degraded land. The forests are not well-managed, and there is considerable illegal harvesting of timber and firewood. Few areas are protected to conserve natural ecosystems. Moldova has already begun to enhance its disaster and climate resilience institutional frameworks but more needs to be done to strengthen the country’s resilience. While the legislative approximation with the EU directives and regulations is underway, enforcement is poor because the necessary institutions are inadequate or nonexistent. Additional issues are inadequate financing of the environmental and disaster risk challenges, and poor management of waste and chemical substances. Moldova needs to implement a comprehensive reform program, which would comprise multiple short- to medium-term reform and investment programs, including improving risk identification, investing in better risk reduction—both in terms of structural and non-structural interventions—enhancing disaster preparedness, including early warning systems, providing stronger financial protection mechanisms, and upgrading resilient recovery and reconstruction policies. Key Actions Area Short term Medium term Disaster Risk  Launching a comprehensive national  Launching a program to finance Management program to strengthen DRM and rehabilitating, rebuilding, or climate resilience, including through reinforcing under-maintained critical the adoption of the draft National infrastructure assets (Ministry of Disaster Risk Management Strategy Infrastructure and Regional (Ministry of Interior) Development)  Upgrading the Early Warning System to  Strengthening the organizational and achieve national coverage (Min. of service delivery capacities of the State Interior) Hydrometeorological Service (SHS) to  Upgrading capacity, equipment, and implement the National Framework for instruments for fire and rescue units Climate Services (Min. of Interior) Environment  Continuing the harmonization of  Strengthening the capacity of the legislation and regulation with the Environmental Agency to perform its Association Agreement and the DCFTA mandate and creating an agency to Chapter on Technical Barriers to Trade manage chemical substances Forests  Implementing the Forest Institutional  Reorganizing forest-related institutions Reform Strategy  Launching a long-term program on  Preparing a National Program for forest regeneration and rehabilitation participating in the EU4Environment  Preparing a national wood energy program for forests program 62 Moldova Policy Notes 2021: STRENGTHENING ENVIRONMENT PROTECTION AND DISASTER RISK MANAGEMENT Where Moldova Stands Now The total reconstruction costs for the building sector alone would amount to US$5.8 billion out Moldova is one of the countries in Europe and of US$62 billion in economic exposure. 44 Central Asia most vulnerable to climate Chisinau, which generates 50 percent of the change, based on many social and economic country’s GDP and is home to close to one- indicators, and it is confronted by numerous quarter of the population, would be particularly adaptation challenges. 42 Climate models predict impacted. Over 324,000 people, or about one in future rises in mean temperature of more than every two inhabitants of Chisinau, reside in high- 2 degrees by mid-century, and a significant risk buildings, which are expected to cause the decline or a slight increase in precipitation, most fatalities in the event of a severe earthquake depending on the region. Climate change is event. 45 Reconstruction costs would impose a expected to heighten the frequency and intensity considerable strain on the government budget, the of most extreme weather events and natural resources and capacities of local authorities, and disasters, such as droughts and floods, hailstorms, the socioeconomic conditions of the affected torrential rains, late frosts, and heavy winds. households. Climate change will also present new climate- related pest and disease challenges. 43 Figure 30. A timeline of key disaster and climate events in Moldova Climate change is already having widespread impacts. Future projected climate warming will create multi-dimensional risks that will affect Moldova’s economy and society. An effective response needs to combine adaptation and mitigation, and the Sustainable Development Agenda 2030 is a window of opportunity to identify operational approaches to tackle climate change. Moldova needs to start investing in transforming its industries, energy, transport, agriculture, and forestry systems. In addition to climate-related natural hazards, including drought and floods, earthquakes could also have a devastating impact. Moldova Source: Strengthening Moldova’s Disaster Risk Management and Climate Resilience, World Bank (2020). is situated in a high-seismicity area due to its proximity to Vrancea, one of the most active seismic areas of Europe. Moldova has suffered The agriculture sector is acutely sensitive to 16 major earthquakes of magnitude 7-8 over the weather and, periodically, it is seriously past 200 years. If an earthquake with the same affected by droughts and other weather magnitude as the 1940 earthquake (magnitude events. A severe drought in 1994 caused a decline Mw 7.7)—the country’s worst earthquake in of 30 percent of GDP and 26 percent in recent history—were to occur today, it could lead agricultural output. 46 The 2007 drought, with to 200 deaths and more than 4,000 injured. 42 According to the widely used Notre Dame Global Adaptation 43 World Bank. 2016. Republic of Moldova – Moldova Climate Index (ND-GAIN, http://index.gain.org/), which summarizes a Adaptation Investment Planning Technical Assistance. Report No: country's vulnerability to climate change and other global ACS18562. challenges in combination with its readiness to improve resilience, 44 Strengthening Moldova’s Disaster Risk Management and Climate Moldova ranks as the fourth most climate-vulnerable country in Resilience (World Bank, 2020) Europe and Central Asia (behind Turkmenistan, Uzbekistan, and 45 Earthquake Risk in Multifamily Residential Buildings Europe and Tajikistan) (January 2017). Central Asia Region (World Bank, 2020 46 World Bank 1995. Moldova Agriculture Sector Review. Report No. 12581-MD. World Bank, Washington DC. 63 Moldova Policy Notes 2021: STRENGTHENING ENVIRONMENT PROTECTION AND DISASTER RISK MANAGEMENT estimated agricultural losses of about conservation programs and activities are one of US$1 billion, accounted for 23 percent of the major priorities for the agriculture sector. Moldova’s GDP. 47,48 Climate change is expected (See Agricultural Policy Note.) to exacerbate existing challenges in the sector. The current total cost of inaction on climate For instance, land degradation and soil erosion adaptation is an estimated US$600 million, are projected to worsen. In 2015, about 37 percent equivalent to 6.5 percent of GDP. By 2050, this of all agricultural land, 953,900 ha, was already cost is expected to more than double in real terms, degraded to some degree and the productivity of reaching about US$1.3 billion. By then, the direct most current crops could well decline by 10 to costs of climate change (the decrease in 30 percent. The 2015 summer drought, which production plus the increase in damage and the was unprecedented in its severity and the amount costs of prevention) are expected to be of similar of territory affected, devastated both agriculture magnitude, at about US$1 billion. Seventy and cattle herding, and is thought to have percent of this cost will be incurred by contributed to a rise in rural poverty, especially agriculture, which faces the biggest challenges, among small to medium-size farmers. 49 albeit also coming with some investment Most recently, the 2020 drought also caused a opportunities. The estimated cost of decline in agricultural production of almost implementing the Climate Change Adaptation 30 percent. Loss of crops is often incurred (CCA) Strategy and its Action Plan is because of flooding, late frosts, hail, and US$200 million. As yet, climate change windstorms, all of which may worsen with adaptation measures are not included in the climate change. By 2050, the projected annual budget. cost to the agriculture of climate change is expected to be about US$700 million. 50 As such, Climate change will become a significant promoting climate-smart agriculture in Moldova problem for Moldovan forests. During the next represents a priority activity for the Government. 20 years, forest health will worsen considerably: in the north, for instance, areas susceptible to die- Continuous land degradation is causing a back will expand by about 15 to 25 percent. In the decline in agricultural productivity. Moldova period 2040–69, the deterioration will spread has unique agricultural land resources that are southward. The impact is expected to be greatest critical to the livelihoods of many, including in the south, which already has the least forest highly productive black soils (about 70 percent) cover, at 8 percent of land area, followed by the and a high agricultural utilization rate (more than center, which has the most forests, 209,000 ha, or 75 percent). However, low forest coverage and 15 percent of total land area. The annual poor land management are exacerbating soil opportunity costs of inaction are an estimated erosion, floods, and landslides. As a result, large US$40 million and will gradually increase over areas of agricultural land are degraded, and the next few decades. agricultural productivity has suffered a significant decline. Land privatization and Weak forest management aggravates the parceling, a lack of crop rotation and other anti- problems of Moldova’s forest resources. erosion measures, and the failure to use best Although forests cover about 12 percent of practices for soil conservation have complicated Moldova’s land area (such a small share the prospects for efficient management of land contributes to soil erosion, floods, and landslides resources. As a result, continuous soil and results in large areas of degradation), the rate 47 UNECE. The Republic of Moldova: Third Environmental 49 FAO drought assessment. Performance Review. 2014 50 Calculated from the difference in future production under the http://www.unece.org/index.php?id=35481 climate change and no-climate change scenarios (roughly US$430 million—US$235 million from crops and US$195 million 48 UN. 2012. Moldova Situation Report – 2012. from livestock) and the portion of the increase in damages and losses (http://www.un.md/drought/2012 /Moldova Drought that can be attributed to the increased frequency and extent of SitRep2012_1.pdf ) extreme events (roughly US$270 million). 64 Moldova Policy Notes 2021: STRENGTHENING ENVIRONMENT PROTECTION AND DISASTER RISK MANAGEMENT of illegal timber and firewood harvesting is very The Government has been strengthening its high. Official estimates put the annual harvest at institutions to better prepare for and respond about 400,000 m3, but the total annual to disasters in recent years. For instance, consumption of fuelwood is estimated at (i) Moldova has improved its ability to forecast 1.1 million m3. The result can only be severe weather, including at the local level, continuous, serious forest degradation. through improved hydrometeorological services; (ii) it has reduced the agriculture sector’s Water scarcity is a growing concern in vulnerability to climate change by improving Moldova. Increased demand for water supply for irrigation services, strengthening the existing households and irrigation purposes, combined agriculture insurance scheme, and promoting with inadequate water management and climate-smart agriculture practices; (iii) it has pollution, are important factors triggering also strengthened its emergency response; and, transboundary issues. Broadening and most importantly in light of the small size of the intensifying transboundary water cooperation has country, (iv) it has strengthened regional potential benefits, including the availability and collaboration and knowledge-sharing DRM. quality of water, ecosystems conservation, and security (floods and droughts management). Moldova has also made significant progress in (See Water Policy Note.) setting the regulatory framework necessary for implementing a modern integrated waste Moldova follows a global trend of growing management system, based on prevention and a urbanization, 51 with cities increasingly circular economy inclusive of chemical waste, as contributing to environmental degradation, well as in addressing persistent organic pollutant and being at risk of climate change impacts (POP) stockpiles and waste legacies. However, and natural disaster events. Forty-three percent the country faces significant implementation of Moldova’s population lives in urban areas, and barriers. The data available indicate that, in 2016, urbanization is expected to further increase. By waste generation in the country was 1.4 million 2030, it is expected that Chisinau alone will host tons, consisting of 1.1 million tons of mixed over 50 percent of the urban population, putting municipal solid waste, with the remainder even more pressure on the city’s infrastructure comprising hazardous waste based on the and services, while also creating considerable EU/Basel Convention classification. social and environmental challenges. During the period 2000–13, the biggest increase in Environmental laws are not being enforced Moldova’s greenhouse gas (GHG) emissions, adequately. In recent years Moldova’s both absolute and relative terms, was observed in Parliament has adopted several laws that are very the transport sector, followed by the residential important for the environment (e.g., on waste, use sector, and the commercial and public sectors. of chemicals, EIA, and SEA). They have yet to be There is a need to improve current urban enforced and, so far, they have had little impact management practices, focusing on, among on Moldovan quality of life. others, sustainable transport and mobility, Reform of the Environmental Agency is utilizing innovative, climate-smart technologies, underway. In June 2018, the Government and engaging the public and private sectors in the approved the creation of an Environmental planning and implementation of green urban Agency, which is responsible for implementing solutions. In addition, cities need to better prepare environmental laws, and for issuing permits and to respond to climate change impacts and natural authorizations, environmental assessments and disaster events. (See Multimodal Transport monitoring, and the management of the shared Note.) 51 It is expected that global urbanization will rise from 47 percent in 2010 to 60 percent in 2030 (UN Habitat). 65 Moldova Policy Notes 2021: STRENGTHENING ENVIRONMENT PROTECTION AND DISASTER RISK MANAGEMENT environmental information system. The current management, among others), and include institutional capacity of the Agency is weak, financial protection measures, for those risks that requiring capacity-building activities. cannot be fully mitigated. How Moldova Can Better Protect the Short-term Actions (< 6 months): Environment and Manage Natural Disasters • Consider recognizing Moldova’s increasing The small area classified as protected areas in climatic and natural disaster risks in all Moldova requires urgent action to better national policy documents, and adequately conserve natural ecosystems. It has now fund them. Consider undertaking a follow-up become urgent to act on biodiversity conservation to the canceled Climate Adaptation Project, strategies by expanding and consolidating the with activities that reflect up-to-date protected areas in the north and center of the priorities. country. This will make it possible to achieve the 2020 target of 15 percent of the total Moldovan • Adopt a National Disaster Risk Management territory specified in the Second National Strategy to provide an overarching vision and Biodiversity Strategy and Action Plan. In the ensure that DRM is incorporated in longer term, adaptation measures for sustainable appropriate national development programs. development should be based on an integrated Such a strategy would also identify existing landscape approach to protecting biodiversity. legislative gaps to bring the Moldovan Moldova’s potential for landscape restoration has legislation into line with commitments under been estimated at 300,000 ha, of which: 125,000 the Sendai Framework for Disaster Risk ha are severely degraded agricultural land; Reduction. 10,000 ha agricultural shelter belts; and 70,000 ha • Promote climate-smart agriculture and buffer zones for rivers, lakes, and other types of forestry practices in communities, and the land. further mainstreaming of climate change Climate and DRM need reinforcement. adaptation measures into sectoral policies. Moldova needs to implement a comprehensive • Adaptation planning in the agriculture, water, reform program focused on strengthening health, forests, energy, and transport sectors, disaster risk preparedness, investing in risk as well as technology transfer and reduction, and further strengthening disaster engagement with the private sector to response. A comprehensive DRM and climate advance the adaptation agenda of the country resilience agenda would need to comprise in a cross-cutting manner. multiple short- to medium-term reform and investment programs, including improving • Implement the Forest Institutional Reform Moldova’s risk identification, investing in better Strategy of Moldova, which was prepared risk reduction—both in terms of structural and within the FLEG Program and agreed with non-structural interventions—enhancing disaster the main stakeholders in the country. preparedness, including early warning systems, The immediate priority should be to separate providing stronger financial protection the management, control, and regulatory mechanisms, and upgrading resilient recovery functions, and enhance the regulatory and and reconstruction policies. Such a framework monitoring capacity of the forest authority. would need to gradually move the focus of DRM • Prepare a national program for participating from “reactive” ex-post responses to “proactive” in the EU4Environment: Eastern Partnership ex-ante risk management. Given limited financial – Forest Program, with a strong focus on resources, it would also need to ensure that risk strengthening the country’s capacity to mitigation priorities are adequately mainstreamed control illegal logging and ensuring efficient within existing national programs (agriculture, management of community forests. infrastructure, urban planning, and flood risk 66 Moldova Policy Notes 2021: STRENGTHENING ENVIRONMENT PROTECTION AND DISASTER RISK MANAGEMENT • Strengthening of the Environmental Agency, • Build up the capacity of the Ministry of enhancing efficiency, and ensuring adequate Environment and other relevant institutions funds from the budget. to adopt and enforce harmonized laws and introduce modern management practices. • Reform the National Environmental Fund to enhance its transparency and effectiveness • Adopt the Air Protection Strategy. and clarify its focus on pollution prevention. • Develop a national policy and action plan on • Instruct both central and local public the circular economy in Moldova. administrations on their responsibilities as • Create an agency for the management of these arise from the Law on Environmental chemical substances and ensure effective Impact Assessment and the Law on Strategic implementation of the Law on Chemical Environmental Assessment, including the Substances. assessment of health impacts and cooperation with the health administration. • Transpose the Industrial Emissions Directive to be in line with the provisions of the • Scale up biodiversity mainstreaming into Association Agreement and engagements territorial and urbanization plans (started under Energy Community. under the GEF 6). The successful practice of developing passports, more detailed • Prepare and launch a long-term institutional information, and respective monitoring of and human-capacity program for forestry. species in nature sites (Ramsar sites currently This should target the reorganized forest being formed, and those protected areas institutions, and pay special attention to local planned in the future) should be continued public authorities, and use a GIS-based forest and replicated. management information system (FMIS) to support monitoring. • Upgrade the Early Warning System to achieve national coverage, which will enable • Enhance Moldova’s technical capacities by effective dissemination of emergency-related investing in special agricultural equipment information, as well as warnings to affected for soil preparation, planting, and combating populations, saving lives, and considerably soil diseases and forest pests. reducing material losses. • Build modern plant nurseries, provide • Provide equipment, such as the renewal of irrigation equipment for older nurseries, and fire and rescue units, and the replacement of improve the seeds base for future plantings. rescue equipment and instruments with ones requiring less manpower, which will reduce • Prepare and launch a long-term critical response time, and improve the safety afforestation/reforestation program, establish and efficiency of interventions. fast-growing plantations, and rehabilitate or create agricultural shelterbelts. This program Medium-term Reforms (<24 months): should draw on cost-effective cultural • Significantly increase funding for the practices and encourage multifunctional environment and create effective management. A first step should be a study of mechanisms for a comprehensive reform of the current/future impact of climate change pollution charges. on forests. • Further improve inter-sectoral cooperation • Draw up a plan for expanding protected areas and awareness of the environment as a cross- (PA) and for building institutional capacity to cutting issue, and mainstream environmental manage them. protection requirements into other sectors • Launch a program to finance rehabilitating, and fields. rebuilding, or reinforcing under-maintained 67 Moldova Policy Notes 2021: STRENGTHENING ENVIRONMENT PROTECTION AND DISASTER RISK MANAGEMENT critical infrastructure assets to strengthen • Prepare and carry out a national wood energy their resilience against natural disaster program for a target afforestation area using events, and whose failure may cause short rotation, high-yielding forest energy significant economic damage and losses to crops that are suited to the projected climate the Moldovan economy. change impacts. This could dramatically increase the supply of legally-sourced • Strengthen the organizational and service fuelwood and alleviate the pressure on forest delivery capacities of the State resources from illegal harvesting. Hydrometeorological Service (SHS) to implement the National Framework for • Develop a strategic forestry research agenda Climate Services. to address the potential impacts of climate change. Inventory and mapping of • Enhance the national dialogue related to biodiversity, especially at the PA level, is climate change adaptation and mitigation, also important for research, while applied including the involvement of local public GIS research would facilitate a cross-sectoral authorities (LPAs) and the private sector. landscape approach to forest research.52 Long-term Reforms (> 24 months): • Align the environment and climate policy • Implement the Government’s Action Plan for frameworks to the Moldova 2030 Strategy. DCFTA Chapters 16 and 17 of the Association Agreement and Technical • Operationalize an Extended Producer Barriers to Trade Chapter. Responsibility (EPR) scheme for waste electrical and electronic equipment (WEEE), • Design and undertake a long-term program plastic, and medical waste. on forest regeneration and rehabilitation to ensure forest sustainability. • Continue the elimination of POPs stockpiles. This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by John Collier, Arcadie Capcelea, Cesar Niculescu, and Axel Baeumler. