SECTOR ANALYSIS REPORT - gov.md Report Final ENG.pdfFINAL DRAFT, August 15, 2007 4 ACKNOWLEDGMENTS...

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FINAL DRAFT

CHISINAU, JULY 2007

FINAL DRAFT, August 15, 2007

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Contents

ACRONYMS AND ABBREVIATIONS ………………………………………………………………… 3

ACKNOWLEDGEMENTS ……………………………………………………………………………. 4

INTRODUCTION …………………………………………………………………………………….. 5

EXECUTIVE SUMMARY …………………………………………………………………………….. 6

METHODOLOGY …………………………………………………………………………………… 12

CHAPTER 1. INITIAL SECTOR ANALYSIS ………………………………………………………….. 13

1.1. CROSS-SECTOR OVERVIEW …………………………………………………………….. 13

1.2. SECTOR-SPECIFIC ANALYSIS …………………………………………………………… 17

1.2.1. AGRICULTURE AND AGRO-PROCESSING ……………………………………….... 17

1.2.2. INDUSTRY ……………………………………………………………………….. 22

1.2.3. SERVICES ………………………………………………………………………... 27

1.3. SELECTION OF SECTORS FOR FURTHER ANALYSIS ……………………………………... 30

CHAPTER 2. IN-DEPTH SECTOR ANALYSIS ……………………………………………………….. 34

2.1. FRUIT & VEGETABLE SECTOR …………………………………………………………. 34

2.2. WINE SECTOR …………………………………………………………………………. 55

2.3. TRANSPORTATION SECTOR ………………………………………………………….… 81

ANNEXES ………………………………………………………………………………………….100


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ACRONYMS AND ABBREVIATIONS

AAMV - Agro-industrial Agency “Moldova-Vin” ACSA - Agency for Consulting and Training in Agriculture ADP - Agribusiness Development Project API - Agro Processing Industry BSTDB - Black Sea Trade and Development Bank CIS - Community of Independent States EBRD - European Bank for Reconstruction and Development EU - European Union FDI - Foreign Direct Investment FIA - Foreign Investors’ Association F&V - Fruit and Vegetables FVI - Fruit and Vegetable Industry GAP - Gross Agricultural Product GAPP – Gross Agro-Processing Product GDP - Gross Domestic Product GIP - Gross Industrial Product Ha - hectare [unit of land] HIC - High Income Countries HVPP - High Value Processed Products IFAD - International Fund for Agriculture Development IFC - International Finance Corporation IFI - International Financial Institutions ITC - International Trade Centre LE - Large Enterprises LIC - Low Income Countries MAFI - Ministry of Agriculture and Food Industry MCA - Millennium Challenge Account MCC - Millennium Challenge Corporation MDL - Moldovan Lei (national currency) MET - Ministry of Economy and Trade MIEPO - Moldovan Investment and Export Promotion Organization MSS - Metrology and Standardization Service NBM - National Bank of Moldova NBS - National Bureau of Statistics NCVQAP - National Center for Verification of the Quality of Alcoholic Products NIVW - National Institute for Viticulture and Wine-making NIS - Newly Independent States NSAPC - National System of Assurance of Product Conformity OECD - Organization for Economic Cooperation and Development PFCP - Private Farmer Commercialization Program RCA - Revealed Comparative Advantage RM - Republic of Moldova RISP - Rural Support and Services Project SIAPS - State Inspectorate on Supervision of Alcohol Production SME - Small and Medium Enterprises SPS - Sanitary and Phyto-Sanitary STI - State Tax Inspectorate USAID – US Agency for International Development USD - US dollar WB - World Bank WDI - World Development Indicators


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ACKNOWLEDGMENTS

This report was prepared by MCA Moldova Sector Analysis Team comprising Eugen Hristev, Felicia Pricop and Sergiu Luchita. In particular, Eugen Hristev was responsible for services sector analysis, Felicia Pricop managed the agricultural sector analysis and Sergiu Luchita dealt with the industry analysis. The report was prepared under the supervision of MCA Moldova Team Director Valentina Badrajan. Careful review and valuable comments on the report had been provided by the First Deputy Prime Minister Zinaida Greceanii. The report development process was guided by MCC Sector Analysis Expert Jason Bauer who provided valuable feedback, comments and overall support and assistance to the study team. The team is grateful to MCA Moldova Constraints Analysis Team (comprising Valentin Bozu, Iurie Gotisan and Dumitru Caragia), Natalia Catrinescu (Head of the Policy Division, MET), as well as to Alexandru Culiuc (PhD student at Harvard Business School) for their useful comments and suggestions on the report. In addition, we would like to thank all of those in the private sector, civil society and donor projects who gave generously of their time and information, thus supporting us in conducting the in-depth sector analyses. Last but not least, special thanks to the National Bureau of Statistics and other state institutions, including MIEPO, MAFI, MET, AAMV for their important support with up-to-date statistical and sector-specific data and information.


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INTRODUCTION

The Sector Analysis (together with the Constraints Analysis) is a component part of the preliminary economic analysis aimed at providing a basis for broad consultations with constituents, and thus supporting and guiding the proposal development process. The Sector Analysis aims at identifying the opportunities for and impediments to growth that exist in key economic sectors with a view toward establishing suitable investments for government to make in order to support private sector investment.

