Republic of Moldova - Competitiveness recommendations

EASTERN EUROPE AND SOUTH CAUCASIS INITIATIVE

SUPPORTING SME COMPETITIVENESSIN THE EASTERN PARTNER COUNTRIESFocus on the Republic of Moldova

Peer Review at OECD EurasiaCompetitiveness RoundtableParis, 4 December 2013 With the financial assistance

of the European Union

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OECD GRS Private Sector Development 2CONFIDENTIAL – NOT FOR DISTRIBUTION

OECD Eurasia Ministerial conference in Warsaw, June 28R. of Moldova volunteered to be reviewed by OECD and Eurasia peers

High-level representatives from Eurasia countries endorse the concept of peer review and establish the OECD Eurasia Competitiveness Roundtable


What is peer review and why is it effective?

An examination of one state’s performance or practices in a particular and well-defined area by other states

Peer review relies on mutual trust among the states involved, as well as their confidence in the process

Peer review is a discussion among equals with no enforcing mechanisms

Peer reviews encourage open dialogue and knowledge-sharing on policies under review

Peer reviews are highly effective due to peer advice and pressure

Peer review mechanisms are the main discussion platform among OECD members


Assessment results of the SME Policy Index 2012 for MoldovaSME policy assessment based on 92 indicators across 10 policy dimensions

Access to finance for SMEs and Support services for SMEs and start-ups were selected as priority areas for additional research and peer review

With the financial assistance of the European Union

Monitors the implementation of the Small Business Act for Europe in the six Eastern Partner Countries in 10 policy dimensions

Developed in collaboration with the European Commission, European Training Foundation and EBRD under the SME Panel of the EU Eastern Partnership

SME Policy Index 2012

1. Entrepreneurial learning and women's entrepreneurship2. Bankruptcy and second chance for SMEs

3. Regulatory framework for SME policy making

4. Operational environment for SMEs

5A. Support services for SMEs and start-ups

5B. Public procurement6. Access to finance for SMEs

7. Standards and technical regulations

8A. Enterprise Skills

8B. Innovation

9. SMEs in a green economy

10. Internationalisation of SMEs

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OECD GRS Private Sector Development 5

Fostering SME policy in the Republic of Moldova since 2010Overview of main project phases

Phase I:

SME policy assessment

(10/2010-06/2011)

Phase II:

Prioritisation and formulation of SME policy(07/2011-10/2012)

Phase III:

Implementation of SME policy and peer review

(11/2012-12/2013)

• In-depth SME policy review of the status of implementation of the ten principles of the EU Small Business Act;

• Publication “Fostering SME Development in the Republic of Moldova”;

• Resulting in a number of policy recommendations and strategic priorities for SME policy reform.

• Elaboration of the national SME Development Strategy 2012-2020 and Action Plan 2012-2014;

• Priorities of the SME strategy resulted from the policy recommendations of the SME policy report and an updated assessment of the SME Policy Index: Eastern Partner Countries 2012;

• Further inputs collected from the local SME community through public-private consultation meetings.

• Endorsement of the SME Strategy by the DPM Lazar on 15 October 2012 in Chisinau.

• Following the launch of the SME Strategy two priority areas were jointly identified by the OECD, the MoE and ODIMM to provide targeted support in the implementation of the strategy;

• Priority area 1 – Improving access to finance for SMEs;

• Priority 2 – Enhancing business support services;

• Two action plans for reforms have been developed through a number of surveys, focus group discussions and public-private working group meetings which are submitted for peer review


The Republic of Moldova in the peer review process Roundtable participants to comment on current practices and guidelines

Peer review workshop with lead reviewers held on 10-11

October in Chisinau

Eurasia Competitiveness Roundtable

OECD reviewer

on Access

to Finance

Country work on

1. Access to Finance

2. Business support services

OECD reviewer

on Business Support

Services

Republic of Moldova

Presentation of the country work to peers

January – October 2013 3-4 December 2013, OECD Headquarters in Paris

The peer review process is expected to stimulate policy reform implementation

in the Republic of Moldova

Turkey / Netherlands Germany


Project results to be peer reviewed include a policy assessment and action plans for reform in access to finance and business support services

Business support services

Assessment of 2 SBA policy areas for SME

competitiveness

Action plans fortargeted reforms

How to enhance the legal and regulatory framework? How to expand and diversify sources of external finance? How to enhance financial literacy?