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 52 Moldova Climate Adaptation Investment Planning TA 2016; Fund Community Forestry Development; National Climate Change Forestry Policy Notes 2015; Rural productivity in Moldova– Adaptation Strategy, 2014. Low Emissions Development Strategy Managing Natural Vulnerability, 2007; Disaster and Climate Risk until 2030; and National Strategy on Biodiversity 2015-2020. Management project; Moldova Soil Conservation and Biocarbon 68 Moldova Policy Notes 2021: WATER RESOURCE MANAGEMENT WATER RESOURCE MANAGEMENT Addressing water security is paramount to economic and social development, especially given that Moldova faces an increasingly challenging water future. The severe drought in 2020, on the back of the COVID-19 crisis, highlighted the far-reaching impacts of these stressors on a system with limited resilience. It revealed the disproportionate impacts on rural populations, where low access to water and sanitation services (WSS) makes Moldova an outlier among European countries. Agriculture—a cornerstone of the rural economy and potential driver of economic recovery—can only fulfill its potential if its competitiveness is improved and irrigation services are expanded. While on average Moldova’s physical water resources can meet existing water demands, water security is undermined by a lack of infrastructure, financing, and institutional weaknesses. Moldova requires a comprehensive, long-term approach to address these challenges so that: (i) accelerated investments turn into better water, sanitation, and irrigation services; (ii) water resources are leveraged sustainably; and (iii) resilience is built into the system. Key Actions Area Short term Medium term Water  Consolidating institutional  Strengthening the mandate of Apele Resources reform, clarifying mandates, and Moldovei and basin level authorities and Management enhancing inter-ministerial and securing resources for their operation inter-agency coordination  Implementing the priority measures for  Strengthening the monitoring and river-basin management and flood risk information management systems, management to restore watersheds and e.g., on water quality, environmental flows, implement urban groundwater, flood, and drought drainage solutions, regulate small forecasting reservoirs, improve dam safety, and  Developing a financing strategy for enhance storage capacity priority measures from for river- basin and flood risk management Access to  Making universal access to safely  Establishing a lead water supply and Water Supply managed WSS a national priority, sanitation (WSS) agency/unit and and Sanitation with a particular focus on inclusion developing a national WSS investment Services plan and financing framework  Regionalizing WSS service providers and enhancing the regulatory framework Irrigation and  Developing a strategic vision for  Mobilizing public resources to support and Drainage Moldova’s irrigation and implement the vision Services drainage (I&D) sector aligned  Accelerating the uptake of rehabilitated with the country’s broader I&D schemes through investments in on- agricultural and climate context farm support, competitiveness, and supply chain development  Ensure that future I&D investments are embedded in a market approach, closely linked to farmer demand and activities 69 Moldova Policy Notes 2021: WATER RESOURCE MANAGEMENT Where Moldova Stands Now and warning systems. However, financing has not been identified and implementation remains Water Resource Management and Resilience severely limited. An integrated approach at the Moldova’s physical water endowments are not basin level, informed by the River Basin and a binding constraint for its development and Flood Risk Management Plan, is needed to can fulfill demand. Only 5 percent of total mitigate water-related risks. average annual renewable water resources are Climate change is a significant external risk to withdrawn on an annual basis and only 33 percent Moldova’s water security. A future climate that of total internal resources. Moldova is, however, is drier and warmer, under an expanded far from water-secure: current water security is development scenario, will result in an expansion limited by a lack of infrastructure, low financing, of “hotspot” catchments, with shortages along the and institutional weaknesses. Prut and Dniester rivers. Thus, while average The stalled reform of Apele Moldovei has had annual water shortages are likely to remain low, adverse consequences on Moldova’s water ensuring institutional capabilities to manage resource management (WRM) capacity. This spatial and temporal variability will be critical for includes limited allocation planning and climate change. management of water resources, limited action on Figure 31. Average annual unmet demand flood protection, and a lack of leadership on 2018 (left) and 2030 (right) in an expanded WSS, mostly a de jure mandate of the Agency. 53 demand scenario with universal access and a Moldova’s main rivers are characterized by a tenfold increase in irrigation high degree of alteration, including canalization and the construction of over 5,000 small reservoirs and ponds. These suffer from siltation and are not properly operated, maintained, or regulated. Combined with widespread degradation of upstream internal watersheds, this increases Moldova’s vulnerability to water-related risks, hamper WRM effectiveness, and limits the productivity of the water sector. A significant amount of work has been carried Source: World Bank, 2020. out in assessing flood risk and identifying priority measures in Moldova. Flooding poses Groundwater is reportedly limited and often a high cost on Moldova’s economy, estimated to has high levels of mineralization, posing a be at least US$62 million annually, with public health risk for the rural population that increasing impacts due to climate change. 54 relies on it as a drinking water source. Strategic options to address these costs include At present, the use of groundwater is not rehabilitation and improvement of the existing permitted in irrigation due to the risk of dyke system, new and rehabilitated flood storage irreversible soil damage, while a comprehensive dams, enlargement of river channels, restoration assessment of its quality and status is lacking and of watersheds, and the use of nature-based remains a key priority. solutions, along with improved flood forecasting 53 Smets, Susanna; Midgley, Amelia; Mao, Zhimin; Vladicescu, 54 European Investment Bank (EIB) and Ministry of Environment of Veaceslav; Neumann, James E.; Strzepek, Ken; Pricop, Felicia. Republic of Moldova. (2016). Management and Technical 2020. Moldova: Water Security Diagnostic and Future Outlook. Assistance Support to Moldova Flood Protection Project: Master World Bank, Washington, DC. Plan Report. 70 Moldova Policy Notes 2021: WATER RESOURCE MANAGEMENT Water Supply and Sanitation Services benchmarks and widespread maintenance backlogs are a concern. Reforms to address the Moldova’s very low level of WSS access and poor performance and fragmentation of domestic the stark disparity between urban and rural funding, particularly the National Ecological areas make it an outlier among European Fund, are critical to ensure that investments turn countries. Low levels of access directly impose a into better services. cost on public and environmental health and limit resilience to future pandemics. One in every two There is scope to improve the performance of rural people lacks access to a public water WSS service providers and expand access supply, 55 while sewerage systems serve only through further regionalization. Further efforts 3.6 percent of the rural population (while should delineate clear roles and responsibilities of reaching 76.3 percent of urban residents). 56 institutions in the sector, and establish a Wastewater treatment facilities are often lacking conducive enabling environment, including or underperforming, and urban drainage systems support for the formation of licensed regional are poor. Inclusion, including of Roma utilities and the full cost-recovery of services. minorities, is of great concern, with the poorest Developing mandatory connection policies, portion of the rural population facing the largest combined with social support mechanisms to obstacles. address affordability concerns, will also play a role in increasing the financial sustainability of Figure 32. Access to publicly provided centralized service providers. Support to regulated utilities drinking water supply (left) and public sewerage should go hand-in-hand with support to local (right) per local government administration WSS operators, which remain key in delivering (% of households connected) services to people during the transitory period, as well as to households that rely on self-supply for water and sanitation where networked solutions are too costly. Irrigation and Drainage Services There has been a major collapse in Moldova’s I&D performance since independence. While agriculture remains a driver for an inclusive economic recovery in post-COVID-19, the sector suffers from low levels of competitiveness and limited irrigation, making it vulnerable to climate Source: World Bank, 2020, adapted from 2013 census data. change. Moldova lacks a strategic plan for I&D, Institutional weaknesses underpin many of while the persistent lack of clarity on national these challenges, including limited national investment priorities, institutional roles, investment planning, project preparation, financing, and risk mitigation efforts hamper quality assurance, and support to WSS service effectiveness. In addition, the high costs of non- providers. Developing a lead WSS agency/unit operational centralized I&D schemes are a drain that can champion and implement sector policies on Apele Moldovei’s budgets. and fulfill these functions is critical to addressing There are some emerging successes for using a many of the challenges. This should go hand-in- Water Users Association (WUA) approach for hand with the elaboration of a national WSS managing schemes rehabilitated under the investment plan and financing framework. Sector Millennium Challenge Compact (MCC). financing is low compared with regional Efforts should build on these lessons and ensure 55 HBS 2018 data provide the most recent picture on national access 56 This leaves most rural households (48.5 percent) using outdoor to a public piped water supply being 70 percent, with urban access dry pit latrines of poor hygienic status with limited comfort, often at 92.4 percent and rural access at 52.2 percent. lacking nearby handwashing facilities. 71 Moldova Policy Notes 2021: WATER RESOURCE MANAGEMENT that investments are embedded in a market framework, including implementation of approach, closely linked to farmers’ demand, and tariff policies geared toward cost-recovery. sensitive to the farmers’ operational context. • Make further efforts to regionalize WSS How Moldova Can Enhance Water Security service providers, while supporting local Moldova needs to embark on a holistic and WSS service providers and households where multisectoral programmatic approach for networked solutions prove too costly. managing the country’s water resources, risks, Water Resource Management and Water- and services, both rural and urban. Actions Related Risk Reduction going forward need to emphasize the following: • Strengthen information and management • In the context of the recent reorganization of systems, e.g., on surface and groundwater the Ministry of Agriculture, Regional water quality and status monitoring, and Development and Environment (MARDE), hydro-technical constructions, including the strengthen coordination mechanisms, State Water Cadaster. including inter-ministerial and inter-agency • Increase funding for water management and coordination across water resource flood risk measures, informed by river-basin management, water services, and risk and flood management plans. reduction functions, given that mandates are • Regulate small reservoirs, improve dam shared across various ministries. safety, and enhance storage capacity. • Clarify the mandate, develop capacity, and • Improve the ecological status of water bodies secure funding for Water Management and restore upstream watersheds. Agency. Irrigation and Drainage • Develop a lead WSS agency/unit to implement accelerated WSS investments. • Develop a strategic plan and vision, including clarified institutional capabilities. Water Supply and Sanitation Services • Pursue accelerated uptake of rehabilitated • Develop a national WSS development plan schemes, building on recent successes of and financing framework, including the Water Users Associations, through reform of sector funding. investments in on-farm support, • Accelerate investments to address inclusion competitiveness, supply chain development, concerns in line with the national WSS and ensuring future investments are linked to development plan. farmers’ demand and sensitive to farmers’ • Invest in wastewater treatment in priority operational context. locations to prevent the pollution of strategic • Climate change is a growing threat to the surface water sources. resilience of farmers, particularly where • Increase efficiency of regional WSS service irrigation services do not exist. I&D schemes providers and enhance the regulatory should be designed to be climate-smart in terms of resilience. This Policy Note was produced by the World Bank to inform policy debate in Moldova. The Note was prepared by Amelia Midgley. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 72 Moldova Policy Notes 2021: INCREASING RESILIENCE AND COMPETITIVENESS IN AGRICULTURE INCREASING RESILIENCE AND COMPETITIVENESS OF AGRICULTURE Agriculture is vital to Moldova’s economy, contributing 11 percent of GDP, 32 percent of employment, and 45 percent of exports. But its low productivity limits incomes and inhibits on-farm investments. Key public services in agriculture, such as education and research, are weak, outdated, and underfunded, with dedicated extension services having been all but discontinued since 2018. The volatility of agricultural output is amplified by the country’s acute vulnerability to weather-related shocks and perpetuated by the lack of effective weather mitigation tools and services. Trade integration with the EU generates both opportunities and challenges for Moldova’s agricultural producers. Enhancing compliance with EU requirements for food safety and quality will improve market access and help Moldova to compete domestically with increasing agricultural imports. Key Actions Area Short term Medium term Financial  Launching capital formation initiatives for young  Revising the existing Incentives agriculture entrepreneurs with a focus on subsidy program to create and innovation and digitization initiatives incentives to increase Subsidies  Promoting targeted subsidies for smart productivity, high-value agriculture activities and support small  Setting up a mechanism for impact evaluation of farmers subsidies Knowledge  Re-introducing dedicated services to improve  Upgrading education and access to knowledge knowledge management systems Food  Expanding/improving public food quality and Quality and safety programs/services, including animal Safety registration and traceability system Where Moldova Stands Now national productivity. As a result, agricultural incomes remain modest. In 2015, poverty was Agriculture is vital to Moldova’s economy. In much higher in rural areas (14.5 percent) than in 2019, agriculture accounted for 11 percent of urban areas (3.1 percent). Moldova’s exposure to GDP and employed up to 21 percent of the labor shocks is amplified by the climate-related shocks force in Moldova. Together with agro- that affect agriculture. processing, it generates about 18 percent of GDP. The sector is a net exporter and a major earner of Figure 33. Share of agriculture in GDP and employment (percent) foreign exchange, while agro-food products comprise over 45 percent of Moldova’s total 40% exports. Agriculture continues to be both a driver 35% of economic growth and an avenue for reducing 30% rural poverty. 25% 20% However, low productivity limits farm 15% incomes and heightens sector vulnerability. 10% The current share of agriculture in employment is 5% 0% nearly triple its share in GDP (Figure 33), which 2010 2011 2012 2013 2014 2015 2016 2017 implies that labor generates far less value-added % employment % GDP in agriculture than in other sectors. Agricultural labor productivity is only 40 percent of average Source: NBS. 73 Moldova Policy Notes 2021: INCREASING RESILIENCE AND COMPETITIVENESS IN AGRICULTURE High output volatility is a serious threat to Education and training in agriculture are agricultural development. Crop production is confronted with similar problems, and there is a particularly vulnerable to bad weather. Droughts, severe mismatch between the qualifications floods, and soil erosion are among major climate- students acquire and those that the labor market driven problems affecting Moldova. Severe needs. Inadequate services for farmers, poor weather events every two to three years since infrastructure, and underdeveloped utilities make 2007 have had a devastating impact on most it acutely difficult to retain young people in crops (Figure 34). The volatility is also partly agriculture and rural areas. caused by underdeveloped measures for By 2018, the provision of extension services mitigating weather-related risks, limited access to had significantly regressed. Until 2018, these irrigation, low adoption of modern resilient services were provided through a network of agricultural technologies, and a lack of regional and village-based consultants of the innovative insurance schemes. National Rural Development Agency, for which Climate change is expected to exacerbate the public resources had been allocated since 2002. impacts of extreme weather. A 2014 World This system of service providers was established Bank study found that climate change will lead to with the World Bank, SIDA, and DfID support significant variations in temperature and rainfall and, despite some limitations, built a solid track patterns and that over the next 40 years the effects record of engagement with thousands of farmers of climate change on Moldova will become more of all types and sizes. In 2018, the Ministry of severe. Without decisive adaptation strategies, Agriculture failed to select an extension service most yields will plunge. provider for the next five-year period, so this Figure 34. Agricultural output volatility, 2007–17 service is no longer available. There is currently (percent) no clear vision on extension services, and informal communications suggest that going 180 total forward extension services will be provided by 160 existing education and research institutions. This crops would be a suboptimal scenario for the delivery 140 of essential knowledge to farmers, as these 120 entities do not have a widespread physical 100 presence in rural areas and lack the resources and 80 skills to provide effective extension services. 60 Trade integration with the EU generates 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 opportunities as well as challenges for Moldova’s farmers. In 2014, Moldova signed Source: NBS. the Association Agreement with the EU and the Education, research, extension, and other related Deep and Comprehensive Free Trade public services that are critical to supporting Agreement (DCFTA). This gives its agro-food sector development are lacking in quality and sector a great opportunity to both compete in the ineffectiveness. Due to systemic deficiencies and largest market in the world and reduce its reliance outdated methods, agricultural education and on the traditional but unstable Russian market. research institutions offer little value to the Indeed, since 2014, Moldova’s exports in general sector. Underfunded, with an inadequate resource and agro-food exports, in particular, have been base, aging staff, and a lack of a modern vision, increasingly directed to the EU (Figure 35). existing research institutes are in survival mode. The share of agri-food exports to the EU shot up The risk of irrelevance is particularly critical from an average of 35 percent before DCFTA because they still operate in isolation from the (2010–13) to 50 to 60 percent thereafter (2015– private sector and the international R&D system. 19). But Moldova’s agro-food sector needs to 74 Moldova Policy Notes 2021: INCREASING RESILIENCE AND COMPETITIVENESS IN AGRICULTURE move faster if it is to compete even domestically producers, vis-à-vis competitors. Another major with EU imports. gap is in infrastructure for the management and Figure 35. Moldova’s agri-food exports, 2010–17 disposal of byproducts of animal origin. Finally, (US$ million) there are major gaps in the management of animal by-products and waste, although the Government is making strides toward the establishment of a 1,200 management system in the years to come. 1,000 These gaps are not only major problems for 800 exports but also significant domestic public 600 health concerns. 400 The “Moldova 2030” National Development 200 Strategy calls for more investment in 0 agriculture, expanded export opportunities, 2010 2011 2012 2013 2014 2015 2016 2017 building up of human capital, and identifying MD agro-food exports, total actions to respond to climate change. MD agro-food exports to EU The strategy emphasizes enhancing the quality of Source: NBS. people’s lives through country modernization and integration with Europe. It acknowledges the low The largest share of agro-foods Moldova productivity and competitiveness of Moldova’s exports to the EU has little value-added. agriculture. The problems of inadequate human Among them recently have been dried fruits and capital and the exodus of young people from rural nuts, cereals, sunflower seeds and sunflower oil, areas are recognized as major developmental wines, and juice concentrates—standardized challenges. Among other threats are global commodities sold in bulk. The next challenge for climate change, which calls for adopting such Moldovan producers in becoming competitive in adaptation measures as access to more resilient EU markets is to add more value to exports and/or plant varieties, raising farmers’ awareness and increase exports of high-value produce such as training, the proliferation of conservation fresh fruits and vegetables. agriculture, and more efficient use of water Compliance with EU food safety and quality resources. requirements is at the core of the EU-Moldova How Moldova Can Enhance Agricultural DCFTA and continues to loom large on Productivity and Become Internationally Moldova’s agenda. Since the creation of the Competitive National Food Safety Agency in 2012, the Government has been pursuing an ambitious Transforming agriculture into a modern, vibrant, agenda for modernizing its food safety and and market-oriented sector is central to fighting quality management systems to align them with poverty, creating well-paying jobs, promotion of rigorous international public health standards, social inclusion, and the reduction of the maintain domestic market share, and promote the urban/rural development divide. A review of the growth of exports to both traditional and new experience post-accession of new EU member markets. Progress to date has been good in many states found that agriculture had benefited more areas but among issues still to be resolved are in countries that gave priority to enhancing those related to the development of the domestic productivity, competitiveness, modernizing the livestock sector. Despite recent improvements, agri-food industry, and adapting it to EU there are still gaps in laboratory diagnostic standards. Moldova should continue to apply a capacity for monitoring and surveillance of variety of strategies to boost agricultural animal diseases, and there is still a complete productivity and competitiveness. Thus, it might absence of programs to monitor the quality of raw pursue the following horizontal strategic focuses milk, which disadvantages domestic dairy and sector-specific measures (see graphic below). 