This study has a dual aim. First, it provides an overview of the economy as a whole and analyses the relative positioning of productive sectors – agriculture, industry and services - with a view towards establishing the role each sector has to play in country’s economic performance, on one side, and contribution to poverty reduction, on the other side. Second, and this comes largely as a result of the initial assessment of major sectors, the study focuses on a limited number of sub-sectors that have been identified as potential drivers of growth with greatest impact on country-wide poverty reduction. The selected sub-sectors are then studied in depth with a view toward identifying the critical constraints inhibiting their growth and development, and testing these constraints against the macro-level constraints (identified by the Constraints Analysis).

The study is organized in two chapters. Chapter 1 presents the initial sector analysis that includes a cross sector overview, followed by a sector-specific analysis. The cross-sector overview provides a perspective on Moldova’s development pattern so far in connection to poverty reduction efforts, and focuses on establishing the role of productive sectors in this framework. The sector-specific analysis is then meant to take a closer look at each productive sector of the economy in order to diagnose its current development status and look at sub-sectors that shape each sector towards assessing their contribution to sector’s performance and growth perspectives. This analysis, complemented by a set of sub-sector quantitative indicators, lies the foundation for selection of sub-sectors for further in-depth analysis presented in Chapter 2.

Chapter 2 provides a detailed analysis of the three selected sub-sectors by use of a comprehensive framework, called the Competitive Diamond, assessing each sector from four perspectives that are complementary to each other (i) factor conditions, (ii) sector structure, strategy and rivalry, (iii) demand conditions, and (iv) related industries and supporting institutions. This inclusive approach has allowed to determine the current state of the sectors, identify sector-specific competitive advantages, both current and potential, as well as reveal the existing constraints, whose removal would allow sectors, and ultimately the economy as a whole, to develop and grow in a sustainable manner. The sector-specific constraints unveiled by this analysis represent a key element connecting the Sector Analysis with the Constraints Analysis. Weighting the sector-specific constraints against the macro constraints is a useful exercise in assessing as to how binding the macro constraints are manifested with respect to the selected sectors.

The findings and conclusions of the Sector Analysis in conjunction with those of the Constraints Analysis provide a solid basis for further consultations with the constituents to be carried out by the MCA Team. The analyzed sectors should not be regarded as indicative areas of further MCC funding, but rather as preliminary research providing baseline information for the proposal development process that is based on broad consultations.


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EXECUTIVE SUMMARY

1. Moldova resumed growth in 2000 and has firmly maintained it over the following years. Continued economic growth has been a major driver of poverty reduction. Throughout the period 2000 and 2006 the economy grew by a total of 41 percent, with average annual growth rates of 5.5 percent. Concomitantly, poverty rates strongly declined from over 70% in 1999 to less than 30% in 2005. Presently, poverty in Moldova is lowest in urban areas (14.7%) and highest in small towns (48.55) and rural areas (42.5%). The development of services and industry preponderantly in urban areas and lack of non-agricultural activities in rural areas, coupled with low productivity and profitability of farming are the main reasons for relatively high poverty rates in rural areas. Landless inhabitants of small towns, where industry is poorly functioning and demand for services is limited, find themselves in the worst-off situation. As a result, the out-of-country migration has been the alternative for most of the rural and small-town workers over the last decade.

2. The structure of Moldova’s economy has been evolving towards a rapidly increasing services sector, relatively stable industrial sector and declining agriculture (in terms of their shares in GDP). Presently services account for 56% in GDP, industry – 14% and agriculture - 15%. In a global perspective, Moldova’s economic structure appears in a transitional phase, currently close to the structure of low income countries, but showing a firm movement in the right direction. The share of services in GDP has already reached (or even exceeded) the regional average, however, Moldova lags behind most countries in the region with a large agricultural share and a relatively low industrial share.

3. The resumption of economic growth that began in 2000 has not been accompanied by an increase in total employment. Instead, total employment in Moldova has declined by 17 percent during 2000-2006. Agriculture released most of the labor (approximately 45% in seven years), industrial labor force remained steady over this period, while fast growing services increased their labor force by 23%. Overall, job destruction exceeded job creation in Moldova, which is a phenomenon specific to transition economies when the pressure of market forces drives enterprises to get rid of excess labor inherited from central planning.

4. This, in turn, has allowed increases of labor productivity, which differ greatly across economic sectors. The services sector that generates 56% of GDP employs only 33% of labor force, while agriculture that produces 15% of GDP engages over 34% of labor force. As a result, the services sector indicates a labor productivity that is 1.5 times higher than that in industry and 4 times higher than the productivity level in agriculture1.

5. Greater productivity should be achieved in the context of systems building for a competitive, market oriented economy. Productivity gains of the recent past, based primarily on labor shedding and factor reallocation, cannot be sustained over the long run. Therefore further increases in productivity should mainly come from enhanced investment and innovation. Concerted effort to develop the rural economy in particular seems to have the greatest impact on poverty reduction. Improved incentives for investment, both local and foreign, are a precondition to this development.

6. The increasing negative trade balance drags down Moldova’s economic growth. The gap between exports and imports of goods has been constantly growing and reached its maximum in 2006 (approximately 1.5 billion USD). The strong import growth has been determined by the remittance-driven increase in domestic consumption (that could not be satisfied by local

1 GDP per employee accounts for USD 4500 in services, USD 3000 in industry and USD 1200 in agriculture.


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production), as well as by growing energy prices. The growth of exports, on the other hand, has been constrained by low diversification of both products and markets. The market and commodity composition of Moldova’s exports increases country’s vulnerability to external shocks, and the 2006 wine crisis is a good proof to this.

Agro-food products account for approximately half of total exports, and industrial (non-ag) products take the other half. Presently Moldova is a net exporter of agro-food products and a net importer of industrial products. However, over the last few years the net trade in agro-food products has been diminishing, while the negative net trade in non-agricultural products has remained constant (at minus 60%), which is an alarming indicator signaling urgent action needed to improve and strengthen exports, but also improve local production to substitute for a part of imports.