How to stimulate the development of a private business service support infrastructure?

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Guidelines and recommendations developed based on consultative processes with in-depth involvement of civil society and business associations

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Access to Finance for SMEs


What are the major policy challenges and guidelines on how to improve access to finance in the Republic of Moldova?

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Key characteristics of the financial sector in the Eastern Partner CountriesBank financing is limited across the region

Domestic credit provided by banking sector, 2012 (% of GDP)

Source: World Bank, 2013, World Development Indicators

The banking sector in the Eastern Partner Countries differ in terms of development and sophistication, but all countries share common challenges:

• Low bank lending: 26.7% of GDP on average in 2012

• Low ratio of banking sector assets to GDP: 74% on average in 2011

• High interest rates varying between 13.4% and 22%

• High collateral requirements: on average 129.6% in 2008-2009

• High concentration in the banking sector: asset concentration of top 3 banks was 45.5% on average in 2011

Armenia Azerbaijan Belarus Georgia Moldova Ukraine0

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OECD av-erage,

206.1 %

Lending interest rate, 2012 (%)

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OECD average*, 4.9%

* For the OECD average data for following countries was used: Australia, Canada, Chile, Czech Republic, Estonia, Hungary, Iceland, Israel, Italy, Japan, Mexico, Netherlands, New Zealand, Switzerland, United kingdom, United States

42.2%

13.4%


Assessment framework for Access to finance for SMEs

Access to finance for SMEs

Sources of external finance for SMEs Legal and regulatory framework

• Credit guarantee schemes

• Public start-up funds

• Business angels framework

• Microfinance facilities

• Leasing

• Availability of risk credit (e.g. venture capital, private equity funds)

• Access to stock market

• Cadastre

• Credit information services

• Registration system for moveable assets

• Collateral and provisioning requirements

• Creditor rights

• Availability of risk credit (e.g. venture capital, private equity funds)

• Access to stock market

Other factors that affect demand and supply of finance

• Financial literacy


Results of the SME Policy Index 2012: Access to Finance remains one of the main challenges to address across the region

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Moldova

Ukraine0

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3.002.74

2.50

3.52

2.65 2.59

The average score for the Eastern Partnership countries in access to finance was 2.83.

Source: EU, ETF, EBRD, OECD, SME Policy Index: SME Policy Index 2012, EBRD and World Bank, 2008-2009, BEEPS

Progress in the development of the legal and regulatory framework is mixed across the region:

• Collateral and provisioning requirements are relatively restrictive in all EaP countries

• Cadastre and credit information systems are developed in Armenia and Georgia and a unified collateral registry is in place in Georgia and the Republic of Moldova.

• Enforcement of creditor rights remains weak in all EaP countries.

Other sources of external finance remain limited:

• Instruments such as leasing, business angels, microfinance facilities, credit guarantee schemes and risk capital are generally undercapitalised and underused

• Public support for SMEs is relatively small and limited by fiscal constraints in most countries (apart from Azerbaijan)

Financial literacy remains low across the region


Republic of Moldova: Need to further enhance the legal and regulatory framework and improve financial literacy

•Land fully registered in the Republic of Moldova, the cadastre is available and accessible online

• A private credit bureau has been established in the Republic of Moldova. Access to credit information is provided subject to a fee, if requested more than once per year, however coverage is limited

•A central collateral registry is in place and under the control of the Ministry of Justice, however, movable assets cannot be registered or used as collateral

•Law on insolvency defines creditor rights, however improvements in the judicial system are required to ensure effective enforcement

•Financial literacy initiatives have been developed by ODIMM and some commercial banks (Victoriabank, FinComBank). However, a national policy and institutional framework is not yet clearly defined and established.

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Republic of Moldova Average in the region

Source: EU, ETF, EBRD, OECD, SME Policy Index: SME Policy Index 2012


Collateral • High collateral requirements are a major impediment for SMEs

Lack of basic infrastructure, inputs, managerial efficiency and comprehensive guidelines

• Most SMEs do not have basic or well-planned infrastructure, especially if they are recently founded

The excessive centralisation of the banking system

• About 70% of the assets from the entire banking system are concentrated in the municipality of Chişinău

Lack of information on loan application requirement among the SME loan

seekers

• Credit application requires availability of adequate information• The lending process becomes laborious when all required documents

are not presented fully and on time

Absence of an appropriate and clear-cut legal framework for enforcing quick

recovery

• Low standard of creditor rights enforcement limits bank control over the serving of loans – limited legal guarantees that the disbursed loans will be recovered

Limited information concerningthe credit history

• Credit history data is available since October 2012• Only commercial banks share clients’ credit history• Participation needs to be extended to non-banking financial

institutions as well as to leasing companies.