75 Moldova Policy Notes 2021: INCREASING RESILIENCE AND COMPETITIVENESS IN AGRICULTURE Focus on strengthening public services Focus on increasing productivity • Continued strengthening of key market • Continue and expand efforts to organize institutions such as the Food Safety Agency farmers for scaling the quantity and quality of and the Agency of Interventions and products. Payments in Agriculture (others such as • Provide additional resources for upgrading Apele Moldovei may require a complete post-harvesting and aggregation/handling revamp). infrastructure (agri-hubs). • Pursue reform of the agricultural research • Continue to support programs for farm and institutes toward higher alignment with the product quality certification (GAP, GAHP), needs of the sector and knowledge-sharing. traceability, and digitization. • Provide access to farmers to agricultural • Provide support for sales and marketing knowledge and advisory services. through product councils and associations. • Consider the implementation of farm • Promote farm-level value addition and advisory and market price information processing. systems for enhancing knowledge Focus on increasing resilience to climate shocks transmission to farmers. • Consider programs for the rehabilitation of Focus on supporting potential entrepreneurs irrigation systems integrated with the with capital formation needs development of intensified production of • Explore the introduction of targeted high-value agricultural products (agri- credit/finance facilities for broader access to clusters around irrigation systems). finance. • Promote on-farm adaptation through • Explore strategies for reducing the costs of knowledge dissemination and financial capital (alleviating central bank prudential incentives on improved on-farm water requirements for credit, partial credit management, soil management, risk guarantees). management technologies, and adjustments • Deepen evaluation efforts of public spending in crop mix. measures to ensure that resources are • Promote restoration of degraded forests and allocated toward highly efficient and pastures, which also promotes agricultural impactful activities. productivity through improved watershed functions and protection from harsh weather. Figure 36. Strategy to boost agricultural productivity and competitiveness 76 Moldova Policy Notes 2021: INCREASING RESILIENCE AND COMPETITIVENESS IN AGRICULTURE choosing service providers, depending on Building competitive advantage for Moldova’s specific needs. Development partners could agriculture will require skilled and innovative advise on international best practices and provide management. Consolidated efforts are needed to technical assistance. improve the business, marketing, and management skills of domestic producers, Still required will be both significant especially young farmers. In the short term, good investment and institutional change to ensure technical managers can be recruited that the agriculture and agri-food sectors internationally, but that can be costly, and in the comply with EU requirements. longer term, Moldovan-trained farm management The Government should prioritize funding and specialists will be needed. The Government could the provision of practical support for: work together with education institutions, (i) addressing remaining deficiencies in the extension services, and the private sector on a country’s food safety laboratory capabilities; clear action plan to improve business (ii) eliminating quality assurance problems in the management in agriculture to drive the sector milk and dairy sector; and (iii) vigorously forward. pursuing the agenda for animal by-product management and disposal (through available In this context, priority should be given to financing from the World Bank). Addressing revamping agricultural education and these priority themes will create the necessary adapting the curriculum to meet dynamism for investments that will enhance the contemporary business needs. Reviewing both productivity and competitiveness of the country’s university and pre-university curricula could help deteriorating livestock sector at both production place more emphasis on modern business and processing levels. practices and closer cooperation with the private sector. Agricultural colleges and vocational Moldova needs to innovate if it is to make its education and training could add courses on agriculture world-class and competitive and to business administration that are customized for promote better and higher-paid jobs for the training middle management and supervisors for rural workforce. The startup and development the agriculture sector. They could also provide costs of truly innovative enterprises in Moldova on-farm training for the certification demanded are expensive because the goal is difficult. by EU retailers, such as GlobalGAP and other Capital formation policies could be pursued more private standards. This would also be a good way intently, such as an Innovation Fund could be to link more closely with the private sector. established to provide matching grants and The curriculum of the Agricultural University supplementary technical assistance to encourage also needs to be adapted to the requirements of companies to innovate. The fund could finance the market economy, and ties strengthened with the development of new products or markets, the companies to organize student placements that uptake of new technologies or processes, or the offer practical company experience. building of strategic relations among new value chain actors. An urgent priority is to make knowledge and extension services available to Moldovan As agriculture proves to be increasingly farmers more systemically and strategically. A affected by adverse events, the need for variety of models could be considered, including effective risk management tools becomes voucher-based systems that would take critical. Moldovan agriculture would benefit advantage of the existing universe of advisory from a comprehensive risk assessment that would actors in the market, including dedicated advisory also identify the policy instruments best tailored service providers, professional and/or product to the Moldovan context. Farm-level reforms associations, research institutions, and input should be identified, such as farm water suppliers, as well as other entities. Under such a efficiency, the adoption of more climate-resilient system, farmers would have the option of seed varieties, crop diversification, and national 77 Moldova Policy Notes 2021: INCREASING RESILIENCE AND COMPETITIVENESS IN AGRICULTURE adaptation and mitigation measures, such as division of roles and risk-sharing between the investment in rehabilitating secondary irrigation public and private sectors, the appropriate capacity. It will be important to establish the targeting of risk management instruments, and appropriate mix of tools for Moldova’s the identification of adequate financial resources. agricultural conditions, the most effective This Policy Note was produced by the World Bank to inform policy debate in Moldova. The Note was prepared by Anatol Gobjila and Felica Pricop. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 78 Moldova Policy Notes 2021: ENHANCING THE BUSINESS ENVIRONMENT AND MARKET COMPETITION ENHANCING THE BUSINESS ENVIRONMENT AND MARKET COMPETITION While Moldova has made notable progress to reducing the regulatory burden for SMEs, further efforts are needed in areas where Moldova still lags behind, such as insolvency procedures, and the complex procedures for procuring construction permits and electricity connections, both of which are closely linked to new investments. In addition, a number of problematic areas were cited by the private sector: unfair competition, skills shortages, and access to finance. Despite numerous free trade agreements (FTAs), poor logistics are holding back the development of trade. The food safety infrastructure for products of animal origin also does not allow for export accreditation. The Government continues to interfere heavily in markets, through for example the high SOE presence, state aid, and the regulation of prices and profit margins on a number of products. Moreover, these interventions have demonstrated to be ineffective, as the prices of these products remain higher than in comparator countries. Key Actions Area Short term Medium term Competition  Adopting the new Competition Law  Rationalizing products under the that is being prepared price control regime and SOEs  Ensuring bylaws are in place to implement transparent concessions and PPPs framework Digitization  Implementing electronic issuance of  Developing on-line business business permits and licenses by all registration for local and foreign government entities businesses  Continuing the use of the E-Inspection  Initiating the digitization of register government business services and registries, phytosanitary, veterinary, sanitary, and tax service  Creating an online repository of businesses financial statements Customs,  Negotiating green customs corridor with  Digitizing export/import export/import neighboring countries for export of procedures by implementing the procedures perishable products single window at customs  Upgrading NQI infrastructure and animal traceability systems and obtaining accreditation for EU exports for Moldovan producers and processors of products of animal origin Where Moldova Stands Now practice. The minimum paid-in capital requirement has been abolished, with the cost of Entry, Exit, and Operations registration as a percentage of income per capita Moldova’s progress in upgrading the quality now 5 percent, marginally higher than the ECA of its business environment has been uneven. average. VAT registration, should a company Over the past several years, Moldova has enacted request it, requires the application to the Tax several reforms to reduce barriers to business Service and takes one day, but in reality, takes entry. With the launch of the single window longer. Firm exit has been a chronic problem— reform in late 2014, company registration should the process is cumbersome and prohibitive for require only one step, but this is not the case in firms. In 2017, several laws were amended to 79 Moldova Policy Notes 2021: ENHANCING THE BUSINESS ENVIRONMENT AND MARKET COMPETITION streamline the process by cutting eight steps in Moldovan business partners. Although a new law company liquidation. However, as yet there is no on accounting and auditing mandates the creation evidence of the impact of these reforms in of a public repository of financial statements, this practice. Its effects need to be studied to identify has yet to start. Such a repository would ways to further optimize the process. According significantly advance business transparency, to the World Bank Group’s (WBG) Doing facilitate commercial links, and open new Business survey, between 2010 and 2019 the cost avenues for local businesses in search of foreign of entry and operation in Moldova improved, but markets and partners. all other elements worsened. Particularly Trade and Access to Markets worrying areas were problems with uncertainty, unethical practices, and the lack of skills. Moldova’s trade openness (proxied by the sum of exports and imports as a share of GDP) The WBG’s Doing Business survey continues surpassed that of regional peers, but the past to report that businesses see inspections as decade has seen trade integration decelerate. designed to create unfair advantages for In general, the trade regime is open: Since 2014 competitors. The Government has begun to Moldova has signed free trade agreements reform inspection bodies, reducing their number (FTAs) with more than 40 countries, including from 58 to 18, and adopting risk-based rules for one (DCFTA) with the EU28 member states. planning and conducting inspections. How well Despite some progress in streamlining trade these reforms work in practice needs to be operations, there are still problems with excessive monitored to ensure that institutional behavior border inspections, unclear and unpredictable and incentives change. The reforms will require requirements, and a high degree of staff strong central government supervision and discretion. Inefficient logistic services that raise management. costs and create delays and unpredictability in The reform of permits and licenses has international trade are also a concern. Importers significantly reduced the number of permits particularly complain about the clearance and required in the country, and an electronic one- release of goods in consignments by several stop-shop (OSS) for issuing permits was importers that have been consolidated into one launched in July 2018. It currently gives full shipment. They also raise concerns about information on processes for securing all 152 Customs valuations of goods and the application permits and allows for electronic application and of indicative pricing. Despite WTO requirements, the issuance of 132 permits. The time and money the application of valuation method 6 is common that businesses spend on obtaining permits have and not properly explained to companies by reduced dramatically—as will opportunities for Customs, making the costs of trading less bribery and corruption. The average number of predictable. licenses that a company needs was reduced to 1.4 Moldova’s trade in recent years has been in 2019, and this reflects efforts to reduce the marked by slackening exports to Russia and number of activities that require licenses. growing trade flows with the EU, which is now Building on this significant simplification and the destination for over 65 percent of Moldova’s technology breakthrough, the Government now exports. However, not all the country’s products needs to ensure that its institutions all use the enjoy the same export regime. Products of animal system effectively by switching to electronic origin cannot access EU markets unless the procedures and to deter the duplication of country has EU accreditation, which depends on processes by manual bypasses. its adopting measures and systems to ensure The transparency of businesses continues to be compliance with EU food safety standards, an issue. There is no database, public or private, including the accreditation of laboratory testing that investors and business counterparts can methods. So far, food safety infrastructure and consult to evaluate the quality of possible the capacity of Moldovan authorities to apply 80 Moldova Policy Notes 2021: ENHANCING THE BUSINESS ENVIRONMENT AND MARKET COMPETITION processes that meet EU requirements are not could be steps in the right direction, but until they adequate, greatly reducing the prospects for are adopted it remains too early to tell. Moldovan food businesses to be able to export to Market competition continues to be a the EU. challenge for the development of the private Domestically, Moldovan companies perceive sector. In at least half of all sectors, SOEs control access to government procurement as being more than half of the estimated market share. pervasively corrupt, with government contracts Their extensive presence underscores the need to going to companies affiliated with politically assess how their activity is affecting market connected persons via bid-rigging or other non- outcomes. SOEs have: (i) a legal monopoly of transparent arrangements. The Public railroad services and infrastructure, postal Procurement Law provides a largely satisfactory services (basic and parcel), and gambling; basic regulatory framework incorporating the (ii) a de facto monopoly on numerous market fundamental EU principles governing the award segments, which serve as inputs for other of public contracts. However, it requires further industries and overall economy, including: amendments (particularly secondary legislation). electricity transmission, telecoms backbone In October 2018, the Government launched the infrastructure and landlines, water collection, MTender digital procurement service, mandated treatment, and supply, passenger port terminals, for use by all government entities, while at the and road infrastructure; and (iii) significant same time increasing thresholds for awarding participation in markets for: electricity import, public contracts without a need for competition. generation and distribution, retail internet The MTender service is building on Open services, air transport, and urban passenger Contracting Data Standard and innovative services, waste management, and several technology to create a new model of digital public manufacturing sectors, such as pharmaceuticals, procurement. The introduction of the transparent certain foods (bread and wheat flour), beverages MTender may help to reduce bid-rigging and (wine), and glass (bottles). corrupt practices and facilitate open access to SOEs are spread through sectors that are public tendering when extended to all public already served by the private sector. contracts in Moldova. Since October 2018, The Government competes directly with the 30,000 electronic tenders have been advertised on private sector even though there are no significant MTender by almost 2,000 public sector bodies. signs of market failures that would justify the Electronic bidding attracts more competition and public investment. State competition with the engenders the greater trust of local businesses private sector requires special attention because than before. However, it requires further of its potential negative effects on attracting investment and significant regulatory changes to investment needed to ensure sustainable growth. ensure open access to all procurement (see also Policy Note on Strengthening the opportunities and more transparent and efficient Capacity and Governance of Public spending. Administration). Competition and State Aid Moldova provides state aid on a large scale. The Global Competitiveness Index 2019 One of the positive reforms undertaken in 2020 is underscores Moldova’s poor performance in the new State Aid Register launched in January competition policy, the extent of market 2021. On average, for 2014–17, total Moldovan dominance, and the burden of government state aid constituted 4.3 percent of GDP, while regulation. Of the 14 ECA economies, Moldova the European Council recommends that state aid had the lowest score on many GCI dimensions. from EU members be less than 1 percent of GDP. There has not been any notable reform in this area Such aid helps to lower the operational costs of in the past several years. At present, the new draft firms, diminishing incentives for them to Law on Railways and the Law on Competition innovate, and to some extent favors individual 81 Moldova Policy Notes 2021: ENHANCING THE BUSINESS ENVIRONMENT AND MARKET COMPETITION companies and specific sectors over economy- facilitate both the incorporation for startups wide horizontal schemes. There is also the risk through online registration, and the registration of that sector-oriented aid may disrupt the efficient businesses by members of the diaspora and allocation of resources across sectors. In 2014– foreign investors. 16, almost 22 percent of all reported Moldovan The Government should continue to use its state aid had a sectoral focus, while the EU electronic OSS for permits and licenses and percentage was 3.2 percent. Most state aid takes ensure that all its entities are issuing documents the form of budget transfers and tax incentives. online with no manual bypasses. Allowing online Price controls are another area where the mechanisms to function routinely in all entities market impact effects should be carefully will bring huge benefits in optimizing assessed. The Government regulates retail government bureaucracy, eliminating margins and prices in several sectors, such as opportunities for corruption, and smoothing essential foods, fuel, and pharmaceuticals. Food interactions between the public and private products classified as socially important have sectors. their retail margins controlled. However, how the Building on the reform of the government Government monitors compliance or verifies inspection system, the authorities now need to wholesale costs is unclear. Moreover, despite the ensure that it is properly implemented, and in control of margins of socially important food particular, ensure that incentives are set up and products, Moldovans still pay more for these than that institutional behavior evolves accordingly. consumers in comparator countries. It seems Remuneration and incentives for inspectors need apparent that controlling margins where there is to be reviewed and performance indicators information asymmetry between the regulator identified to make sure that inspectorates direct and market players leads to inflated costs to their efforts to achieve the intended impacts. overcome the margin restrictions, and ultimately Central supervision of inspection system to higher final prices. As discussed in the operations needs to be reinforced in terms of both Moldova CEM, the average prices of some IT systems and personnel, granting the latter socially important food products are about sufficient powers to ensure that the reforms are 53 percent higher in Moldova than in peer not lost or reversed. countries. Moldova should revisit the relationship between In the Moldovan economy, the combination of: local and central public authorities for business (i) the extensive presence of SOEs, which often permitting, to ensure that efforts by the central hold dominant market shares and operate in an government to streamline its interactions with environment that is not competitively neutral; businesses are not lost, or watered down, at the (ii) significant state aid provided without much local level. Local procedures for issuing control; and (iii) pervasive price controls, may be construction permits need special attention to building impenetrable barriers to competition and keep them aligned with new legal requirements. higher productivity in the economy. Local authorities need to build on central How Moldova Can Enhance Its Business government IT achievements and garner the Environment political will to implement changes uniformly throughout the country. Entry, Exit, and Operations The creation of a public repository of company Moldova should build on what recent business financial statements is a priority for attracting climate reforms have achieved to make investment and facilitating links of domestic conditions more encouraging for the private companies with each other and with foreign sector. In the business entry, the missing step is partners. Besides commercial and investment making business registration available online and benefits, transparent and publicly available further digitizing it. In particular, this can 82 Moldova Policy Notes 2021: ENHANCING THE BUSINESS ENVIRONMENT AND MARKET COMPETITION financial information will greatly benefit better efficiency of government spending. governance, lowering corruption. The elimination of corruption from the system of attributing government contracts, enforcement of Moldova should now follow up on the business fair competition, and proper financial liquidation reforms it has already passed. Their management mechanisms in government impact needs to be assessed to verify how they procurement are priorities. contributed to business dynamics and what still needs to be done. The possibility of a clear and An investment climate becomes dynamic when simple exit will help attract the investment capital state involvement in business operations—as that Moldova needs. both a market player and regulator—is neutral to competition and not a barrier to private sector Trade and Access to Markets participation where that is feasible. The Moldova should further streamline trade logistics Government needs to think strategically about to make sure its companies can easily trade across how to leverage the private sector to boost service borders and respond to foreign demand for its in regulated industries where there is already a products. The country should re-assess its trade private investment. Making sure that its and transport corridors and its logistics services engagement with the private sector is transparent and consider how customs can facilitate trade. and driven by objective competition principles, Streamlined customs procedures are essential, the Government could take advantage of the laws especially for risk-based border inspection, the governing public-private partnerships approved processing of mixed consignments, and post- in 2008 to promote greater inclusion of the clearance audits. Enabling electronic trade by private sector. simplifying customs procedures for small parcels, It would be advisable to: (i) conduct particularly for export, should be a priority in comprehensive market assessments of the supporting small businesses and startups. effectiveness and efficiency of price controls; The authorities should further revisit their (ii) identify possible reasons for high prices in customs valuation practices and apply valuation Moldova; and (iii) adopt reforms to boost methods as per WTO rules, making the currently competition. Current limitations on margins and applied valuation method 6 more of an exception profitability must be reviewed simultaneously rather than the default method. with an assessment of the mechanisms for Access to foreign markets must be ensured for all monitoring wholesale acquisition prices and the Moldovan products, with the export of products costs of their administration. Similarly, it would of animal origin a priority, given the importance be advisable to review restrictions on firms’ of agribusiness for the economy. Food safety market entry and firms’ ability to compete, such infrastructure needs to be raised to European as burdensome requirements to import. levels. It will be especially important to: (i) pass The Competition Council should continue to laws permitting incineration and co-incineration advocate for public authorities to move away of animal waste resulting from animal breeding from sectoral to horizontal forms of state aid, and processing; (ii) develop and accredit which are more likely to spur sustainable laboratory testing methods to meet European investment (e.g., support to SMEs, R&D, job requirements; and (iii) implement national animal creation, regional development, and disease monitoring and prevention plans. Exports environmental protection). The Government would further be promoted by initiatives such as should review tax incentives and budget cutting the remaining high tariff and liberalizing expenditures to ensure that the tax system is key utilities. efficient and effective. This would also prevent A sound system of government procurement can discrimination against eligible firms based on be a significant stimulus for private sector state aid rules. development and, at the same time, a source of 83 Moldova Policy Notes 2021: ENHANCING THE BUSINESS ENVIRONMENT AND MARKET COMPETITION This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Galina Cicanci, Alberto Criscuolo, and Tarik Sahovic. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 84 Moldova Policy Notes 2021: FOSTERING SMES AND STRENGTHENING FDI LINKAGES FOSTERING SMES AND STRENGTHENING FDI LINKAGES Small and medium enterprises (SMEs) in Moldova are neither productive nor diversified, and the products they export lack sophistication. As a result, their export survival rates are low. Despite being open to international trade, Moldova has not been able to fully realize the benefits of trade and has yet to translate increasing exports into productivity growth. Export-oriented innovative foreign direct investment (FDI) that successfully links to local ecosystems can promote growth and job creation. However, despite preferential tax treatment and other state support measures for firms that are located in special economic zones (SEZs), there have been no spillovers from these zones to the rest of the economy. Local and international export-oriented firms source more than 65 percent of their inputs from abroad. Furthermore, the share of FDI in Moldova's GDP has been steadily declining. Deficiency in backbone and input services, a shortage of skills, and a lack of access to finance are barriers to firms’ productivity and competitiveness. Key Actions Area Short term Medium term SME  Implementing an actionable program  Implementing programs on export exports of building linkages and integration readiness, match-making, export of local firms into international value standards chain, and support certification FDI/Special  Implementing supplier development  Amending investment incentives Economic programs linked with larger firms/FDIs framework to promote FDI in Zones (OEMs in automotive; machinery and upstream sectors, stimulate appliances; food sector, etc.) investment in R&D and encourage local linkages and technology and knowledge spillovers Where Moldova Stands Now sophistication of their exports are minimal. The fact that few exporters last long may be Micro, small, and medium enterprises because their products are not of high enough (MSMEs) represent 96 percent of all quality. 58 Nonetheless, large firms play a key role registered companies in Moldova. The number in Moldova’s economy: they comprise most of of active SMEs in Moldova has been estimated at the sales, value-added and formal employment, as almost 35,000; they are mainly in services, well as most of the net formal job creation. Over especially retail and wholesale trade, by far the the past decade, the prominence of large firms has largest Moldovan industry. In terms of value- become even more pronounced; for instance, added, SMEs account for only 61 percent of the their share in total employment increased from total value-added, with significant differences by about 50 percent in 2009 to 60 percent in 2019. sector. The fact that the share of employment by Large, foreign-owned, exporting, and SMEs is higher than their value-added means that manufacturing companies are the most in SMEs labor productivity is lower than in large productive. companies. 57 Moreover, the contribution of SMEs to total exports has been estimated at just Moldova is looking for additional drivers of over half, and the diversification and growth, and growing exports could boost 57 SME Segmentation Study, World Bank 2015. 58 Moldova Trade Study, World Bank 2015. 85 Moldova Policy Notes 2021: FOSTERING SMES AND STRENGTHENING FDI LINKAGES productivity. Even after almost two decades of production and discourage exports. Other trade flow averaging more than 120 percent of widespread problems are access to foreign GDP, Moldova has failed to translate its markets and inadequate marketing, followed by increasing exports into higher productivity. difficulties, especially for micro firms, in The economy has been unable to shift resources: establishing collaboration and links to larger (i) from low- to high-productivity sectors; firms, and the dearth of technical expertise in both (ii) within sectors to higher-productivity uses; companies and the marketplace (something and (iii) for firms that are innovative to seize new SMEs perceive as a more severe operating market opportunities. constraint). Local and international exporting firms source more than 65 percent of their inputs Entrepreneurs perceive the lack of skills and from abroad instead of locally. 61 political uncertainty as to their main business obstacles. 59 Political uncertainty prevents firms Corruption also suppresses firms’ from making medium- to longer-term decisions performance and productivity. Moldovan firms and this impacts their operations. Coupled with that make informal payments to the authorities the lack of transparency, corruption, and heavy are less productive than their counterparts. regulatory burden, these can be detrimental to Not all firms in Moldovan territory enjoy the firms’ operations. The shortage of skills has been same conditions. Currently, most FDI-supported an issue for the past several years, due to the firms are in one of the country’s seven free migration of younger and better-skilled members economic zones (FEZs). Moldova also has nine of the workforce to the EU. The COVID-19 industrial parks, one free international airport, pandemic has further eroded employment in and one free water port terminal with similar Moldova, with more than 50 percent of firms benefits. Firms located in these areas benefit from reducing their permanent workforce since the state support incentives that are not available to start of the pandemic. 60 firms elsewhere in Moldova. However, to date, Digitization of government-to-business (G2B) there have been no spillovers from these zones to services and reducing the regulatory burden the rest of the economy, either directly or via the on SMEs/FDI is important going forward. SME support ecosystem. Most raw materials While the Government has made notable used in FEZs are imported and the products improvements in the digitization of services and exported. The main domestic input is local labor. reducing the regulatory burden, it is critical to: In Moldova, export-oriented, foreign-owned, (i) further streamline and improve inspections; and innovative firms are far more productive (ii) ensure all business permits/licenses and other than other enterprises (controlling for size, age, requirements are digitized and online; and sector). Export-oriented FDIs that have (iii) import/export procedures are digitized and successful links to the local ecosystem can have a streamlined; and (iv) respective quality positive impact on growth and job creation. But infrastructure is put in place to enable exports Moldova is experiencing a continuous decline in (currently, some products cannot be exported to the share of FDI in GDP—a trend that may the EU and other countries due to poor quality reinforce the perception that firms face barriers to infrastructure). entry and investment. Poor factor conditions, especially deficient SME Development Agency programs are backbone, and input services do major harm starting to target small and medium firms too. to firms’ productivity and competitiveness. For many years, the Agency aided only startups Expensive and poor-quality utilities, especially via incentive programs and incubators. Startups inadequate power, water, telecommunication, tend to remain small rather than grow into and transport services push up the costs of 59 World Bank, Enterprise Survey 2019. 61 World Bank, Firm linkages report, 2020. 60 World Bank, COVID-19 Enterprise survey, 2021. 86 Moldova Policy Notes 2021: FOSTERING SMES AND STRENGTHENING FDI LINKAGES medium or large firms. As a result of World Bank SMEs to overcome the main barriers to exporter and other development partner assistance survival are crucial to growth and diversification. programs, the Agency is now starting to target Government support programs should target other firms too. The evaluation of matching-grant upgrading export product quality and improving programs of the World Bank and Government the standards that exports meet. Promoting that fund export-oriented firms’ upgrades found country brands and key export sectors that firms receiving export-related support systematically should continue but should aim to achieve better outcomes (US$1 invested through draw in a wider number of companies. Targeted matching grants yields US$9 in export sales). 62 assistance to SMEs in export readiness and match-making programs for them should become The Investment Agency is mandated to attract a priority. investment and promote exports. The Investment Agency started export missions Productivity depends on well-functioning in 2021 (more than 60 local firms benefited from input markets and ready access to electricity, this work and some have already signed export water, telecommunications, and transport contracts). Helping exporters with information on networks. Labor market conditions need to be re- export markets, linking them with potential balanced by modernizing legislation to give firms buyers, and working on economic diplomacy the flexibility to adjust quickly to structural and have been some of the new programs of the cyclical fluctuations in the economy and their Agency in the past two years. The Agency is also markets. Modern labor laws will bring actively working on investment promotion and productivity gains that translate into better jobs. attraction. Meanwhile, efforts must continue to cut corruption in public entities at all levels to ensure How Moldova Can Build Up SMEs and that resources are directed to growth and Ensure FDI Spillovers development Moldova needs to work on upgrading firms’ Financial markets must be deep and well- productivity. One priority is to promote private functioning to support firms’ investment and sector product and process innovation. This can growth. In addition to the recommendations of be done directly by, for example, incentives such the Financial Sector Policy Note, alternatives to as matching grants for eligible firms based on bank financing should be developed, especially support programs with proven impact. Since for capital market instruments such as corporate innovators have regularly proved to be more bonds, export financing, insurance, and other productive, the authorities should identify instruments that can spur innovation and enable support programs that truly stimulate innovation businesses to invest efficiently. rather than stimulating the re-creation of basic business models. Programs should give firms Moldova should actively promote FDI and incentives to offer management training and ensure that the expected gains materialize. invest in skills in critical areas, such as corporate This means maintaining an open and effective financial literacy, export readiness, how to meet dialog with investors to identify policy reforms quality standards, and access to foreign markets. and remove obstacles to attracting and retaining investment, such as by building up the current Moldova should support its firms’ dialog through the Economic Council. internationalization. As productivity and The continuous decline in FDI as a share of GDP foreign trade enhance each other, helping also needs to be analyzed carefully for factors that Moldovan SMEs to access foreign markets deter FDI. It could be, for example, that should be a policy priority. 63 Policies that help competition and market regulation policies are 62 World Bank, Impact Evaluation of Matching Grant Facility, 63 See Enhancing Business Environment Note recommendations on Second Competitiveness Enhancement Project, World Bank, March products of animal origin. 2021. 87 Moldova Policy Notes 2021: FOSTERING SMES AND STRENGTHENING FDI LINKAGES ineffective, or that the judicial system does not promoting FDI in upstream sectors and by give investors enough protection to generate encouraging the interaction of foreign and investor trust. Here too, anti-corruption initiatives domestic firms by building supplier development would reduce the cost of doing business and make programs. There is also a need to increase the investing in Moldova more attractive. capacity of domestic firms to absorb spillovers, perhaps by supporting education and training to The country needs to encourage technology improve labor force skills, investment in research and knowledge spillovers from FDI and FEZs and development, to the rest of the economy. This can be done by This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Galina Cicanci, Alberto Criscuolo, and Tarik Sahovic. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 88 Moldova Policy Notes 2021: ENHANCING FINANCIAL SECTOR STABILITY AND GOVERNANCE ENHANCING FINANCIAL SECTOR STABILITY AND GOVERNANCE The financial sector is small relative to the size of the overall economy and, while total bank credit has grown in recent years, it has been declining for enterprises. The authorities have taken major steps to restore the stability of the banking sector after a banking crisis in 2014 and have tightened up bank supervision and regulation to align with EU directives. Although the banking sector is well-capitalized, liquid, and profitable, nonperforming loans (NPLs) remain high. At the same time, the deposit guarantee framework has weaknesses. All segments of the non-bank financial sector are underdeveloped. Inadequate, incomplete financial infrastructure related to insolvency, secured transactions, credit information-sharing, and consumer protection, are additional hurdles to financial intermediation. Key Actions Area Short term Medium term Banks  Assessing the resources, policies, and  Operationalizing the DGS for banks and procedures with supervisory actions to SCAs to ensure adequate staffing and strengthen banks’ preparedness for procedures, regulations, and dealing with NPLs methodologies  Implementing the MREL and bail-in  Continuing the upgrading of banks’ regulations, and continuing the Resolution Plans and implementing first upgrading of banks’ Resolution Plans banks’ MREL requirements to operationalize the new bank  Reviewing the bank liquidation resolution framework framework  Adopting the Law on the new deposit guarantee scheme (DGS) for banks and Saving & Credit Associations (SCAs) Non-Bank  Accelerating the transfer of  Strengthening supervision of non-bank Financial regulatory and supervisory powers credit organizations with special Institutions over the non-banking sector to NBM attention to combatting money  Adopting the draft Insurance Law laundering and MTPL Insurance Law and  Strengthening supervision of SCA addressing the legal hurdles for sector enforcement of NCFM decisions  Preparing for the transition of the SCA sector to the DGS including clean-up and consolidation of the sector Financial  Amending data protection legislation  Introducing a consumer insolvency Infrastructure to enable the development of digital framework financial services  Upgrading the collateral registry IT  Upgrading the regulatory framework of system the movable collateral registry  Enhancing the credit information sharing system  Strengthening consumer protection 89 Moldova Policy Notes 2021: ENHANCING FINANCIAL SECTOR STABILITY AND GOVERNANCE broad powers, including mandatory transfers and Where Moldova Stands Now bail-in to ensure that non-viable banks can Banking Sector quickly exit the market, and requires that the NBM prepare resolution plans and set up a While banks remain well-capitalized, liquid, and profitable, nonperforming loans (NPLs) privately funded resolution fund. are relatively high. All 11 banks maintain high There are legal and institutional gaps in the capital adequacy ratios (CARs), with the CAR of deposit protection framework. To meet the the banking sector, as measured by the share of objective of deposit protection, depositors must regulatory capital in risk-weighted assets, at have confidence that the deposit insurer will have 26.6 percent as of March 2021. This is partly both the financial resources, and the technical and explained by the measures introduced by the operational capacity to reimburse deposits in a National Bank of Moldova (NBM) aiming to reasonable timeframe. The Moldovan Deposit relax the capital buffer requirements for banks. Guarantee Fund for the Banking System All banks meet prudential requirements with (FGDSB) currently has limited capacity, regards to liquidity indicators. Liquid assets to inadequate structure and staffing, and an total assets were at 50.4 percent in the first quarter insufficient coverage level (MDL 50,000 per of 2021. The profitability of the banking sector depositor). A draft law under preparation aims at was hit by the COVID-19 pandemic, with the addressing these issues by, among others, return on equity (RoE) down from 14.6 percent in improving the fund’s governance. The draft law 2019 to 9.3 percent in the first quarter of 2021. also aligns the deposit insurance framework with However, asset quality remains a vulnerability, the EU Directive on Deposit Guarantee with the ratio of NPLs to gross loans as of June Schemes—a requirement of the Association 2021 at 7.5 percent, and at 12.7 percent for loans Agreement between Moldova and the EU. to micro, small and medium enterprises Access to Finance (MSMEs) as of June 2021. While there has been a downward trend in the NPL ratio since 2016, a Financial intermediation in Moldova is low. rise is anticipated in the remainder of 2021 and Deposit penetration is low, with domestic bank beyond as the impact of the COVID-19-related deposits amounting to 40 percent of GDP in credit repayment restructuring and moratorium 2020. Domestic credit to the private sector (as a will be reflected on banks’ balance sheets. percentage of GDP) was a mere 27.8 percent in 2020, compared with an average of 56.5 percent The clean-up of banks’ ownership structures in the Europe & Central Asia region, excluding since 2014 has resulted in sounder governance high-income countries. Business credit demand is overall. On the regulatory side, the NBM has constrained by the relatively low share of large been implementing prudential and bank firms, a high share of foreign-owned firms, and resolution reforms introduced after the 2014 their use of non-bank financing sources. The high banking crisis. The new framework mirrors that level of NPLs affecting some banks, minimal of the EU. Significant reforms have involved access to long-term funding, and a preference for more stringent fit-and-proper requirements for government securities have also undermined the shareholders, directors, and managers, more ability of banks to finance the real economy in stringent capital, liquidity, and governance recent years. Financial intermediation is also requirements, including the requirement to adversely affected by structural elements of the prepare recovery plans, a risk-based approach to economy, including poverty, rurality, and banking supervision, and broad supervisory informality. powers to address emerging weaknesses in banks. Moreover, a new bank resolution framework was While total credit has been growing, credit to introduced in 2016, which identifies the NBM as enterprises has been declining. While credit has Moldova’s bank resolution authority, conferring improved since 2015, with outstanding loans 90 Moldova Policy Notes 2021: ENHANCING FINANCIAL SECTOR STABILITY AND GOVERNANCE registering a compound annual growth rate financial market is regulated and supervised by (CAGR) of 3.6 percent in the period 2015–20, the National Commission for Financial Markets this has been mainly driven by the household (NCFM) although, according to the law, sector, while loans to businesses registered a regulation, and supervision for insurance, negative CAGR of 1.9 percent. The combined NBCOs, and SCAs, will transition to the NBM on impact of the COVID-19 pandemic and the July 1, 2023. drought in 2020 on the economy is expected to There are concerns about the regulatory and drag on credit demand, particularly for supervisory framework for NBCOs, as well as enterprises, because of a significant number of with regard to consumer protection for their business closures and loss of employment. clients. Large numbers of complaints are being The uncertain economic recovery is expected to filed about abusive terms demanded by the constrain lending, particularly for riskier industry. The responsible entity, the Consumer segments, such as MSMEs. The supply of credit Protection Agency, has not developed sufficient could be curtailed through the deteriorating capacity in financial services to effectively tackle quality of banks’ balance sheets, reduced the sector’s problems or to launch much-needed profitability, and higher costs of funding. consumer education