7. Supporting Moldova’s transition towards a diversified and export-oriented economy would require building on country’s comparative advantages (in agriculture and agri-business) as

well as grasping prospective market opportunities (in services). Poverty reduction efforts are believed to have broader country-wide effects with emphasis on rural areas if the focus is put on:

(i) Spurring agricultural growth and productivity, this to be further supported by a

(ii) Dynamic and expanding agro-processing industry, which in addition to adding value to agricultural produce, also provides additional non-farm employment opportunities in rural areas and small towns.

(iii) Growing services should complement this process as active absorbers of labor, while enhanced business activity coupled with investments in rural infrastructure would give a “rural” direction to the expansion of the services sector.

8. The model presented above, complemented by sub-sector based analysis (both quantitative and qualitative), has allowed to narrow down the choice of sub-sectors and led to the selection of the following three sub-sectors that are seen as potential drivers of growth with the highest impact on poverty reduction in Moldova. These are:

� fruits and vegetables, both fresh and processed;

� wine;

� transportation services

The diamond approach applied to analyzing the three sectors has revealed the current status of these sectors, their comparative advantages, both current and potential, as well as the constraints inhibiting their growth in an attempt to separate between constraints that are best addressed by the private sector and those to be dealt with by the state.

9. Poverty reduction efforts in rural area and small towns will be best rewarded through the sustainable development and growth of the fruit and vegetable

sector, both fresh and processed. At the moment, significant untapped potential lies ahead the Moldovan F&V sector. A brief snapshot of the sector is presented in Figure 1 below, where the major identified constraints are highlighted in red. Concerted effort to enhance competitiveness of Moldovan F&V products, both fresh and processed, will ensure stable and expanding markets to domestic producers and processors, thus transforming Moldovan agriculture into a highly productive and profitable business.

Both fresh and processed sectors critically depend upon modernization of primary

agriculture. The under-developed fresh sector could quickly catch up and achieve international competitiveness if investments in innovative agricultural technologies and production techniques

FRUIT & VEGETABLES


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(intensive orchards and vineyards, greenhouses, new high-yielding varieties), irrigation infrastructure and marketing infrastructure (cold storages, packing houses, etc.) occur at an accelerated pace. The processing sector, much more advanced in its development as compared to the fresh sector, is currently a significant player on export markets and has excellent opportunities for expanding its presence there if three major areas of concern are properly ensured: adequate raw material supply, availability of skilled (and young!) labor force, and development of new products with high market demand.

10. The four major constraints of the Fruit and Vegetable Sector are human capital,

market infrastructure, innovation and competitiveness, as well as investment and business

climate. Accelerated investment flows, local but especially foreign, could rather quickly spur innovation and enhance competitiveness by bringing the required know-how, building new skills, modernizing market infrastructure (including irrigation) and driving quality standards while seeking to respond to the demands of international markets. Therefore, removing obstacles to investments and improving the domestic business environment is a key pre-condition.

11. Most of the identified constraints of the Fruit & Vegetable Sector can and should be

addressed by the Government. The majority requires insignificant financial resources but

essential political will in form of policy actions and institutional rearrangements. Key

constraints that require large financial resources on behalf of the state are irrigation

infrastructure and standards harmonization. Market infrastructure (cold stores, packing

houses) and part of irrigation infrastructure (i.e. on-farm irrigation equipment), on the

other side, should be private-led investment initiatives. The state, preferably in

collaboration with donors, should support and encourage these types of investments.

Successful business models are critically important acting as effective catalysts for

investments and triggers for the mass replication of success stories. This is the challenge

that presently lies ahead the Moldovan fruit and vegetable sector.

12. Diversification of export markets, getting closer to consumer needs and

improving the competitiveness might lead to sustainable development of the wine sector.

Orientation to high value markets and acceptance into large markets chains, producing of wine according to consumers’ sophisticated preferences and its efficient promotion even on traditional markets are immense challenges and in the same time opportunities of local winemakers. Moldovan wines might become more competitive within the tough competition on external markets, if the offered quality would be the best in the target price segment. Additional investments are needed for assuring high quality of grapes and modernization of production and storing processes and equipment, which would decrease production costs and increase the quality of wines. The effect of these strategic actions may be stimulated and multiplied trough liquidation of identified major constraints.

13. The most important constraints within the wine sector are of human capital, financial

capital, market infrastructure, innovations and competitiveness, and business climate. Specification of constraints might be seen into Fig.1 below, highlighted in red. The wine sector analysis results are different to some extent from those of the constraints analysis. This is due to microeconomic character of the sector study versus the macroeconomic character of the constraints analysis. Thus, results coincide to financial capital (high inflation generates high credit costs) and business climate (licenses, marks, certificates, credibility in justice) and do not coincide to human capital, infrastructure (road quality and power losses are not significant to wine enterprises) and innovation and competitiveness.

WINE


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14. The Government could figure out a major part of constraints identified with different

costs and terms. Thus, the most expensive would be the following activities: (a) strengthening institutional capacities of the NCVQAP or even of some more labs throughout Moldova (short term), (b) adjustment of standards to EU/other states requirements (short/medium term), and (c) modernization/actualization of technological instructions’ system (short/medium term). Other constraints the Government would be dealing with do not need significant resources and should be liquidated trough specific decisions and sector policy reformulations. Diminishing the inflation which would lead to decrease of the borrowed capital, represents a major concern of the Government, NBM and IMF. Other constraints could be figured out by the private business efforts.