Key constraints limiting access to bank finance – legal, regulatory and financial literacy issues


Guidelines to enhance the legal and regulatory framework for the financial infrastructure and improve financial literacy for SMEs

Enhance the regulation of microfinance

institutions and leasing entities

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Expand the coverage of the Credit Bureau

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Extend the variety of collateral

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Support SMEs in business planning and financial management

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• Improve information and transparency requirements (e.g. ownership and price transparency), capital requirements, financial reporting (e.g. auditing requirements), credit evaluations standards and risk management

• Introduce new types of collateral, namely secondary guarantees, accounts receivables and warehouse receipts

• Incorporate information from non-banking financial institutions to achieve comprehensive coverage of credit history information

• Enable financial coaching• Provide credit counselling on dealing with debt situation• Provide information on how to access these services and training • Link enterprises to available donor and government programmes

Improve SMEs’ capabilities in accessing finance

5 • Develop SMEs capacities in promoting their business ideas • Increase their communication skills when negotiating the loan• Launch credit education campaigns on building credit knowledge and

positive skills and behaviours


Republic of Moldova: Need to expand and diversify sources of external finance for SMEs

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• The banking sector in the Republic of Moldova is small: total assets account to 66% of GDP (2012). There are 14 commercial banks. Most of them are privately owned, some have foreign participation. Banking sector is highly concentrated with five largest banks that account for about two-thirds of total assets

• There are 73 micro-finance institutions in the Republic of Moldova with assets worth 1.6 billion lei (~920 mil. EUR). Top 10 MFI concentrate about 80% of the total assets. Current regulation for microfinance institutions is only very general, prudential norms for microfinance institutions are not established

• Two credit guarantee schemes exist in the Republic of Moldova but they are underused and the rate of coverage is too low (50% of the loan amount, 70% for rural start-ups)

• Top ten leasing companies hold 90% of the total assets, and the four largest hold 70%. Their activities are barely regulated

• No national venture capital fund exists; some foreign funds are operating in the country

• Access of SMEs to the stock market, public financial support and private equity are limited

• Business angels associations are non-existent Source: EU, ETF, EBRD, OECD, SME Policy Index: SME Policy Index 2012


Access to loan • Banks are reluctant to provide loans to SMEs due to high processing and monitoring costs.

Extremely short grace period • SMEs have to start the repayment of credit within a very short time after disbursement of the credit.

Insufficient loan amounts • The amounts of money offered to SMEs as loans are too small for their business projects.

Cost of loan • The cost of loans due to high interest rates was a major constraint before and during the crises period in 2008-9.

The running period of loans • SMEs are mainly granted only short-term loans.

Lack of basic infrastructure, inputs, managerial efficiency

and comprehensive guidelines• Most SMEs do not have basic or well-planned infrastructure,

especially if they are recently founded.

The excessive centralisation of the banking system

• About 70% of the assets from the entire banking system are concentrated in the municipality of Chişinău.

SME constraints in accessing bank finance


Guidelines for the Republic of Moldova on how to expand and diversify sources of external finance

Encourage special credit products to SMEs

Promote products, consultations and training for SME

financing

Bring improvements to the grace period for

SMEs

Improve banks’ credit risk management

• Diversify the range of products and services offered exclusively to SMEs• Banks need to define SMEs as a separate target market• Banks need to create a separate product division designed for SMEs• Consider creating SME products associated with special services

• External sources offered to commercial banks by international organisations could bring improvements to the grace period for SMEs

• Decentralise banking services to rural areas• Provide information and consultancy directly to potential clients• Banks should focus on an improved customer service

• Understand the SME market• Develop products and services• Acquire and screen SME clients• Manage information, staff and knowledge

Increase the usage of the public Credit Guarantee Fund

• Increase the coverage rate • Extend co-operation with commercial banks• Promote the fund and raise awareness

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What are the major policy challenges and guidelines on how to improve business support services in the Republic of

Moldova?