campaigns. A recent study Access to finance has always been a significant also identifies a risk of over-indebtedness on the obstacle for MSMEs and has been exacerbated retail consumers serviced by both banks and non- by the COVID-19 pandemic. Access to finance banks—a risk aggravated by deficiencies in and the high cost of credit are often cited as key Moldova’s credit reporting system. constraints to MSME development. It is SCAs play an important role in financial estimated that the MSME financing gap inclusion by providing financial services to the amounted to 14 percent of 2017 GDP. In the 2019 population in rural areas. The sector is highly Business Environment and Enterprise fragmented, with 228 entities, 64 of which are Performance Survey, only 23.6 percent of firms deposit-taking with a market share of had a bank loan, with significant variation by 88.4 percent (end 2020). The sector comprises size. Access to finance for MSMEs is further small entities with limited access to technology constrained by high levels of collateralization in and the capacity to achieve economies of scale. Moldova (221.2 percent of the loan amount). The services provided by the apex organization While the Credit Guarantee Fund within the are underdeveloped. The deposit-taking SCAs Organization for Small and Medium Enterprise have no deposit protection but the draft law under Sector Development (ODIMM) aims to facilitate preparation, among others, contains provisions access to finance for MSMEs, it has been on introducing a deposit guarantee scheme (DGS) underutilized and faces challenges in achieving for deposit-taking SCAs. significant impact with regards to products and pricing, operational framework, and monitoring The penetration of insurance has fluctuated at and evaluation. around 1.0 percent of GDP during the past five years. The market is dominated by policies other Non-Banking Financial Sector than life insurance, especially Motor Third Party Although the non-banking financial sector is Liability (MTPL) insurance, which is compulsory still small, it has been growing rapidly. While and accounts for 50 percent of gross non-life the financial sector is dominated by banks, the insurance premiums written. For the past five share of credit extended by non-bank financial years, the non-life insurance market has been institutions (NBFIs), which include both non- stagnant due to sluggish economic growth, low bank credit organizations (NBCOs) and Saving & incomes, lack of public trust in the insurance Credit associations (SCAs), has been growing sector, and fierce price competition to build rapidly since 2015, from 3.0 percent of GDP in market share by the 16 insurers. A significant 2015 to 5.5 percent in 2020. The non-bank number of insurers are at high risk of insolvency 91 Moldova Policy Notes 2021: ENHANCING FINANCIAL SECTOR STABILITY AND GOVERNANCE and show signs of weak capacity to pay claims. is not mandatory for SCAs. Credit bureaus are Their true financial condition is likely to be even also limited in the sources of information that worse than it appears: minimal regulatory they can legally collect and use, including both requirements for insurer solvency, provisioning, private and public sources. There are significant and valuation of assets means that company data protection-related restrictions, which limit solvency is likely to be overestimated. Without access to information for bureaus. stabilization measures, full market liberalization This significantly holds back risk appraisal is likely to trigger unsustainable price capacity in the financial sector and drives up both competition and further jeopardize the already NPLs and consumer protection concerns. precarious financial position of the sector. Although lending secured by movable Moldova’s capital market is shallow and collateral exists, mostly for equipment and underdeveloped. Domestic government debt machinery, other tangible assets, including was about 5 percent of GDP until 2016 when it categories such as accounts receivable and shot up to about 17 percent of GDP due to inventory, are rarely used. The legal framework recognition of government guarantees issued to (the Pledge Law and the Civil Code) has recently the NBM for the emergency loans provided to been updated to encourage creditors to take banks during the banking fraud crisis and control of new types of assets and to improve subsequent conversion of the loans into long-term access to finance by MSMEs. However, despite government bonds. The maximum maturity of the numerous legislative reforms in recent years, regular government securities is just two years. 64 there is a major implementation gap because the The secondary market is thin, with banks being collateral registry has not been upgraded to its primary dealers and investors. The Moldova accommodate the possibilities afforded by the Stock Exchange (MSE) is not liquid. For the past new legal framework. While the Civil Code several years, its turnover has been less than 1 recognizes a variety of forms of security and percent of GDP and it lists only corporate shares allows financial institutions to register security because no corporate bonds have ever been directly with the collateral registry, these options issued. Market capitalization is 3 percent of GDP. are simply not being used because the registry is There are only 32 joint-stock companies listed. designed to follow the registration process pre- The MSE is currently not equipped to contribute reform. to the development of the national capital market. How Moldova Can Build Up Its Financial Financial Infrastructure Sector Consumers remain excluded from the Banking Sector insolvency system. The Insolvency Law, which Reforms in banking regulation and was recently updated to comply with supervision should continue. The NBM should international standards, does not apply to continue to make progress in its risk-based consumers who may be dealing with over- supervision approach, ensuring that its indebtedness. operational structure supports the implementation Despite several credit bureaus, there are gaps of the supervisory approach. The NBM should in the credit information sharing system. also prepare for a possible worsening of banks’ The exchange of information among these asset quality and a corresponding increase in bureaus is inefficient, partly due to technical or NPLs by requesting banks to prepare strategic communication aspects that have not been and operational plans for reducing the number of overcome. Moreover, reporting to a credit bureau bad loans and continue to focus on the adequacy 64 In March 2018, the Ministry of Finance issued an inaugural five- year government bond and a seven-year bond in 2021, in limited volumes. 92 Moldova Policy Notes 2021: ENHANCING FINANCIAL SECTOR STABILITY AND GOVERNANCE of the loan classification and provisioning across Non-Banking Financial Sector the banking sector. The NBM should also start It is critical to ensure a smooth and efficient assessing the potential impact that climate change transition of supervision of the non-banking may have on the banking sector and propose a financial sector to the NBM. A lengthy regulatory and supervisory framework that transition of the regulatory and supervisory considers the transition and physical risks that powers to the NBM could be damaging for the climate change poses for the banking sector. trust of market participants, the public, and The NBM should continue the operationalization investors in the Moldova financial system. of the new resolution framework, including the It could undermine efforts to undertake enhancement of banks’ resolution plans and by significant reforms in the financial sector and requesting loss-absorbing requirements for the should be accelerated. largest banks. The NBM should also review the bank liquidation framework to ensure that Nevertheless, it is important to ensure effective professional managers can be appointed to supervision of the non-banking financial liquidate a non-viable bank. sector in the transition period. Important legislative reforms, particularly in the insurance The FGDSB must be effectively sector, need to continue. It is also important to operationalized with the necessary staff and involve the NBM in these reforms such that the adequate procedures, regulations, and NBM is prepared to exercise its new powers, methodologies. The new legislation must be while the NCFM should enforce compliance with enacted to address operational challenges, existing regulations. The NBM will not be able to improve the fund’s governance, streamline the assume the new functions without relying on the payout procedure so that it can be done in a short technical expertise of key NCFM staff. It would timeframe, and ensure that adequate be helpful to establish effective channels of methodologies are required for the fund to meet communication between the two institutions. its mandate. This institutional strengthening The NBM will also need a plan for the transition, should also include addressing staff and technical including a new organizational structure, budget, shortcomings to ensure that the provisions of the and the additional resources needed. new legislation can be implemented satisfactorily, raising public awareness, and There are also effective actions that the NCFM putting systems in place to allow the FGDSB to can undertake until the transfer of supervision have a “single customer view” to effectively pay becomes effective. The NCFM should set out depositors in case of a bank failure. supervisory objectives for the NBCO industry and focus on anti-money laundering (AML) and Access to Finance consumer protection (including retail depositors Authorities need to support a sustainable in SCAs). increase of financial intermediation, especially Authorities should assess the readiness of each for underserved segments. This requires a SCA to operate within the deposit guarantee comprehensive approach, including reviewing scheme (DGS) and clean up/ consolidate the and enhancing the scale and operation of sector, prior to the introduction of DGS. development finance public institutions, and risk- Priority reforms for ensuring sustainable sharing mechanisms such as improved credit development of the SCA sector include guarantees, as well as enabling financial (i) consolidation of the deposit-taking SCAs by infrastructure (such as credit reporting, secured the regulator to ensure that only viable entities transactions, etc.). join the DGS; and (ii) a stricter supervisory regime to promote its sustainable development. 93 Moldova Policy Notes 2021: ENHANCING FINANCIAL SECTOR STABILITY AND GOVERNANCE To address challenges in the insurance sector, indebted consumers to achieve a discharge of the NCFM, in cooperation with the NBM, their unsustainable debt. Although NPL ratios should tighten regulatory requirements and in the consumer loan segment are not exorbitant, enhance supervision of capital adequacy and the introduction of a system providing consumers solvency, reserving, asset valuation, and with a second chance could lead to sounder allocation of expenses. It is also necessary to lending practices. address gaps in auditing, governance, and Equally critical to the recovery of the Moldovan transparency by amending the Insurance and economy is the introduction of tools allowing MTPL laws, and to ensure consistency with the MSMEs to leverage their movable assets and Civil Code as recently amended, which has obtain the credit they need for sustainable growth. several insurance provisions that deviate from To support this, it will be essential to modernize international best practices. The INCFM’s the collateral registry to fully accommodate the enforcement powers should be strengthened to new provisions on security interests in the Civil protect its regulatory decisions from cancellation Code. by courts before supervision is transitioned to the It is important to introduce consumer NBM. In the medium term, the supervision protection mechanisms for financial sector should shift from compliance-based to risk-based consumers. Both bank and non-bank consumers supervision. need to be protected from abusive and fraudulent The Government and financial sector practices in credits and deposits. Authorities regulators should continue their efforts to should set up an agenda and build capacities to build up the capital market, for example, by effectively tackle the consumer protection developing investment and pension funds, and problems, and even launch much-needed the markets for government and corporate bonds, consumer financial education campaigns. listing government and corporate bonds on the Finally, the credit information sharing system stock exchange and adopting rules to preserve needs to be strengthened. The use of credit market integrity. Privatizing state-owned bureaus must be mandatory for all lenders for enterprises (SOEs) could heighten market loans above a small minimum size, in addition to liquidity and attract foreign portfolio investment. enforcing the current law and ensuring that all Improving corporate governance and credit bureaus comprehensively exchange and encouraging listed companies to transition to integrate the information they have. The access of IFRS standards will promote transparency and credit bureaus to credit information should be engage more investors, both foreign and local. expanded and data protection procedures Financial infrastructure streamlined, to allow for the development of The Government should consider enacting a better risk assessment. consumer insolvency law that allows over- This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Natalie Nicolaou with contributions from Galina Cicanci, Fernando Dancausa, Ismael Fontan, Danilo Palermo, Pramita Moni Sengupta, and Alena Zielinski. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: https://www.worldbank.org/en/country/moldova 94 Moldova Policy Notes 2021: STRENGTHENING EDUCATION OUTCOMES AND SKILLS STRENGTHENING EDUCATION OUTCOMES AND SKILLS Over the past decade, Moldova has made progress in improving the efficiency of its primary and secondary school system. A similar trend has been registered in the Human Capital Index, which improved from 0.56 in 2010 to 0.58 in 2020, indicating that the future productivity of children born in 2020 was 58 percent of what it could have been with complete education and full health. However, challenges related to equity, access, inclusion, quality, and relevance of education remain. Moldova compares poorly with other countries in the region. These challenges have only been deepened by the COVID-19 pandemic, which imposed prolonged school closures, as well as contributed to teacher shortages. These have led to learning loss, thus risking the human capital gains made in the past decade. These challenges are especially daunting for children from disadvantaged backgrounds. Skills mismatches represent a major obstacle for both employers and graduates, especially for youth making the transition from school to work. Key Actions Area Short term Medium term Implement  Implementing strategies to reopen  Continuing the implementation of for recovery schools safely learning recovery and acceleration  Providing teachers support to tackle strategies for foundational skills and learning losses and recovery, including disadvantaged children digital skills Protect  Establishing Programs for Teaching  Introducing entrepreneurship, learning for at the Right Level for remediation innovation, and applied ICT skills in the all and re-engagement curricula  Establishing programs that offer  Improving curricula by involving psychosocial support to the employers in reviewing occupational disadvantaged and vulnerable profiles and qualification standards  Formulating a national lifelong learning strategy with a specific focus on digital skills development, second chance, and short-term education Prepare to  Conducting a Digital Education  Implementing the recommendations build back Readiness Assessment to identify of Digital Education Readiness better- priority reforms based on the readiness Assessment Digitizing level  Leverage interdependencies with Education relevant entities and stakeholders for improving learning outcomes (PISA) in 2018, have improved over the past Moldova’s Education System: Status and decade, 50 percent of 15-year-old students still do Major Challenges not have basic proficiency in mathematics, Together with improving the internal 46 percent are not proficient in reading, and efficiency of the educational system, the 42 percent are not proficient in science. Where priorities of the Government should be equity is concerned, the PISA results in science improving the quality and equity of education. reveal a gap equivalent to almost three years of In terms of quality, 40 percent of Moldovan schooling between high- and low-income students lack basic cognitive skills, such as students of 15 years of age. Also, many reading and writing. Although student learning disadvantaged students hold lower ambitions outcomes in Moldova, as measured by the than should be expected given their academic Program for International Students Assessment achievement: about one in three high-achieving 95 Moldova Policy Notes 2021: STRENGTHENING EDUCATION OUTCOMES AND SKILLS disadvantaged students (compared with one in 10 children of other ethnicities, and those of Roma high-achieving advantaged students) do not ethnicity, from rural and urban areas, with and expect to complete tertiary education. The gap without internet connection could increase between students living in rural and urban areas considerably both within and between countries. is equivalent to 1.5 years of schooling. There has Figure 37. Estimated impact of Covid-19 on PISA been robust progress on inclusion, resulting in a results fourfold increase in the number of children with disabilities or special educational needs in regular schools since 2012. In transforming mainstream participation into successful inclusion and quality learning outcomes, challenges that need to be overcome are teachers’ limited capacities to provide efficient individualized support and the lack of relevant technologies for such support in schools. The COVID-19 pandemic and the need to close schools or move to remote learning is expected to result in a substantial learning Source: OECD loss. Assuming that a student gains 40 PISA Although there has been some very good points of learning in a year, given that schools progress in terms of preschool enrolment in have been closed for around four months, on recent years, equity in access to preschool average, and that remote learning in any country needs attention. In 2021, the net enrolment rate is half as effective as face-to-face learning, we for children aged 3 to 6 increased to 95 percent, estimate that learning in Moldova will have fallen up from 72 percent in 2017 and 87 percent in by the equivalent of 8 PISA points, i.e., from 424 2020. Nonetheless, enrolment is substantially to 416, which represents 20 percent of the lower among Roma children, children with expected learning gain. This erodes some of the disabilities, and those from remote areas. In the improvements made over the past six years. 2018–2019 school year, out of 439,115 children, It is also expected that the gap between the 7,693 children with Special Education Needs richest and poorest will have widened. Continued (SEN) and 1,464 children with disabilities were school closures have potentially widened enrolled in the general education system. 66 inequalities because of differential access to The decentralization process, which shifted the learning technologies across student groups (e.g., responsibility for financing preschools from rich over poor, urban over rural). The COVID-19 central to local authorities, resulted in severe pandemic could result in a loss of between 0.3 underfunding of preschool education in many and 0.9 years of schooling adjusted for quality, areas, contributing to inequalities in access and bringing the effective years of schooling that quality. There are no facilities in many rural students achieve during their lifetime down from localities, while many urban localities have 7.9 years to between 7.0 and 7.6 years. 65 overcrowded institutions. In OECD countries, the top 10 percent of students In the past decade, Moldova has made some outperformed the top 10 percent of their reading improvements in the efficiency of its primary classmates by 141 points before the pandemic. and secondary school system. Since 2014, In Moldova, this gap was smaller (102 points), efforts to optimize the school system through but still significant. Disparities between girls and school mergers have made it more efficient. boys, children with and without disabilities, As a result, the average student-to-teacher ratio 65 https://thedocs.worldbank.org/en/doc/798061592482682799- 66 National Bureau of Statistics (29 May 2020). 0090022020/original/covidandeducationJune17r6.pdf 96 Moldova Policy Notes 2021: STRENGTHENING EDUCATION OUTCOMES AND SKILLS for grades 1–12 increased from 10.8:1 in 2012 to chose the dVET path and 60 percent of those 12.4:1 in 2020. However, with a continuous graduates were employed directly on graduation. decline in the size of the school-age population Similarly, enrolment in higher education in anticipated, there is room for more progress in Moldova has been declining since 2007. this area. At present, only 54,761 students are enrolled in In general, the education infrastructure in local universities, down from 126,132 in 2005 Moldova is suboptimal. This is especially true and 81,669 in 2015. In the past three years, the regarding accessibility for children with number of enrolled students has decreased by disabilities, the physical condition of learning almost 10 percent. The number of university spaces, and access to water and sanitation. Few students per 10,000 inhabitants decreased from kindergartens are prepared for children with 289 to 227 between 2015/16 and 2020/21. This is disabilities, rural schools often lack indoor toilets, a result of demographic challenges in the country, and vocational schools struggle with outdated but also due to a lack of quality education in learning environments. Around two-thirds of Moldovan universities, while access to kindergartens, less than 5 percent of schools, and universities in neighboring countries is easy and 12 percent of VET institutions have had diplomas offer more perspectives for significant renovations done in the past few years, employment and higher wages (Romania, while the remaining institutions have only had Ukraine, and the Russian Federation). minor maintenance work done. Moldova’s higher and VET education systems A significant number of young Moldovans do not meet labor market demand, resulting in (aged 15–24) are not in education, formal a skills mismatch. While university graduates employment, or training (NEET). In 2017, this have better employment and earnings prospects proportion reached 29 percent, which was more than those with less education, they lack many than double the EU average of 12 percent. The professional and job-specific skills. For instance, situation has improved significantly in the past about 43 percent of those university graduates few years and, currently, the proportion of NEET who are employed report a mismatch between Moldovan adolescents (aged 15–24) has their education and their job. Firms believe that decreased to 17.6 67 percent. But this is still too curricula are outdated and lack relevance to high. Because they are neither improving their occupational profiles. Employers rank limited future employability through investment in skills availability of a skilled workforce third among nor gaining experience through employment, the the constraints to expanding their businesses. NEET are particularly at risk of both labor market For about 40 percent of Moldovan firms, skills and social exclusion. The longer they remain deficits are rated as a major or severe constraint NEET, the less employable they become. to growth—one of the highest percentages in the Europe and Central Asia region. In vocational education and training (VET), recent investments have not yet improved The Government has been working on a youth employability. Between 40 and 50 percent lifelong learning strategy since 2017, but no of VET graduates choose not to look for work or major progress has been registered so far. have become discouraged from participating in With the shrinking population and an expected the national labor market. To address this issue, reduction in the share of the working-age the Government introduced a pilot dual VET population, it is vital for Moldova’s workforce to (dVET) program in 2014 with employers’ direct be equipped with adequate skills to contribute involvement in the development and delivery of productively to the economy and provide for their programs. By 2018, 14 percent of VET students own financial security. A well-developed lifelong learning system could make a significant 67 National Bureau of Statistics 2018. 