15. Sustainable development of the wine sector can contribute to rural poverty reduction. Enterprises will continue purchasing grapes from companies and population in the next 5-7 years. In the meantime, selection of suppliers will take place depending on supplied quality and demanded price, and which would determine a more efficient co-operation with them. This process will be stimulated by the tendency of planting own vineyards by the wine enterprises. The most probably is that a part of population could not sell grapes anymore if they do not cooperate in order to increase quality and optimize costs. In the meantime, development of enterprises would lead to new jobs both unqualified (processing of vineyards and qualified (wine factories). The demand could be covered by the ex-grape suppliers labor force.

16. Transportation sector plays a very important role for the

national economy, however, due to identified constrains, its development is refrained, as a

result offering an inferior logistics and increased transportation costs for the goods moved

within and/or out of Moldova. Currently only road and railway modes of transportation may offer large scale operations in Moldova and be competitive at the regional level. Therefore, clear establishment of the priorities for the revival and development of the transportation sub-sectors is extremely important provided limited financial resources.

17. Taking into account the geographical area of the Republic of Moldova, probably there

is no other feasible alternative to the road transportation, fact which has been confirmed by

the evolution of the transportation sector in Moldova in the recent years. In most of the European countries, 85% of the freight (in terms of weight) is moved by road transport and is carried within the 150 km distance. Up to 500 km of distance, 97% of the entire freight weight is transported by the road transport. It is proved that at such distances there is no alternatives in terms of efficiency and costs. 90% (in value terms) and 80% (in terms of weight) of freight is transported on roads worldwide.

18. Identified constrains, which refrain the development of the transportation sector, may

be divided in two groups: of internal and external nature. The first one includes critical

constrains such as the quality of the road and railway infrastructure and business climate,

while the latter includes the serious disparity for transit needs between Moldovan

transportation sector via neighbouring countries and their need to transit Moldova’s

territory, which is much smaller. Infrastructure constrains represent issues of national importance, with financial tags well over current means of the state or local budgets. On the other hand, improvement of the business climate needs a more active implication from the part of the government in its endeavours to adjust to the European standards.

TRANSPORTATION


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Figure 1. Competitive Diamond Analysis for the three sectors

FACTOR CONDITIONS STRUCTURE, STRATEGY

& RIVALRY DEMAND CONDITIONS

RELATED INDUSTRIES

& SUPPORTING

INSTITUTIONS

FFRRUUIITT && VVEEGGEETTAABBLLEESS

Favorable natural resource: rich soils and warm climate adequate for production of temperate F&V.

Scarce human resources, both skilled and unskilled. Lack of young skilled labor force in small towns.

Capital resources

generally available upon collateral availability. Long-term loans are scarce.

Infrastructure deficien-cies: inadequate water quality → additional costs; irrigation is largely unavailable, but highly required; poor road condition. Electricity, gas and communications are satisfactory.

Fresh sector: vegetable production → needs investments in irrigation and greenhouses; fruit production → investment in cold storages and packing houses.

Processing sector: two major concerns - secure raw material supply and expanding markets.

Competition within the sector is regarded as open and healthy.

Minor rent-seeking actions of state bodies increase costs of doing business.

FDI is relatively low

but increasing and highly valued. Restriction on ag land ownership is a constraint to FDI.

World markets for F&V show very favorable demand trends.

Importers (both EU and CIS) demand high and consistent product quality, steady & timely supply, complete product specifications, high-quality packaging, Eurep GAP for fresh and HACCP for processed products.

Non-harmonized standards, weak labs and certification bodies, and lack of EU accreditation are major constraints to market expansion into EU and high-end CIS.

Active participation in regional exhibitions is an important learning tool.

Achieving reliable raw material supply is a big task that processors handle through both cooperation with farmers and expansion of own production.

Ag inputs are widely available, but plant variety choice is limited.

Locally produced

packaging materials do not fully meet demand.

Imported machinery and equipment, weak competition.

Weak research and education institutions, not connected to needs of market participants.

Unorganised private/

public dialogue.

WWIINNEE

Favorable climate, soil. Lack of non-qualified labor force in rural areas. Education and scientific research are overrun and not connected to the business. Credit resources exist. There are no problems with the collateral. The cost of resources is high. Insufficient credits per 10+ years’ term. Leasing is underdeveloped. Infrastructure is satisfactory. Quality of traffic roads is poor but not critical.

State – excessive role, with elements of interference, monopoly and un-loyal competition. Presence of the state in commercial enterprises’ capital, existence of state enterprises. Local competition is considered as “calm” and healthy. Presence of investments, foreign and local, is significant, but insufficient for finalizing modernization and re-equipment. The opinion on the

Production is mainly exported to CIS markets. Excessive dependence on the market of Russia. Importers often fix the prices. Enterprises diversify exports, but do not possess a short/ medium/ long term strategy for getting out of the crises, and the export prices policy is inadequate. The reduced volume of the internal market is a problem, but not critical. Low capacity of reorientation to the preferences of consumers

Vineyards degrade rapidly and have a low productivity. Enterprises plant own vineyards to control quality and production costs. The quality of grapes acquired from the population is unsatisfactory. Certain raw materials

are produced locally; auxiliary materials and winemaking equipment are imported. Competition in the domain is healthy. Efficient cooperation between winemaking


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Roads quality affects the wine-making tourism. The risk exists of blocking railways access to CIS markets. Fiscal and customs legislation is acceptable; Lack of trust in the judiciary system. State trademark, add-al investments and expenditures needed. Inadequate technological instructions. Cooperation with foreign experts, chronic dependence on them.

restriction of procurement of the agriculture terrene by foreign investors is contradictory.

on the high value markets. The production of wines in the „New World” style is necessary. The standardization system is adjusted to the requirements of Russia, and does not correspond to the EU requirements. Weak institutional capacities of the NCVQAP and high certification costs. High cost of ISO implementation.

enterprises within associations is lacking. The efforts of wine business associations and of the Government for promoting wines and the country image are insufficient. Enterprises do not

insure vineyards. The Government grants support. Participation to exhibitions, forums, trainings and other events contributes to enterprises development and promotion on other markets.