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The role of Business Development Services for SMEs

BDS add value to goods and services, allowing businesses to compete more effectively, access new markets, operate more efficiently, and be more profitable. BDS address fundamental institutional constraints and develop markets quicker and more effectively

SMEs •These represent the actual or potential clients of BDS providers

BDS Providers •They provide services directly to SMEs

BDS Facilitators •They support BDS providers, by promoting good practice, building provider capacity, etc.

Donors •They provide funding for BDS projects and programmes

Governments •Like donors, they may provide funding for BDS projects and programmes

THE BDS ECOSYSTEM


Assessment framework for Support services for SMEs and start-ups

Support services for SMEs and start-ups

SME support services Business information for SMEs

• Government action plan on business services

• Range of business services

Support-services for start-ups

• Business information jdshfkjhdjkfhdgjhgjsdsdkghskdjgh

• Quality of online portal

• Business incubators

• Advisory services support for start-ups

• Financial services support for start-ups (vouchers, grants, etc.)


Results of the SME Policy Index 2012: Business support services are developing across the region

The average score for the Eastern Partner Countries in business support services was 2.71.

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3.28

2.122.41

2.92

3.79

1.77

•The market of private business service providers is developing in all EaP countries, however, it is mostly dominated by international consultancy firms that target large firms and not SMEs

•Business services for SMEs are often limited to public support schemes and sustained through donor-funded programmes

•Business information for SMEs is available all over the region through websites providing basic information

•Among EaP countries, several business incubators have been set up recently through donor-funded programmes

• In comparison with other EaP countries, Moldova’s performance on business support service delivery is above average on all indicators measured. A wide range of start-up services are provided by the government and the private sector, mostly based on donor support, however the development of private business service providers remains limited



Results of the SME Policy Index 2012: Business support services in Moldova

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SME support services Business information for SMEs

Support services for start-ups

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•A network of seven business incubators is developing to facilitate company start-up in the Republic of Moldova. Additional incubators are maintained by AITT as well as academic and private-sector institutions

•Most BDS providers offer information, training and consultancy services for standard BDS activities such as start-up, financial reporting and legal and regulatory issues

• Information, training and consultancy services are typically free of charge and supported by the government or through donor initiatives

•For consulting services, a higher percentage of services are either co-financed through public support or paid by the beneficiary

•BDS providers are almost exclusively located in urban areas, they are mainly NGO in form and they remain small

•The percentage of complex BDS paid for is very low. This suggests underutilisation and potential to enhance the range, quality and take-up of such services in the future



Main challenges of business support services to address from a demand-side perspective

Mismatch between demand and supply for business support services

•30% of companies reported that they do not require any of the available service

Lack of awareness•20% of companies reported either that they could not

identify or are not aware of the benefits of the available services

Capacity or willingness to pay •17% of companies considered available services as too expensive

Lack of expertise •Most firms indicated that better quality would increase their willingness to pay for services

Geographic coverage •Existing BDS rarely cover SMEs situated in rural areas

Source: OECD Survey, 2013


Guidelines to improve business development services in the Republic of Moldova

• Establish a coordination forum: quarterly meetings of key stakeholders• Evaluate BSIs: assess whether public funds and development models are

effective• Determine priority support programmes to strengthen BSIs and mobilise donor

and state funds

• Undertake capacity building to diversify training and consultation services• Review business associations capacities, services, funds and technical support for

better quality BDS provision, diversification of services• Implement quality standards and certify business development services

• Strengthen and make sustainable the AgroInform/ACSA services• Develop a stronger emphasis on non-agricultural economic development

• Scale back free BDS provision• Scale back direct state BDS provision• Stimulate BDS market development through co-financing initiatives

• Promote business development services through websites, databases, etc.• Establish an association of consultants • Raise the awareness among entrepreneurs of the potential benefits of BSI /

BDS in terms of raising productivity, efficiency, market share, profitability, etc.

Strengthenpolicy

coordination

Fill-in the rural gaps in BDS

provision

Strengthen NGOs and business

associations to provide BDS

Deepen the emerging BDS

market

Raise the awareness, quality

and trust of BDS provision

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Next steps

Peer review of project results in Paris on 3-4 December at OECD Eurasia Competitiveness Roundtable

All Eurasia Partner Countries are invited to:

Read the reports and the recommendations

Provide comments on how to further improve the recommendations, taking into account their own country’s experience in strengthening access to finance and developing business support services

Prepare questions to the delegation of the Republic of Moldova with regards to their challenges and next steps in the reform agenda

Republic of Moldova - Competitiveness recommendations

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