97 Moldova Policy Notes 2021: STRENGTHENING EDUCATION OUTCOMES AND SKILLS difference for the country’s development 68 and driven and practice-oriented. In this regard, the could help with post-COVID-19 learning cooperation between the VET schools and the recovery/acceleration. private sector should be further strengthened, including through options such as digital VET Developing Moldova’s Human Capital for (dVET), as employability is 10 percent higher Growth than the regular VET. The ICT programs offered To address challenges in access to preschool in vocational schools should be modernized and education, a new funding formula should be incentivized. Second-chance education and e- introduced and implemented. The new formula learning programs should be developed and of funds allocation to institutions should be based offered to early school leavers, children, and on a per-capita principle, with specific adolescents with disabilities, and those from coefficients to support children from disadvantaged families to increase their chances disadvantaged groups of the population. It needs of inclusion and employability. The same to be supported by legislative changes that would approach should be used in the process of the require local authorities to adequately finance post-COVID-19 learning recovery. preschool education institutions and ensure Policies for higher education should give universal access, including for children with priority to enhancing program quality and disabilities, Roma children, and children from labor market relevance. Occupational profiles rural areas. and qualification standards should be drawn up In primary and secondary education, the with the participation of employers. Internal and emphasis should be on quality and equity. external quality assurance mechanisms, such as In addition to continuing efficiency reforms, professional accreditation of programs, should be current policies should be directed toward developed, and the involvement of both improving the quality of teaching and teaching employers and employees in the education conditions and strengthening the student, teacher, process should be strengthened. and school assessment systems to ensure quality Internationalization should be recognized as a education services for all children. Pre-service potential force to raise the quality of education and in-service teacher training should be adjusted programs. University financing mechanisms to align with international best practices and the should be based on performance indicators. current pandemic situation including by Lifelong learning should be incentivized to developing digital skills, soft skills, and address the challenges confronting both the competencies to support children and young employed and the unemployed. Universities people transitioning into adulthood and preparing and VET institutions, which currently have no them for life (including school-to-work significant role in the lifelong learning market, transition). To further strengthen the quality of should be given incentives to provide short-term education, and in line with the provisions of the adult training programs, especially considering National Strategy on Strengthening Parental the declining student population, to ensure Skills 2016–2022, greater emphasis should be continuous rebooting of employee skills and placed on engaging parents as partners of equipping them to better contribute to the teachers contributing to better learning outcomes economy. for children, adolescents, and youth. Throughout education service delivery—from The VET system needs to be modernized with pre-primary to lifelong learning programs— an emphasis on building digital skills. there is a need to concentrate on the recovery The curricula should be increasingly demand- from COVID-19-related learning losses and 68 See a case of Denmark: Lifelong Learning Strategy | Eurydice (europa.eu), Lifelong learning | Ministry of Children and Education (uvm.dk) 98 Moldova Policy Notes 2021: STRENGTHENING EDUCATION OUTCOMES AND SKILLS improving system effectiveness, inclusion, and such that all Moldovan children and youth resilience to future disruptions. This means receive opportunities to develop the knowledge making better use of data for decision-making and skills required to thrive in the 21st century; and, related to this, accelerating the use of (iii) instill greater resilience in the system in the technology-enabled solutions at scale to face of shocks and crises; and (iv) foster learning (i) increase the effectiveness of the education acceleration, which is very important to fight the system by providing personalized, responsive, learning loss caused by the COVID-19 pandemic. and high-quality learning; (ii) ensure inclusion This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Denis Nikolaev, Lucia Casap, Flora Kelmendi, Anna Olefir, Subhashini Rajasekaran, and Caryn Bredenkamp. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 99 Moldova Policy Notes 2021: EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES Moldova has implemented its Digital Moldova Strategy 2020 with investment and policy advancements, helping achieve a good level of connectivity and digital government. However, the market remains concentrated by the distortive presence of the SOE Moldtelecom, with a persistent digital divide between rural and urban and across socio-economic groups and genders. About 72 percent of the wealthiest households have access to computers, compared with just 36 percent among the poorest. Moreover, about 50 percent of households are connected to broadband while the average for ECA is 77 percent. Integrating digital inclusion in the Digital Strategy and leveraging digital technologies would expand access to jobs and overall upward mobility and help ensure that transformation does not exacerbate inequality. Currently, Moldova is attracting foreign talent through special visa provisions, while tapping into the local, and particularly rural, population and upskilling it to help close the skills gap needed to sustain the already growing exports of IT and IT-enabled services (ITeS). Moreover, aligning with European acquis such as General Data Protection Regulation (GDPR), and global data protection and cybersecurity standards would be beneficial, building on legal and regulatory frameworks that are broadly in place for e-ID, privacy, cybersecurity, and data protection. Catching up on regulatory frameworks would be also important in the area of new technologies, such as artificial intelligence (AI), blockchain, and the Internet of Things (IoT). Finally, expanding services to citizens, particularly at the municipal level is an important priority to be targeted building on the robust and modern Digital Government horizontal infrastructure (MConnect system, e-ID system, digital authentication, and payment services). As COVID-19 has clearly demonstrated, countries at the advanced spectrum of digital development were better able to cope by adjusting their health care, education, social services, and commerce to an online environment as well as mitigating economic losses overall. Key Actions Area Short term Medium term Digital  Adopting regulations to implement  Expanding regulatory framework divide infrastructure sharing to include policies aimed at  Developing financial strategies including ensuring an equitable digital incentives for rural broadband in ‘white transformation zones’, addressing last-mile challenges  Implementing the strategies for (Ministry of Infrastructure and Regional broad connectivity Development and Ministry of Finance) Competition  Introducing enabling regulation to increase  Restructuring Moldtelecom, and competition in the mobile telephony and possibly privatizing it (Min. of broadband markets Infrastructure and Regional Dev. and public property Agency) Digital Skills  Conducting gap analysis on the current  Implementing policies and digital education system, including higher programs to boost digital skills education and training and digital education (Ministry of Education) New  Expanding regulatory framework to include  Implementing measures for Technologies new technologies (artificial intelligence, introducing the new technologies blockchain IoT) Cyber-  Expanding regulatory framework to include  Implementing cybersecurity and security cybersecurity policy pertaining to threat data privacy protection (Deputy analysis and prevention, coordination Prime Minister for Digitization/ mechanisms, and to strengthen data privacy State Chancellery/ e-Governance Agency) 100 Moldova Policy Notes 2021: EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES Where Moldova Stands Now Figure 38. Device and internet adoption (%) Moldova’s digital industries—its electronic communications sector, information technology (IT) and IT-enabled services (ITeS) sectors, GovTech with foundations such as digital ID, payments, and data exchange—have been performing well for the past decade. Public and private stakeholders foresee further growth, but also a range of challenges. The most lagging segments of digital development are digital skills Source: Eurostat, 2015. and addressing the skills gap, technology There is also a rural-urban broadband divide. absorption by enterprises, and ensuring digital About 70 percent of the population uses the inclusion across the most vulnerable groups of internet, but 61 percent of all fixed broadband the population. (FBB) is in the capital and other urban areas. Communications Almost 22 percent of rural localities have no fixed broadband internet access and, in many The communications sector, especially the others where networks are present, speeds are less internet market, has been growing steadily. than 30 Mbps. The Moldova Digital 2020 By early 2021, about 50 percent of Moldovan strategy, similar to many other countries, sees households, up from 22 percent in 2010, were 30 Mbps as the baseline for user needs today. connected to fixed broadband and subscribed to mobile services. About 70 percent of households Few people are connected to higher speeds, have access to computers, which positions creating a risk that Moldova could slip below the Moldova reasonably well globally and sets the EU, where the target for 2025 is for all stage for the adoption of such digital services as households to be connected to broadband at public interaction with government agencies and speeds higher than 100 Mbps. In Moldova, only e-commerce. Moreover, international rankings of 7 percent of all internet connections reach such retail internet access speeds typically feature speeds, and about 50 percent operate at 30 to Moldova in the top 20 countries in the world. 100 Mbps. At the same time, only 35.7 percent of the poorest The next phase of FBB development is to households have access to computers, showing extend networks beyond the economically huge inequality in access. more lucrative urban centers. The current The connectivity market has low formal situation suggests that the market in its current barriers to entry, but it is concentrated. Three form has stabilized—growth rates are moderate. mobile network operators operate in Moldova When compared with EU member states with low along with over 100 internet service providers FBB penetration, the growth rate of penetration (ISPs). However, two of the three mobile of services in Moldova appears to lag. Targeting operators share almost 85 percent of the market, rural areas that are not yet connected could bring with the share of largest at over 50 percent. The a second round of growth. There are mainly two largest fixed broadband provider also has over 50 reasons for the limited penetration and adoption percent market share, and the top three account of FBB networks in rural areas: (i) service for almost 90 percent of the market. providers see the business case for those areas as unviable because of the higher costs of deploying 101 Moldova Policy Notes 2021: EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES networks and perhaps lower revenue because relative price among Eastern Partnership (EaP) users do not see broadband as attractive or countries. Although an improvement from affordable; and (ii) there may be obstacles to previous years, it is still much higher than the UN competitive service provision. Broadband Commission’s proposed target of Figure 39. Fixed broadband household 2 percent of GNI per capita. Moldova’s low GNI penetration trend and projections (%) per capita may also explain why entry-level broadband plans are relatively unaffordable and why the market has yet to develop much beyond urbanized areas. A major distortive factor in the market is the presence of state-owned Moldtelecom (MTC), which still has a sizable market share. Multiple efforts to privatize MTC have failed, and the company also owns much of the passive infrastructure (e.g., ducts), especially in rural areas, and does not allow access to competitive Source: Ministry of Finance (MoF). operators on technical grounds, even though the regulations promote sharing. In addition, MTC is Mobile broadband (MBB) networks—which often given preferential treatment, such as being are cheaper and faster to deploy—appear to awarded a mobile telecoms license without be the access networks of choice in rural areas. contest and at a low entry fee. Its tariffs cannot be Three MBB 3G networks cover 99 percent of the regulated by the industry regulator, but instead, Moldovan population, while three 4G networks require government approval. cover 33 percent with three networks. However, because MBB services do not always offer the MTC also has significant social obligations same speed and reliability as FBB, it is useful to which, despite their importance, are not have a mix of both available nationwide. This sustainably designed. Reorganizing MTC to would allow for businesses and households to separate social business lines, while renewing the connect to FBB services, while individuals and effort to privatize the company, could promote temporary applications (e.g., for logistics competition and allow private investment in tracking or field-based staff) could use MBB. rural, as well as urban, connectivity. Explicitly FBB is especially important for enabling the next defined and funded programs to attain social generation of digital applications, such as AI, objectives can boost their sustainability. Efforts advanced manufacturing, and financial services. should therefore focus on reducing the costs of The positive trend of subscribers shifting from network deployment to open new markets, 3G to 4G continued in 2020, with 4G adopting measures to increase competition, and subscriptions growing by 7.2 percent, while 3G offering incentives that improve market subscriptions saw a 10 percent decline. outcomes. The affordability of broadband remains an IT and ITeS sectors issue in Moldova, though this remains The growth of Moldova’s IT and ITeS comparable to international averages. subsectors has been steady, and a considerable New users, especially those who are less well-off, volume of its exports are in ICT services. may be finding the unavailability of reasonably However, the links between IT firms and the priced entry-level broadband plans a barrier. cross-sector digitization of businesses are still Almost 60 percent of Moldovans not connected tenuous. About 22,000 people work in ICT, and to the internet report that they cannot afford the many well-paid jobs are available for highly access device. Entry-level broadband plans cost skilled workers. According to WTO data, exports over 5 percent of GNI per capita, the highest in telecoms, computer and telecommunications 102 Moldova Policy Notes 2021: EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES services grew at 26.4 percent in 2018 and at 14.7 To promote the growth of the IT industry, a 2019, and this trajectory is expected to continue “startup visa law” has simplified access to if Moldova can keep up by addressing its skills Moldova’s labor market for qualified IT gap. specialists. Private sector stakeholders are not sure how well this will attract international There are clear growth opportunities; the EU- workers but recognize it as a step forward. Moldova Association Agreement could help to The Ministry of Economy and Infrastructure is grow trade links, and global industry analysts defining an ICT industry competitiveness are beginning to take an interest in the roadmap through 2023. In addition to improving country. Many stakeholders (public and private) infrastructure, it will focus on capacity agree that IT jobs could more than triple over the development, the business and startup ecosystem, next decade if the business climate, infrastructure and investment promotion. Meanwhile, the such as IT parks, and skills training programs Ministry of Education is moving to upgrade keep growing. Growth has been stimulated by a school ICT curricula and infrastructure. vibrant and well-organized private sector, support The number of graduates in ICT-related fields— from the public sector, and the increased visibility about 6,500 annually—is higher as a share of of Moldova in the global IT industry. The graduates than in Bulgaria, Hungary, or Romania, Association of Information and Communications though smaller than the EU or OECD averages. Technology Companies (ATIC) has been a significant contributor. The number of digital Employers and industry representatives are startups has been increasing rapidly in recent critical of the quality and relevance of skills of years. graduates in terms of meeting their demand. Some policy restrictions also limit the potential However, the current scarcity of talent could for closer industry-academia collaboration: IT hold the Moldovan IT industry back, industry professionals are not formally allowed to especially compared with regional peers. teach at universities even part-time unless they IT industry representatives report that it is have advanced degrees and pedagogical becoming more difficult for firms to find talent certification. In any case, a focus on and predict the problem will get worse as improvements in higher education alone cannot technological change accelerates, shifting client make up for weaknesses in primary or secondary demand and the skills needed. Concerns are schooling. Although efforts are increasing to growing that many qualified (especially young) expose younger students to digital technologies, professionals are leaving the country. Some these are ad hoc and not fully integrated into the digital firms estimate that half their technical curriculum or teaching system. employees who resigned in the past few years have emigrated. There is also anecdotal evidence Not much information is available on the that many companies are “poaching” IT “horizontal” use of digital tools and professionals from other firms, which could drive technologies in other sectors such as banking, up wages. Interviews with stakeholders suggest tourism, and agriculture. Data suggest, for that supporting IT professionals and graduates to example, that Moldova’s businesses have been set up businesses in Moldova could encourage slow to adopt digital technologies. In the most them to remain in the country. recent Enterprise Survey of 360 formal Moldovan firms with five or more employees, for example, Although they realize the need to address the only about 60 percent had websites or used email skills constraint, few local companies invest in to conduct business. In the Czech Republic, the training current staff, either due to limited finding was 90 percent and in Poland, it was over means or little interest. Though private sector 80 percent. It is perhaps significant that, in terms efforts coordinated by the ATIC and supported by of ICT goods as a share of all goods imports since the Government are seeking to remedy this, more 2010, Moldova’s share of about one-third is effort is needed. lowest among comparator countries and is 103 Moldova Policy Notes 2021: EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES significantly less than Central European and to modernize administrative services through Baltic averages. its re-engineering and digitization. The project conducted an inventory and horizontal review of GovTech existing administrative services and is focusing In the past decade, the Government has made on the modernization of selected services (85 in significant strides in modernizing the public total), including those related to the civil service, sector and administration using information social assistance, and business registration. and communication technology (ICT). The project also aims to roll out 80 centers for The Government set up the e-Government assisted service delivery in rural areas for the Agency, a high-capacity institution responsible disadvantaged and vulnerable, and in consular for implementing GovTech solutions in public offices abroad for the diaspora. In addition, administration and the modernization of public through GovTech Global Partnership Multi- services. The World Bank-financed Governance Donor Trust Fund, the World Bank is supporting e-Transformation (GET) Project (2011–16) put in the Government to implement e-Archive and e- place an enabling legal and regulatory Local Public Authorities platforms. framework, established a governmental Cloud, How Moldova Can Promote Digital and deployed several shared platforms, such as Development and GovTech MConnect, MPass, MPay, and MLog, to name a few, allowing for further public modernization In support of digital development, the and enhanced service delivery. Moldova was Government has adopted the Broadband among the first countries in the world to Development Program for 2018–20, the implement Mobile Signature (MSign) and among Strategy for Increasing the Competitiveness of the first countries in the region to establish an the IT Industry for 2015–21, and the Digital open data portal. Moldova 2020 Strategy and the Government’s Digital Transformation Program for 2012–20. Citizens’ access to government services is at Building on these programs and recognizing the the top of the Government’s public importance of the private sector in the administration reform agenda, but access to communications and IT and ITeS subsectors, the digital services remains low. The Government following actions to promote digital development has already partially digitized around are recommended. 