TTRRAANNSSPPOORRTTAATTIIOONN

Lack of high speed highways of national importance;

Weak correlation between the development of road and railway infrastr. with the market demand and strategy for the development of the transp. sector; Development of the European transport corridor IX for the transit goods and 4 major European highways passing through Moldova Qualified but insufficient labour force; Aging fleet and insufficient level of investments for its renewal; Lack of specialized road transportation, such as refrigerators for the transportation of agricultural products

Increased competitiveness both on internal and external markets for road transportation; Dominant position of the single state operator in the railways transportation; Tariff regulations for

passengers transportation; Lack of fiscal incentives for the development of the transportation sector; Non-harmonized legislation with the EU norms in the transportation area; Technical and logistical barriers for the border crossing procedures.

Increased volume of trade both on internal market and cross-border one; Increased amount of goods transported in transit; New EU environmental and security standards ; Regional development

programs; Demographic factors for the passengers transportation; Development of the economic sectors dependent on the transport services; Strong non-

governmental sector and associations in the transport sector.

Auxiliary and supporting services for the road and air transportation, but lack of such for the railway stock; Emerging develop-ment stage of the financial sector, including financial leasing; Emerging state of the insurance sector; Dependence of the other sectors of the national economy on the transportation sector.


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METHODOLOGY

The methodology utilized for carrying out this study has been based on the Guidelines for Conducting Sector Analysis provided by Millennium Challenge Corporation. The initial sector analysis (presented in Chapter 1) has extensively used data of the National Bureau of Statistics, which served as the major source of raw country-level data for this study2. For benchmarking and comparison purposes, relevant statistical data on other countries have been collected from available Internet resources, these including World Development Indicators of the World Bank and databases of the International Trade Center. Important qualitative data and information has been extracted from various analytical reports, which had been referenced in footnotes across this report.

A set of quantitative indicators has been identified to support and streamline the selection of most prospective sub-sectors that are seen as potential drivers of growth in Moldova. These indicators are particularly useful as a tool for ranking sub-sectors on the basis of hard quantitative evidence. More specifically, the indicators have been selected to measure sector-specific contributions to the economy, the performance of sectors domestically, including some productivity indicators, the competitive export performance in target markets, as well as some indications of the international market demand that gives a global perspective to sectors/ products under review (see Annex 6 and Annex 11).

This quantitative analysis should be regarded as complementary to the qualitative analysis performed in Chapter 1 (sections 1.1 and 1.2) and has been utilized to narrow down the choice of sub-sectors in the light of wider macroeconomic perspectives to growth and poverty reduction. This integrated approach has allowed make informed decisions as to which productive sectors of the Moldovan economy have the potential to be drivers of growth with the greatest impact on country-wide poverty reduction.

The in-depth analysis of selected sub-sectors presented in Chapter 2 has been guided by the Competitive Diamond3 methodology provided in MCC Guidelines for Conducting Sector Analysis. The analysis has been based on the results of surveys carried out with stakeholders of the selected sectors. Stakeholders included primarily the private sector, but also representatives of sector associations, donor assistance programs as well as government institutions. Individual interviews held with sector stakeholders had been guided by a comprehensive questionnaire developed to cover as fully as possible the Competitive Diamond Framework. The full list of interviewees for the in-depth sector analysis is provided in Annex A.

Survey findings had been complemented with statistical and export data on selected sectors obtained from the National Bureau of Statistics and sector related state institutions (MAFI, MET, Moldova Vin, MIEPO). In addition, world trade data and market information had been collected from the ITC Product Map (available on-line at www.intracen.org, www.p-maps.org), USAID/ADP market studies (www.export.acsa.md) and CBI market surveys (www.cbi.nl) in order to get a picture of international and country-specific demand trends for the selected products.

2 It is important to note that country-level data provided by NBS do not include Transnistria region. 3 The Competitive Diamond Framework was developed by Michael Porter at Harvard Business School (see The

Competitive Advantage of Nations by M. Porter, New York: the Free Press, 1990).


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CCHHAAPPTTEERR 11.. IINNIITTIIAALL SSEECCTTOORR AANNAALLYYSSIISS

11..11..CCRROOSSSS--SSEECCTTOORR OOVVEERRVVIIEEWW

19. Moldova resumed growth in 2000 and has firmly maintained it over the following

years. Throughout the period 2000 and 2006 the economy grew by a total of 41 percent, with average annual growth rates of 5.5 percent. In 2006 the growth rate diminished to 4% that was due to a number of negative factors, mainly external, whose combined effect has had an adverse effect on the economy’s output and external balance. These include the prohibition of important Moldovan exports by the Russian Federation and difficulties to access other markets, doubling of prices for energy resources imported from Russia, as well as significant increases in the international energy prices.