178 services and made them accessible through a single electronic platform. In addition, the Communications Government has published information on The primary policy objective should be to 649 government administrative services provided increase access to high-speed broadband (100 by the central government authorities (out of the Mbps+) while ensuring affordability (entry-level total of 680 services available) through the Public broadband priced at less than 2 percent of GNI Services Portal (https://servicii.gov.md/). per capita). This builds on the current targets for While Moldova has the ICT infrastructure and 2020 of the broadband penetration rates of at least digital consumers ready to communicate, engage, 60 percent of households and connecting every and interact with the Government through digital town with a municipal office to fiber internet. channels, physical access or assisted access to The recommended way to attain this goal is to digital administrative services is still necessary reduce the costs of network deployment and for the most disadvantaged and vulnerable. encourage competition in the market. In the short Low penetration of smartphones among mobile term, this would be supported by the following: devices and a lack of broader internet access continue to hinder online access. • Apply the Law on Infrastructure-sharing comprehensively by defining regulations and The Government, with support from the enforcing them. The law to encourage the World Bank-financed Modernization of sharing of infrastructure, and reduce the costs Government Services (2017–2023), continues 104 Moldova Policy Notes 2021: EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES of broadband network deployment, was and promote innovation and entrepreneurship; passed in 2016. It can be implemented fully doing more to advance digital literacy and skills by: (i) the coordination of public agencies or beyond the IT industry, for both the current and SOEs that own property or telecom-ready future workforce; and accelerating the infrastructure, such as municipalities and digitization of businesses so that they can utilities; (ii) creation of a digital increase their productivity, access to markets, and infrastructure map; (iii) simplifying the innovation. In the short to medium term, permitting processes; and (iv) reinforcing the therefore: capacity of ANRCETI, the electronic • Promote entrepreneurship, innovation, and communications regulator, to enforce the applied ICT skills by including these subjects law. in the curricular and extra-curricular • Financially support the promotion of rural education at the senior high school and higher broadband connectivity in “white zones”. education levels. Support the development of Identify geographic areas where it will not be children’s innovation and ICT skills, building possible for commercial services to be on existing initiatives. provided within a reasonable timeframe (e.g., • Increase the relevance of education curricula three years), and work closely—through a by engaging the private sector and industry in process that is open, competitively neutral, the development and delivery of ICT courses. and transparent—to define a program to Promote partnerships with IT sector reduce the risk for private investors to expand businesses/professionals to provide higher access into those areas. education students with opportunities, such • Use regulation to increase competitive as innovative labs or IT mentorship pressure. It will be important to strengthen programs, to increase the relevance of student the process of market analysis and ex-ante skills upon graduation. competition regulation by ANRCETI and to • Continue and scale up current collaborations reinforce its mandate. of the public and private sectors, supporting • To further increase competition, restructure the IT industry to improve quality and shift to MTC, and consider privatizing it: Create a higher value-added products and services; strategic plan for the company’s corporate and increasing the awareness of younger restructuring and market repositioning so that students and their families about digital skills it can meet the challenges of competition and and jobs. technological convergence. If there is a case • Undertake short-term programs to quickly for privatization, in addition to adopting a train un- and underemployed people to find short-term, low-cost, high-impact strategic work in digital industries, for example plan to generate rapid improvement in its through virtual IT parks, in IT and ITeS performance, it will also be necessary to firms, and IT applications in other sectors. define the parameters of successful privatization in terms of, for example, target • Support digitization of SMEs. Identify pilot ownership structure, the pace of the sectors to test out training approaches for transaction, and investment requirements. businesses and individuals to develop and IT and ITeS improve their digital competencies and skills; set up a program—possibly implemented by Moldova has an opportunity to position its IT ODIMM, the SME Development Agency, and ITeS subsectors for robust growth and the and the ATIC—to link local IT expertise with creation of more inclusive digital jobs across businesses to identify and implement digital the economy. This calls for continued support to upgrades, potentially with a focus on SMEs. digital industries to make them more inclusive 105 Moldova Policy Notes 2021: EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES GovTech of data centers and the transition to a hybrid cloud model. Moldova should continue its efforts to digitize public administration and modernize public • Developing measures to attract and retain services in line with the Government’s Program high-skilled IT staff in the public sector, on its digital transformation. The creation of the through offering competitive salaries, a range new position of Deputy Prime Minister for of non-financial incentives, and flexible work Digitization responsible for the implementation arrangements. of the digital transformation agenda puts GovTech among the main government priorities. • Further digitization of services by making The World Bank is committed to further them proactive and mobile-friendly, supporting the GovTech agenda through the including services for the diaspora, such as e- implementation of the Digital Transformation Consular service. Consular services are Action Plan 2021–2022 recently proposed by the particularly relevant in Moldova’s context Deputy Prime Minister for Digitization. given the large diaspora and the importance The World Bank will continue the of remittances in household incomes. implementation of the Modernization of • Improve access to digital services through Government Services project and GovTech the country-wide roll-out of the centers for technical assistance. At the same time, it will also assisted service delivery in rural areas to initiate a dialogue with government counterparts reach the disadvantaged and vulnerable. on the potential continuation of the digital transformation agenda, building on previous • Implementation of modern disruptive results. Further assistance might include: technologies (blockchain, AI, big data, machine learning, IoT) to enhance public • Support in the development of the new administration, service delivery, and data GovTech strategy (the previous strategy analytics. Support in the development of expired in 2020), to set the vision and legal and regulatory frameworks for principles for further digital transformation emerging technologies to ensure consumer using modern technologies and enhancing protection regulation is in place prior to the data governance and use. Long-term commercialization of new technologies. planning should include the sustainability of digital government platforms and solutions. • Development and implementation of a data The sustainability planning should include governance framework to enhance the use of financial provisions for maintenance, data for evidence-based policy and decision- upgrades, and ongoing operational support of making. digital platforms. It should also ensure the • Enhance cybersecurity and data privacy, availability of IT professionals to support through the approval and implementation of introduced platforms. the new cybersecurity program (the last one • Improve cross-institutional coordination expired in 2020). Going forward, one of the mechanisms, interoperability provisions, and priorities should be to similarly strengthen internal change management to overcome cybercrime legislation, regulations pertaining the “analog” mindset among public servants to cyber threats and prevention, as well as regarding government services. cross-institutional mandates and the coordination of cybersecurity, by further • Further strengthening of the government aligning them with new European and Cloud, through continuing the consolidation international standards. 106 Moldova Policy Notes 2021: EXPANDING INCLUSIVE DIGITAL DEVELOPMENT OPPORTUNITIES This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Sandra Sargent and Constantin Rusu. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 107 Moldova Policy Notes 2021: MULTIMODAL TRANSPORT AND LOGISTICS MULTIMODAL TRANSPORT AND LOGISTICS The 2013–2022 National Transport and Logistics Strategy improved decision-making and strategic planning in the transport sector and supported regulatory and legislative harmonization with EU standards and legislation. However, a new multimodal sector strategy needs to be developed recognizing the comparative advantage of each transport mode, providing opportunities for PPPs in developing logistics centers and strengthening international connectivity. The recovery from the COVID-19 pandemic offers new opportunities for reshaping transport systems to be more resilient, efficient, sustainable, and equitable. The misalignment of allocation of resources across transport modes to sector objectives has impacted the efficiency and reliability of the railway sector and increased the attractiveness of less climate-friendly road- based modes. During 2007–16, the Government spent more than €1 billion on the maintenance and rehabilitation of its road network, while railway infrastructure rehabilitation received less than €150 million. The modal share of railways in Moldova is currently low at about 15 percent of freight traffic and less than 1 percent of passenger traffic. These unbalanced allocations Restructuring the railway transport system to increase its institutional, operational, and investment efficiency is key for the sustainable development of the country. At the same time, the road sector could benefit from measures to strengthen institutions and their capabilities to manage the sector. Moldova has a high rate of road fatalities, more than twice the average rate in the EU. It is also one of the few countries in Europe that do not have direct user charges (tolls) that could underpin greater financial sustainability. The efficiency of Road Fund spending and prioritization could be improved, and modern road maintenance practices based on performance rather than inputs need to be introduced. The increase in urbanization, with the urban population rising from 38 percent in 2014 to 57 percent in 2020, has increased the pressure on cities and towns to deliver efficient, adequate, and affordable services and utilities. Chisinau suffers from serious traffic gridlocks and flooding, investment backlogs in public transport, and limited alternative mobility solutions, which have increased dependence on personal cars. Key Actions Area Short term Medium term Transport  Developing a new national  Rebalancing funding to align with new and transport and logistics strategy national transport and logistics strategy Logistics  Building back better by introducing resilience in transport infrastructure design and construction Railways  Adopting the new Railway  Initiating the restructuring of Moldova Transport Code Railways Company (CFM) Roads  Developing a Road Safety Strategy  Implementing the road safety strategy  Introducing mid-term and performance- based maintenance contracts  Developing a road sector financing strategy, including with direct user charges feasibility Urban  Developing a strategy for using  Promoting initiatives to increase the use of Mobility alternative and more active modes alternative and more active modes of travel of travel (e.g., cycling) (e.g., cycling) 108 Moldova Policy Notes 2021: MULTIMODAL TRANSPORT AND LOGISTICS Where Moldova Stands Now While the condition of the road network has seen major improvements in recent years, this Moldova currently has a reasonable amount of improvement is not sufficient. In 2013, only transport infrastructure. This includes one 26 percent of the network was assessed as being international airport, one primary international in good or fair condition, but by 2019 this ratio river port, 5,850 km of national roads, 3,494 km had increased to almost 44 percent, 71 with more of local roads, and 1,157 km of railway track. than 50 percent of the national and regional road However, the condition and efficiency of the network being in poor condition. In 2019, the transport infrastructure are far from Global Competitiveness Index 72 compiled by the acceptable. In 2019, Moldova’s roads carried World Economic Forum ranked Moldova at 126 63 percent of passenger traffic and 85.5 percent out of 140 countries for road quality. of freight, while rail carried just 0.4 percent of Figure 40. Quality of road infrastructure, national passenger traffic and 14.5 percent of freight. 69 and regional roads, IRI, % Roads 29.65 28.72 24.59 22.83 26.2 26.33 In recent years, the national road network has 13.8514.58 6.65 6.61 received a large amount of investment, mainly financed by international finance institutions Excellent Good (IRI 2- Fair (IRI 4-6) Slightly Heaviley (IFIs), which have committed €429 million for (IRI<2) 4) damage (IRI damage (IRI national road rehabilitation. The World Bank has 2019 2020 6-8) >8) contributed another US$80 million to rehabilitate Source: Road Fund report 2020. 150 km of local roads. The improvement and proper maintenance of Allocating sufficient funds to local rural roads the Priority Road Network of Moldova is a is a poverty reduction priority. Almost two- major objective of the National Transport and thirds of Moldovans live in rural areas. However, Logistics Strategy (NTLS). The Strategy such investments should be done efficiently. provides comprehensive estimates of the Since most jobs in Moldova are in urban areas, spending required to maintain the national adequate transport connectivity and mobility are network for 2013–22. However, the funding crucial for economic growth and development. transferred to the Road Fund has been far less For instance, it has been proved globally that than the Strategy targets. limited access to transport decreases the probability that women will participate in the Table 4. Road Fund execution, 2015–20 labor market by 16.5 percent, which can have a Million 2015 2016 2017 2018 2019 2020 MDL significant impact on the economy. 70 Road Fund 1,063 1,015 1,447 1,330 1,400 2,229 Policymakers also need to consider different Revenue Collection mobility needs and travel patterns. Road Fund 1,038 1,000 1,079 1,072 1,077 2,556 Roads consume the largest part of the Budgetary Allocations transport budget. Moldova spends about Road Fund 641 1,000 1,779 1,682 1,790 2,237 1 percent of its GDP annually to maintain the transfers road network. Because the Road Fund represents Transfers to 641 1,000 1,079 972 1,024 1,605 SRA a large share of public investments, the efficient Transfers to ---- ---- 700 710 766 632 and transparent use of its resources is critical. LPAs Arrears 229.6 100 69 www.Statistica.md 72 http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenes 70 International Labor Organization. sReport2019.pdf 71 In 2017, 3,494 km of local roads were transferred from the State Road Administration to local public authorities to manage; this has influenced the figures related to the condition of the roads 109 Moldova Policy Notes 2021: MULTIMODAL TRANSPORT AND LOGISTICS Figure 41. Road Fund financing, NTSL, and road How Moldova Can Enhance Road Sector fund transfers Financing Efficiency To advance the road maintenance reform action plan, the following actions are recommended: • Prepare necessary amendments to the legal framework to require that any new capital investment in the road sector be accompanied by adequate maintenance funds. Predictable Road Fund transfers Source: State Roads Administration. would permit the Ministry of Economy and Infrastructure and the SRA to manage road Decentralization has affected the assets strategically. Historically, most of the administration of road infrastructure. In 2017, funds were allocated starting in October—too the management of 3,494 km of local roads was late in a year to allow the SRA to plan transferred from the State Road Administration efficiently. The late allocation also creates a (SRA) to local public authorities (LPAs). disproportionate workload near the end of the The transfer of the assets was complemented with year and underutilizes funds because it a 42 percent share of the Road Fund’s resources misses the construction season. As soon as to be transferred and used directly by LPAs to they are collected, the funds must be maintain and repair local roads. transferred for utilization. A mechanism Maintenance of the primary road network has should also be introduced to transfer been substantially underfunded and the unutilized resources of the Road Fund into cumulative impact is concerning. the next budget year. Amending the law to The economic cost of poor maintenance is borne create a dedicated Treasury account primarily by users and service providers in the exclusively for Road Fund transfers is form of higher operating costs. For example, recommended. when a road is allowed to deteriorate from good • Modernize maintenance practices by using to poor condition, every dollar saved on medium-term and performance-based maintenance increases vehicle operating costs by contracts. Two actions are necessary to US$2 to US$3. 73 Maintenance is also important ensure continued progress in road to the investment strategy because the loss in the maintenance: (i) introduction of mid-term capital value of infrastructure caused by lack of maintenance contracts, which will allow for maintenance can significantly exceed the cost of the efficient planning and execution of the maintenance required to maintain that value. maintenance activities (current contracts are The Road Maintenance Reform Action Plan limited to one year); and (ii) introduction of has brought some improvements. The 2012 performance-based maintenance contracts, Government Decision Nr. 244 on “Reform of the which are usually for three or more years. Road Maintenance System” was the legal basis • Allocate Road Fund resources based on a for the reorganization and provided an action plan long-term maintenance plan. Sound for 2012–17. Consolidation of the 38 district road maintenance management and methods will maintenance enterprises into 12 new companies, help to sustain the utility and economic which began in 2011, is now completed and the effectiveness of road assets. That involves 12 new companies are fully operational. This lifecycle planning of maintenance resources would reduce operating costs. and the efficient delivery of the work. 73 Notes on the Economic Evaluation of Transport Projects, World Bank, January 2005. 110 Moldova Policy Notes 2021: MULTIMODAL TRANSPORT AND LOGISTICS Maintenance investments should be as the main strategic planning tool and the core prioritized within an integrated Road Asset of the road safety funding mechanism. Management System (RAMS). How Moldova Can Enhance Road Safety • Build up the capacity of the local • Enhance the capacity of the Executive construction industry. For efficient road Bureau of the National Council on Road maintenance and construction in a Traffic Safety to efficiently manage road competitive market, there is a need for safety in the country. contracting firms of all sizes to undertake projects ranging from minor maintenance to • Allocate dedicated funding for the Bureau large-scale major road construction. and its activities. To achieve the full benefits of using the • Prepare a new Road Safety Strategy and private sector, the workload contracted must allocate funding for its implementation. be of adequate size, and realistic competition between local contracting firms offering • Enhance the crash data system in line with the competitive prices needs to be established. Common Accident Data Set. Experience with work on current IFI- financed contracts in Moldova demonstrates • Adopt and implement EU 2008/96 Directive that the country’s local contracting capacity on road infrastructure safety. is inadequate. • Enforce Safe Speed Limits and road safety- Safety on the Roads related legislation (helmet usage; child restraint systems; mobile phone usage while While Moldova is recording an overall decrease driving, etc.). in the total number of registered road crashes, this remains high compared with other countries Railways in the region. In 2020, Moldova recorded the Railway transport in Moldova has lost a third-highest fatality rate (9.24 fatalities per significant volume over the past two decades. 100,000 inhabitants) benchmarked against the The weakness of the rail sector in Moldova other countries in the Eastern Partnership (EaP) jeopardizes the economic development of the region and EU-27. Moldova’s fatality rate is country, as it reduces the competitiveness of higher than the EaP and EU-27 average fatality many participants: (i) exporters, who need to be rates by 10.4 percent and 54.5 percent, reliable suppliers offering a satisfactory level of respectively. The estimated socio-economic order fulfillment; (ii) importers, who need to limit cost of road crash fatalities and injuries is their inventories without compromising the 3.1 percent of the GDP. While the Executive ability to fulfill orders; (iii) producers/processors, Bureau of the National Council on Road Traffic who maintain a lean operation by synchronizing Safety is responsible for road safety the arrival of inputs with their processing coordination in the country, it lacks capacity schedule, while still being responsive to and dedicated funding. A Road Safety Strategy individual orders from their clients; and to address the current road safety crisis is (iv) shippers of transit cargo, who have to lacking. More sustainable and gradually coordinate transport services in multiple increasing funding for road safety measures countries. should foster better cooperation and partnership between key road safety partners. The railway can play a vital role in developing An investment plan for road safety could serve a green transportation system and providing safe and affordable transport services. 74 74 In 2014, Moldova adopted the Environmental Strategy for 2014– 2023, which sets a GHG reduction target of 20 percent by 2020 compared to 1990 levels to be achieved through energy efficiency 111 Moldova Policy Notes 2021: MULTIMODAL TRANSPORT AND LOGISTICS Considering the EU ratio of GHG emission by • Outsource non-core activities that are not modes of transport (railways generate only financially viable. 