20. Economic growth has been a major driver of poverty reduction, but 2005 poverty

figures indicate that this is not longer the case. The latest poverty update4 reveals that in spite of continued economic growth, the poverty rate took an upward turn in 2005 returning to its 2003 level (see Figure 1), thus suggesting that economic growth is no longer reducing poverty. It is important to note, however, that so far this is just one data point and not a trend yet, thus a fragile base for firm conclusions.

Most recent (2005) by-region indicators of poverty rate reveal that poverty is highest in small towns (48.5%) and rural areas (42.5%), and lowest in urban areas (14.7%). While in urban area poverty rates continued to decline in 2005, in small towns the poverty situation slightly worsened as compared to the previous year (by 3 percentage points). The poverty drift in rural areas has been even worse showing a firm negative trend the second year in a row: from 35.7% in 2003 the poverty rate rose to 37.1% in 2004 and expanded even more in 2005 reaching 42.5%. Although still lower than in small towns, the poverty rate in rural areas seems to be steadily sliding in that direction, with the gap between small towns and rural areas diminishing from 14% in 2003 to only 6% in 2005 (see Annex 1).

21. The poverty in Moldova has a rural face, while agriculture fails to continue providing a

safety net out of poverty. This was confirmed by another finding of the latest poverty update, according to which farmers were the ones most hit by the poverty rate increases, followed by the group of agricultural employees and pensioners (Annex 1). Worsening incomes in agriculture are connected to the evolution of relative prices, which is deep rooted in sector’s low productivity and weak market linkages (see more discussion on this in section 1.2.1). The development of services and industry preponderantly in urban areas and lack of non-agricultural activities in rural areas, coupled with low productivity and profitability of farming are the main reasons for these negative developments. Landless inhabitants of small towns, where industry is poorly functioning and demand for services is limited, find themselves in the worst-off situation. As a result, out-of-

4 Moldova: Poverty Update, World Bank Report no. 35618-MD, June 2006.

Figure 1. GDP Growth versus Poverty rate

-4

-2

0

2

4

6

8

10

1999 2000 2001 2002 2003 2004 2005Real G

DP growth, %

0

10

20

30

40

50

60

70

80

Poverty Rate, %

GDP growth rate Poverty rate

Source: Moldova: Poverty Update, World Bank Report no. 35618-MD, June 2006


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country migration has been the alternative for most of the rural and small-town workers over the last decade.

22. The structure of Moldova’s economy

has been evolving towards a rapidly

increasing services sector, relatively

stable industrial sector and declining

agriculture (in terms of their shares in GDP). In a global perspective, Moldova’s economic structure appears in a transitional phase, currently close to the structure of low income countries, but showing a movement in the right direction (Figure 2). The share of services in GDP has already reached (or even exceeded) the regional average, however, Moldova lags behind most countries in the region with a large agricultural share and a relatively low industrial share.

In spite of significant shrinking of both agricultural and industrial outputs during the 1990s, both sectors began to recover starting in 2000. Throughout 2000-2006 the industrial sector grew by approximately 8% per annum, and its cumulative growth accounted for as much as 56% over the seven-year period. The performance of agriculture, however, has continued to be poor and highly unstable: agricultural output grew by less than 10% in seven years (2000-2006). Year 2006 has been marked with a decline in both industrial and agricultural sectors. The latter was determined by unfavorable weather conditions and the former by the crisis of the wine sector (caused by the closure of the Russian market).

23. The resumption of economic growth that began in 2000 has not been accompanied by

an increase in total employment. Instead, total employment in Moldova has declined by 17 percent during 2000-2006. Agriculture released most of the labor (approximately 45% in seven years), industrial labor force remained steady over this period, while fast growing services increased their labor force by 23% (Annex 1). Overall, job destruction exceeded job creation in Moldova, which is a phenomenon specific to transition economies when the pressure of market forces drives enterprises to get rid of excess labor inherited from central planning. This, in turn, has allowed increases of labor productivity.

24. The distribution of labor force by economic sector is not proportional to sectors’ share

in GDP, suggesting highly contrasting productivities across sectors. Figures 3 and 45 below clearly show these disparities. The services sector that generates 56% of GDP employs only 33% of labor force, while agriculture that produces 15% of GDP engages over 34% of labor force. As a result, the services sector indicates a labor productivity that is 1.5 times higher than that in industry and 4 times higher than the productivity level in agriculture (see data in Annex 1).

5 Unless otherwise indicated, the source of data utilized in this report is the National Statistical Bureau of R.M.

Figure 2. GDP Structure by countries, 2005

0

20

40

60

80

100

LIC* MD ARM GEO KYR UKR ROM HUN HIC*

percent of G

DP

Agriculture Industry Services+

Source: WB/WDI

[* LIC – Low Income Countries; HIC – High Income Countries]


15

25. Low wages in agriculture continue to push away labor, which is attracted by higher

wages in services and industry, but even more so by better income opportunities available

abroad (Figure 5). Year 2006 has marked the second round of ag labor force downsizing (by approximately 100,000 people) that partly dropped out of the domestic labor force (migrants) and partly have been absorbed by the growing services sector (see Annex 1). This also means a movement out of the rural zone into both the urban areas and out of country. The rapid growth of wages on the domestic market has been driven by this migration phenomenon that lead to a great inflow of remittances into the country. The ability of Moldovan workers to move abroad at relatively low costs and get higher earnings has put an upward pressure on wages in the domestic labor market.

26. Increasing investments are driven by rapidly growing domestic consumption and are

therefore concentrated in services, while investments in the two productive sectors,

agriculture and industry, are rather stagnating. Fixed capital formation has remained modest in Moldova, averaging at 15 percent of GDP over the period 2000 through 2006. The over-time trend is however encouraging: this share has enhanced from 11% in 2000 (or 140 million USD) up to 25% in 2006 (or 830 million USD). International benchmarking suggests that the current investment level in Moldova compares well to other countries in the region: the average-performing OECD economies register investment rates between 20-25% of GDP, while investment rates for the East-Asian “miracle” economies reach an average of 30 percent of GDP6.

6 Source of information: World Bank Report Moldova: Opportunities for Accelerated Growth, A Country Economic

Memorandum for the Republic of Moldova, Report No. 32876-MD, September 9, 2005.

Figure 5. Average monthly wage by sector

0

500

1000

1500

2000

2500

2000 2001 2002 2003 2004 2005 2006

MDL [nom

inal term

s]

Economy-wide Agriculture

Industry Services

Figure 6. Fixed capital investments by sector

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005 2006

percent of total investments

Agriculture Agro-proc Ind Industry other Serv ices

Figure 3. Sectors’ share in GDP Figure 4. Sectors’ share in employment

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005 2006

percent of G

DP

Agriculture Industry Serv ices

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005 2006

percent of total empl

Agriculture Industry Serv ices


16

The services sector is the absolute leader attracting a 63% share of total investments in fixed capital (see Figure 6 and Annex 1). In 2006 investments in transportations and communications, real estate transactions and trade have soared by almost doubling as compared to 2005 level. Agriculture, on the other side, appears to be largely and persistently avoided by investors attracting a mere 5% of total investments. Agro-processing seems somewhat more interesting in this respect with an average annual share of 14%, though decreasing over the last years. It appears that quantity improvements have not yet been accompanied by the necessary quality improvements of investments.

27. The increasing negative trade balance drags down Moldova’s economic growth. The gap between exports and imports of goods has been constantly growing and reached its maximum in 2006 (see Figure 7). The strong import growth has been determined by the remittance-driven increase in domestic consumption (that could not be satisfied by local production), as well as by growing energy prices. The growth of exports, on the other hand, has been constrained by low diversification of both products and markets. The market and commodity composition of Moldova’s exports increases country’s vulnerability to external shocks, and the 2006 wine crisis is a good proof to this.

Presently CIS countries take approximately half of Moldova’s exports, followed by EU with 30% and CEE with 10-12%. Russia is Moldova’s key market that captures between 60 and 70% of the CIS share. The direction of Moldova’s trade has been gradually redirecting towards the EU over the last decade, but this transformation has been rather slow due to the low competitiveness of Moldovan products in terms of quality, safety, packaging, volumes. The diversification is thus needed not only to reap more benefit from trade, but also reduce the negative impact of trade disruptions with CIS countries.

Agro-food products account for approximately half of total exports, and industrial (non-ag) products take the other half. Presently Moldova is a net exporter of agro-food products and a net importer of industrial products (see Annex 1). However, over the last few years the net trade in agro-food products has been diminishing, while the negative net trade in non-agricultural products has remained constant (at minus 60%7), which is an alarming indicator signaling urgent action needed to improve and strengthen exports, on one side, and improve local production to substitute for a part of imports, on the other side.

28. Moldova’s recent development pattern and its impact on poverty has been leading to

the conclusion that further reduction of country-wide poverty should be supported by an

economic growth based on qualitative and sector-wide productivity increases. Productivity

7 Excluding energy resources, the net trade in non-ag products is somewhat higher at minus 50% in 2006.

Figure 7. Foreign Trade in goods Figure 8. Foreign Trade in Services

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003 2004 2005 2006

million USD

-50%

-40%

-30%

-20%

-10%

0%

Export of goods

Import of goods

Net Trade in goods, %

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006

million USD

-12%

-10%

-8%

-6%

-4%

-2%

0%

Export of services

Import of services

Net Trade in services, %


17

gains of the recent past, based primarily on labor shedding and factor reallocation, cannot be sustained over the long run. Therefore further increases in productivity should mainly come from enhanced investment and innovation. It is important that these productivity increases are evenly distributed across economic sectors so that the existing cross-sectoral gaps diminish, thus contributing to a widespread reduction of poverty, rural poverty in particular. Greater productivity should be achieved in the context of systems building for a competitive, market oriented economy. Concerted effort to develop the rural economy in particular seems to have the greatest impact on poverty reduction. Improved incentives for investment, both local and foreign, are a precondition to this development.

11..22.. SSEECCTTOORR--SSPPEECCIIFFIICC AANNAALLYYSSIISS

1.2.1. AGRICULTURE AND AGRO-PROCESSING

29. Agriculture is one of the largest sectors and has a great contribution to the Moldovan

economy. Agriculture produces 15% of country’s GDP, while it employs as much as 34% of labor force (see Figure 9). While this is a clear indicator of low labor productivity in agriculture, it also points out to the scarcity of jobs outside agriculture and under-development of other sectors, factors that have been driving the out-of-country labor migration. The dominance of agriculture in the Moldovan economy is confirmed by the prevailing share of agro-food exports at 50-60% of total exports. This large share is sustained by the export oriented agro-processing industry, which produces most of the agro-food exports, adds approximately 7-8% to GDP and employs around 5% of labor force (see also Annex 2).

30. In spite of its large size and major contribution to the economy, the sector exhibits the

highest poverty rates. The latest poverty update has indicated that in 2004 and 2005, while the poverty rate continued to decline in urban areas, and was relatively stable in small towns, it had however began to rise in rural areas. (Needless to say, rural population in Moldova is mainly involved in farming, in the absence of other businesses operating there.) This was reinforced by the finding that farmers were the ones to be most affected by the poverty rate increase, followed by the group of agricultural employees and pensioners.