0.6 percent of the total GHG emissions produced by the transportation system, while road transport • Establish a tariff policy consistent with the produces 71.7 percent), a developed railway commercial approach of railway activities. system will significantly help accomplish its aims • Implement a reliable costing system in on GHG reduction. Railways can also provide a railway company(-ies). much safer system of transport. In 2018, there were 366 fatalities related to road transport, while • Identify mechanisms for financing public rail transport recorded only seven fatalities. transport of passengers. The long-lasting neglect of investment in • Identify mechanisms for financing railway railways in favor of roads has contributed to infrastructure. the gradual decrease of the quality of rail • Strengthen the corporate management of services and the loss of market share. railways. The Moldova Railway Company is in a vicious circle of underinvestment and decrease in the • Implement mechanisms to measure the demand for its services, with fixed costs performance of railway company(-ies). remaining high and requiring government • Decide on the role of the private sector in the support to avoid bankruptcy. Rail traffic has railways. reached minimum levels for both freight and passengers, while the company still employs Public Transport and urban mobility about 7,500 staff. The adoption of new structural Chisinau attracts about 60 percent of total arrangements to comply with the EU railway industrial production, 70 percent of long-term acquis, as part of the planned restructuring, investments, and half of the employment represents a good opportunity to reconsider how opportunities in Moldova. Due to this, the city has best to capture more of the regional railway a strong inflow of new residents, and this rapid market. suburbanization is putting pressure on the city’s How Moldova Can Revive Its Railway Sector infrastructure and services. In the process of reviving the railway sector, The City of Chisinau’s public transport system is political commitment is considered key for aging and experiencing deteriorating service success, as both the Government and Parliament quality amidst increasing overall demand for play a leading role in championing the framework transport. Buses, and trolleybuses, which are and policies that are needed for the CFM to heavily used, are often operating at or near develop and implement reforms. The following capacity during peak hours. Moreover, the city’s issues need to be clarified by the Government to transport plans are not well coordinated with build a new business-oriented culture in the overall urban development plans and are not railway industry and create an enabling responding to spatial expansion, growing environment for successful reform motorization, or changing mobility patterns. implementation: These factors are contributing to traffic congestion, deterioration of air quality, increases • Clarify the role of the state in its relationship in travel time and costs, increases in road traffic with the new railway company(-ies). crashes and casualties, and loss of productivity. • Address historical debts of the railways. The lack of a developed public transport network and limited alternative mobility solutions • Adopt a commercial approach for all (cycling tracks and improved pedestrian activities of the railway company(-ies). infrastructure) has increased car dependence. In addition to transport supply issues, the nature 112 Moldova Policy Notes 2021: MULTIMODAL TRANSPORT AND LOGISTICS of transport demand is also changing. reduce fleet requirements. Encouragingly, demand for greener transport is • Develop the transport modeling and increasing leading to public calls for government service planning tools needed to action. reorganize routes and services to enhance Investing in Chisinau’s urban transport systems mobility, eliminate redundancies, and can provide the basis for strengthening the city’s increasing value from operating competitiveness is a must. Improving the subsidies. reliability and quality of urban mobility, as well as ensuring coherent and enhanced traffic • Develop additional revenue streams to management are keystone for the overarching support public transport investment using objectives of enabling increased levels of charges on private modes of transport production and service delivery. (e.g., parking, area permits, cordon schemes); How can Moldova improve urban mobility and public transport in Chisinau? • Enhance non-motorized transport infrastructure adjoining to public • Pursue modernization investments in transport nodes (cycle paths, pedestrian fleets, control systems, infrastructure, paths, waiting areas) to increase mobility and ticketing to increase the efficiency of and ease of integrated trip-making. service delivery and reduce operating subsidy requirements. • Pursue universal accessibility standards so that all residents (including • Allocate additional road space and individuals with disabilities) have access intersection priority to public transport to public transport services. vehicles to increase revenue speed and This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Elena Lungu. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 113 Moldova Policy Notes 2021: ADDRESSING ENERGY SECURITY AND SUSTAINABILITY ADDRESSING ENERGY SECURITY AND SUSTAINABILITY Over the past 20 years, Moldova has undertaken significant reforms of its energy sector through cost- reflective pricing, independent regulation, and the promotion of efficient operations and investments. However, energy security continues to be a central concern due to the country’s high dependence on energy imports and supplies from single-source suppliers of gas and electricity. While Moldova has reduced primary energy imports from about 97 to 82 percent and has diversified petroleum products supply, many important sustainability and security challenges remain. The sector continues to be characterized by highly concentrated gas and electricity markets, aging power generators, unresolved issues of historical debts, and low diversification of the power-generation mix. To build a more resilient energy sector, Moldova should diversify its power-generation mix and expand supply and transport options for both gas and electricity. This could be achieved through the strengthening of links with European power and gas networks, upgrading and increasing of local power generation capacities, further implementing comprehensive reforms in the area of sustainable heating, and promoting renewable energy generation. Properly executed, these measures would minimize the risk of supply disruptions, allow the country to access competitively priced electricity and gas and to develop local energy markets, promote more rational and efficient use of energy within the boundaries of the whole of Moldova, and move toward closer integration with regional and EU energy markets. Key Actions Area Short term Medium term Transmission  Implementing appropriate cost recovery  Preparing for and methodologies synchronization and Distribution  Completing unbundling and certification of interconnection with EU the transmission system operators including software and  Strengthening gas and power transmission capacity building for system links with the EU—quick implementation operators of the Vulcanesti-Chisinau 400kV OHL and  Rationalizing markets for the Back-to-Back interconnection between electricity and gas Moldova and Romania (ENTSO-E) for including participation in timely completion and the smooth EU and Ukraine markets operation of the Iasi-Ungheni-Chisinau gas for gas and electricity pipeline  Exploring strategic options for grid resilience in preparation for renewable integration and synchronization with ENTSO-E Power  Exploring options for diversification of power  Increasing the share of Generation supply through financial and physical sustainable and efficient instruments allied with neighboring countries power generation, especially competitively bid private sector investments in renewables District  Improving energy efficiency of district  Improving energy Heating heating through timely implementation of efficiency by expanding gas major renovation and new combined heat procurement options, and power (CHP) installations settling of historical debts, and promoting global “best practices” in pursuing biofuel and waste 114 Moldova Policy Notes 2021: ADDRESSING ENERGY SECURITY AND SUSTAINABILITY Where Moldova Stands Now Renovation of the National Stock of Buildings through to 2030 in Moldova will help in A. Institutional Structure and Policy achieving existing national commitments. Environment Moldova’s energy territory, however, remains Moldova implemented fairly successful energy split between the right and left banks of the sector reforms at the end of the 1990s and the Dniester River (RBD and LBD respectively); beginning of the 2000s, with the partial and Moldova’s energy sector reform agenda, as privatization of electricity distribution and the well as its legal and regulatory provisions, are still establishment of an independent energy sector not applicable on the LBD (Transnistria). regulator (ANRE). Following further progress in the implementation of reforms, in 2010 Moldova The largest power generation companies on became a member of the Energy Community the RBD, namely: Termoelectrica (306 MW), (EnC) Treaty and is now striving to join the CHP-North (CET-Nord, 24 MW), and the European energy market to foster competition hydropower plant (HPP) Costesti (16 MW), are and increase the security of supply, as well as to state-owned and subordinated to the Public reduce energy poverty and increase energy Property Agency (APP). Termoelectrica was affordability. created in 2015, following the merger of CHP-2 (CET-2, 240 MW), CHP-1 (CET-1, 66 MW), and Moldova’s Electricity and Gas Laws of 2016 Termocom (heat supply company in the capital provided for numerous major changes in city of the country - Chisinau). MTPP, commonly operations of the national electricity and gas known as MGRES (2,520 MW), on the LBD, is sectors. Participation in the EnC and major currently owned by Inter RAO Group of Russia regional developments over the past decade have and operates as a power producer based on the further boosted substantial reforms in Moldova’s license issued by ANRE for periods not energy sector since 2016. These changes were exceeding six months. 75 The national electricity enforced by ANRE’s regulations adopted in transmission network is operated by TSO recent years, particularly in 2019–20. These Moldelectrica, a state-owned enterprise (SOE) include new Electricity and Gas Market Rules, administrated by the Ministry of Infrastructure Electricity and Gas Network Codes, and new and Regional Development (MoIRD), electricity procurement rules. Other major succeeding in this function the former Ministry of developments include the adoption of the RES Economy and Infrastructure [MoEI]). 76 Law (2016, effective since October 27, 2017), the Certification of TSO Moldelectrica by ENTSO-E Energy Efficiency Law (2018), the Third has not yet occurred. Three out of the five former National Energy Efficiency Action Plan 2019– electricity distribution companies on the RBD 2021 (2019), and implementation of pertinent were privatized in 2000, forming DSO RED regulations by ANRE. Moldova is currently in Union Fenosa, which in turn was taken over in the process of updating its Energy Strategy 2019 by DSO Premier Energy Distribution. The through to 2030 (2013), while the National other two distribution companies (DSO RED Energy Efficiency Program 2011–2020 (2011) Nord-Vest and DSO RED Nord) remained SOEs, and the National Action Plan for RES 2013–2020 subordinated to APP, and merged in 2017 into (2013) are to be replaced by new policy DSO RED-Nord. documents, such as the National Energy and Climate Plan through to 2030. Completion and The gas sector is still dominated by adoption of the draft Long-term Strategy and Moldovagaz (with majority shareholding by Roadmap for Mobilizing Investment in the Gazprom), the sole importer and the only Inter RAO: https://www.interrao.ru/en/activity/generation/ and 75 76 https://mei.gov.md/ro/content/fost-stabilit-topul-celor-mai- ANRE licenses: https://www.anre.md/registrul-de-licentiere-3-134 transparente-intreprinderi-cu-capital-public-moldelectrica 115 Moldova Policy Notes 2021: ADDRESSING ENERGY SECURITY AND SUSTAINABILITY wholesale supplier of natural gas to Moldova with gas, electricity, and heat generation prices (in both the RBD and the LBD). 77 Moldovagaz is for consumers on the LBD not increasing the founder of two transmission system operators significantly. The heat generated (RBD) in 2019 (TSO Moldovatransgaz [RBD] and TSO was 36 percent lower than in 2005, while Tiraspoltransgaz [LBD]), 18 distribution electricity generation decreased by 23 percent companies (12 DSOs in the RBD and six DSOs compared with 2005. This was attributed in the LBD), and four other companies. 78 TSO primarily to gas (import) price increases since Vestmoldtransgaz, created in 2014, is operating 2005, and consequently for gas-fired heat and the new gas pipeline Iasi-Ungheni-Chisinau electricity generation. In 2020, electricity between Moldova and Romania and is affiliated generation on the RBD slightly increased, while to TSO Transgaz of Romania, being today the heat generation decreased further due to a milder only TSO in Moldova certified under EU rules. winter (January-February 2020). Certification of TSO Moldovatransgaz is still Figure 42. Moldova’s TES, 2018 pending. Moldova: RBD and LBD B. Key Energy Indicators The total installed generation capacity in Moldova is nearly 3 GW, with an overwhelmingly uneven geographical distribution, with 433 MW in the RBD and 2,566 MW in the LBD. The power sector is therefore unevenly split between the RBD and the LBD, with 80 percent of the electricity supplied to the RBD from only two sources: a 2,520 MW 79 thermal plant, MGRES (LBD, Transnistria), and imports from Ukraine. Moldova: RBD only Moldova’s Total Energy Supply (TES-both RBD and LBD) is dominated by gas, followed by petroleum products, biofuels, and waste-to- energy. The use of biofuel accelerated in 2009, potentially as a substitute for expensive gas, and has continued to have a significant share in TES since then. While large hydro, wind, and solar are present, their proportion is small. About 75 percent of TES is being supplied to the main part of the country, the RBD, while the remainder is supplied to the LBD (Transnistria). Between Moldova’s energy intensity is still high 2010 and 2019, Moldova saw significant compared with the EU and some other decreases in the RBD in terms of both heat and regional countries. According to IEA, energy power generation, as well as gas consumption, intensity in Moldova (RBD and LBD with the sharpest fall occurring in the period combined) 80 is double that of the EU average 2005–15. These decreases were on the RBD only, (2019). 81 During the past decade, Moldova 77 Note: there are currently 26 gas suppliers holding ANRE’s largest power plant (MTPP/MGRES) and the large part of the licenses: https://www.anre.md/registrul-de-licentiere-3-261 former USSR industry is located. Source: IEA public database. 78 https://www.moldovagaz.md/rom/despre-companie 81 Based on national statistical data Moldova’s (RBD) energy 79 Including 1,600 MW of coal-based generation capacity which has intensity is close to the EU average and in the lower range of EnC not been operational for over two decades. countries. 80 IEA data includes, additionally to the RBD energy consumption, some of the LBD energy consumption (mainly gas), where the 116 Moldova Policy Notes 2021: ADDRESSING ENERGY SECURITY AND SUSTAINABILITY (RBD) achieved significant improvements in proceeds. Additionally, this is important to ensure energy intensity indicators through numerous a reasonable level of comfort for households, energy efficiency measures implemented in particularly in rural areas, where more than half industrial and other energy-intensive processes. of the population resides. In 2019/2020, the Nonetheless, the main decrease in energy average bulk electricity price (RBD) was consumption resulted from excessive energy US$0.06/kWh, 82 while the retail tariff was price increases in the decade after 2005. US$0.10/kWh. The price of electricity is largely derived from the bulk price of gas, which Total energy supply per capita in Moldova averaged US$233.7/tcm (US$6.6/MMBtu) 83 in (according to both IEA and national statistical 2019 —a threefold increase from 2005 (RBD). data) is among the lowest in Europe, or about In 2019, the average retail gas price was one-third of the EU average, while electricity US$270.8/tcm (US$7.65/MMBtu), showing a consumption per capita is the lowest among 16-percent spread to account for service and EU, EnC and FSU countries. Thus, it can be retailing costs. While this margin is reasonable in assumed that, even with energy efficiency US dollar terms, in local currency the trend shows measures being implemented, energy the largest margin in 2017, with narrowing consumption in Moldova will likely continue to margins thereafter (ANRE, 2020). increase as Moldova’s economic recovery Figure 43. Evolution of electricity prices (RBD) Figure 44. Evolution of gas prices (RBD) Currently, Moldova has no gas storage solidifying Gazprom’s control over the gas capacity, and the gas sector is dominated by a transmission and transit network. For decades, single company, Moldovagaz, in which gas transit through Moldova played a major role Gazprom has a controlling stake (50 percent locally and regionally. With the plus one share). The administration of operationalization in 2020 of the TurkStream gas Transnistria holds a 13.4 percent share, but its pipelines bypassing Ukraine, gas transit through rights are also transferred to Gazprom’s control, Moldova toward the Balkans decreased to about thus making the state of Moldova a minority 10 percent of its previous annual levels. After stakeholder, at 35.3 percent. The gas TSO completion of the Nordstream 2 gas pipeline Moldovatransgaz is a subsidiary of Moldovagaz, project, which also bypasses Ukraine, the current 82 Figure 39 presents data in units of “c$/10kWh” which is US (source: ACER/CEER Annual report on the results of monitoring cents/10 kWh. the internal natural gas markets in 2019, fig. 11, page 32, 83 Compare with 3.6 to 7.3 US$/MMBtu for European Union natural https://documents.acer.europa.eu/Official_documents/Acts_of_the gas imports, or US Henry Hub (HH) gas price of 2.22 to _Agency/Publication/ACER%20Market%20Monitoring%20Repor 3.11 US$/MMBtu in 2019. Moldova’s bulk gas price is higher than t%202019%20- all EU and Energy Community bulk gas prices, except Finland %20Gas%20Wholesale%20Markets%20Volume.pdf) and double the highest HH gas price in 2019. 117 Moldova Policy Notes 2021: ADDRESSING ENERGY SECURITY AND SUSTAINABILITY gas transit routes through Ukraine will become The companies supplying only heat struggle to even more unviable, increasing the risk to future remain viable, and many had to close. Since 2015, gas supplies to Moldova through these traditional trends are more stable, but only 10 companies routes. To increase the security of gas supply and have survived, including three companies that ensure alternative gas supplies (routes; sources restarted their activities in 2020, after a long and suppliers) to Moldova, the Iasi-Ungheni- period of being shut down. Chisinau gas pipeline with Romania was Improving conversion inefficiencies in CHPs finalized and became operational on October 4, and heat-only boilers (HOBs) remains an 2021. immediate priority. The heat supply tariffs from Aging power infrastructure and its 2009 to US$228/GCal (around US$119 to concentration in the LBD: The most recent US$904/MMBtu, or US$7.2 to power plant additions or extensions occurred US$54.5/Gigajoules), including from 2019 to 40 years ago. Even after the mothballing of the 2021, US$54 to US$80/GCal (around US$214 to 1,600 MW coal-fired generation units in MGRES US$317/MMBtu, or US$12.9 to (LBD), nearly 70 percent of the generation US$19.1/Gigajoules). capacity is still located in the LBD/Transnistria, For district heating companies still in and the plants are all more than 35 years old. To operation, heating tariffs are currently within continually build resilience in the power grid, the range of those of European tariffs, which Moldova should focus on timely completion of are however able to have a more diverse fuel the 400 kV Vulcanesti-Chisinau OHTL link, base. In Moldova, companies closed operations pursue ENTSO-E synchronization as a priority, between 2011 and 2013, when heating tariffs and promote well-designed investments in wind were double current ones. Heating tariffs in many and solar power generation. There is also a need cases exceeded the affordability level of to look into power trades with neighboring consumers, who as a result discontinued use. The countries. timely implementation of critical infrastructure High cost and inefficiencies in CHP improvements in district heating should be a companies: A combination of heavy reliance on priority. Supported by the World Bank-financed natural gas for heating, the inefficient conversion District Heating Efficiency Improvement Project of old boilers, and a rapid transition from (DHEIP), Chisinau has embarked on a subsidized pricing to the full market price of gas comprehensive institutional, corporate, and are responsible for high heating costs. Figure 45 financial restructuring, supported by investments shows the pricing trends for 14 heat supply in operational modernization. The timely companies, including the two large district implementation of DHEIP-2 is a strategically heating companies: Termoelectrica (former important priority. CET-1 and CET-2) and CHP-North. Figure 45. Heat supply pricing from CHPs and HPs (RBD) 118 Moldova Policy Notes 2021: ADDRESSING ENERGY SECURITY AND SUSTAINABILITY The health and climate impacts of rising different synchronous systems: namely, fuelwood use among Moldovan households. IPS/UPS and ENTSO-E, aimed at integration In 2019, fuelwood consumption in RBD was into EU electricity markets. The asynchronous more than natural gas and electricity combined. interconnection consists of the installation of a The rapid increase in biofuel and waste use in 600MW Back-to-Back (BtB) station and the TES began after 2005, in response to high gas construction of a new 400kV Vucanesti-Chisinau prices, and is currently at around 20 percent of overhead transmission line. The Government’s TES and 48 percent of residential energy decision is based on a series of World Bank- consumption. A deeper evaluation of fuel supported technical studies, which identified that switching to biofuels and waste-to-energy should an asynchronous interconnection is a least-cost be undertaken, with a focus on reviewing biofuel option for the energy security of the country. It sourcing and renewal, as well as the efficiency of was also confirmed that an asynchronous conversion processes. interconnection is economically viable regardless Integration into European energy markets. of the timing of the ENTSO-E synchronization, One of the key elements influencing Moldova’s which allows the Ukraine and Moldova power energy sector developments and integration into systems to be part of the ENTSO-E synchronous European energy markets is its membership since area. Moreover, recent studies conducted by the 2010 of the Energy Community. The Energy ENTSO-E consortium identified that the BtB Community acquis, based on adapted and interconnection will help stabilize the entire adopted EU directives and regulations, is binding synchronized power grid. Hence, the for Moldova. This acquis includes EU provisions asynchronous interconnection with ENTSO-E regarding common rules for the internal markets should be implemented as soon as possible for in electricity and gas, conditions for access to the energy security, lower cost, and market network for cross-border exchanges in electricity integration. and gas, wholesale energy market (electricity and Figure 46. Moldova’s residential energy mix gas) integrity and transparency, measures to (RBD, 2019) safeguard the security of electricity and gas supply, competition rules, energy efficiency, RES and other provisions. The EU-MD Association Agreement, signed in 2014 and effective since 2016, also includes some of these EU directives and regulations. Moldova is well advanced in the transposition of the Energy Community acquis but is lagging in the implementation of some of its key provisions. The Government made a strategic decision in 2018 to implement an asynchronous interconnection with ENTSO-E power grids, which allows for the connection of two This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Sandeep Kohli, Koji Nishida, and Natalia Timofte. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. For any questions regarding this note, please contact moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 119