The report points out that the core reason for the fall in farm incomes is the evolution of relative prices. Moldovan farmers’ real incomes fell because the prices they received for their products were flat (or fell) (see Annex 3/T.3.14), while the prices paid for inputs rose. Prices received by Moldovan farmers had been far below international parity prices. Low farm-gate prices hint that a relatively small number of purchasers may have relatively strong bargaining power in wholesale markets where many small farmers sell: this is particularly true for the markets for cereals and oilseeds. For other commodities, especially fruit and vegetables, the depressed prices may be due to quality deficiencies, on one side, as well as restrictions on exports to Russia, on the other side.

31. Increasing poverty and falling incomes in agriculture are connected to sluggish growth

and low productivity. Indeed, since 2000 agriculture has been showing much slower and unstable growth patterns than the rest of the economy (see Figure 10). The rapidly growing labor productivity in agriculture has been due to labor outflow and not to efficiency gains, which is

Figure 9. The Importance of Agriculture for the

Moldovan Economy

0%

10%

20%

30%

40%

50%

60%

2000 2001 2002 2003 2004 2005 2006

Share of agriculture in employment

Share of rural population in totalShare of agriculture in GDP


18

confirmed by the low land productivity that has closely followed the GAP growth pattern (Figure 11). The labor productivity growth in agro-processing, on the other hand, has seen a rapid increase over the last years, while the 2006 downturn was due to the severe wine sector crisis caused by the sudden closure of the Russian market.

32. The current production structure of the Moldovan agricultural sector reflects its

largely subsistence nature. Climate and high native soil fertility makes Moldova well suited to growing most temperate fruits and vegetables, potatoes, and cereals. Crops clearly dominate with a share of 70% in the total agricultural output (see also Annex 3/T.3.3). Livestock inventory is currently concentrated within the individual sector and has the main purpose of satisfying the on-farm and family needs of rural households, while the surplus produce – meat, milk, dairy products and eggs – is usually marketed. The crop sector, on the other side, is dominated by low value staple crops – mainly cereals and oilseeds – that have expanded in area due to low input requirements, extensive on-farm usage and guaranteed markets.

The production of high value crops, such as fruit, vegetables, tobacco, has contracted due to high production costs and severe lack of financial resources. The deteriorating irrigation infrastructure (particularly important for vegetables) and ageing low-yielding orchards and vineyards are important impediments to high value produce growth in Moldova. However, certain developments of the high value sector do take place in the recent years, such as plantation of new vineyards and orchards, rehabilitation of some irrigation systems and purchase of new irrigation equipment. These are still limited investments though that need to expand, grow and develop in order to have an effect at the macro level.

33. Production of high-value crops, fruit and vegetables in particular, offers the best

potential for increased income and is thus a route out of

poverty for the rural poor. Statistical data clearly show that the current output per unit of land (i.e. hectare) is highest for fruit and vegetables, as well as tobacco (Annex 3/T.3.6). A recent survey of small farms indicates that profitability levels per crop are highest for irrigated vegetables, as well as fruits (Figure 12). In the same context, an IFAD study8 has concluded that while basic field crops are a recipe for continued poverty, fruits, grapes and vegetables are the most profitable areas of Moldovan agriculture.

34. The present low efficiency of the agricultural sector

derives from its weak link to the markets and the low competitiveness level of the output

8 Regional Comparative Advantage Analysis: Albania, Georgia and Moldova, IFAD, 2004.

Figure 10. Sector growth rates Figure 11. Productivity growth rates

90

110

130

150

170

190

2000 2001 2002 2003 2004 2005 2006

2000=100%

GDP growthGAP growthGAPP growth

90

100

110

120

130

140

150

160

170

180

2000 2001 2002 2003 2004 2005 2006

2000=100%

Ag Labor prod-tyAg Land prod-tyAPI Labor prod-ty

Figure 12. Profitability by crop, 2006 [MDL per ha]

cereals 1727

sunflower 1167

sugar beet 3265

tobacco 6388

vegetables [irrigated] 34555

fruits 8884 Source: Survey of small farms, Agrex

NGO


19

produced. This unfortunate state of affairs is determined by interconnected market failures that all together form a vicious circle that is hard to break. Weak and underdeveloped agricultural markets for inputs and outputs keep the producer prices depressed, while input prices keep increasing much faster. Since most of the tradable ag inputs are imported, Moldovan farmers face the world prices for their inputs, but are not able to receive the world prices for their produce.

Constraints on both the supply and the demand side are to blame for this situation. On the supply side, the low and inconsistent quality of agricultural produce is responsible for the poor marketing opportunities presently available to Moldovan growers. This, in turn, is linked to demand side failures, i.e. the under-development of vertically coordinated supply chains in Moldova (comprising food retail chains, processors, exporters, other downstream players) that in developed economies drive the demand and set standards for the agricultural produce based on latest market requirements. Farmers in Moldova also lack institutional arrangements in form of voluntary membership organizations meant to facilitate marketing and other services to better integrate them in vertically coordinated supply chains.

35. Today the success of agriculture and agricultural producers of a small open economy,

such as Moldova, is highly determined by their compliance to the international standards

and quality systems. Modernization of the Moldovan system of management of quality, food safety, and animal and plant health is critically needed to maintain access to profitable market segments in CIS countries, as well as to acquire and increase access to new export markets through diversification, especially in the expanding EU. Replacement of the present system of mandatory standards and overlapping inspections by one based on fewer mandatory regulations, voluntary standards, and streamlined inspections will reduce costs — hence increasing competitiveness — at the same time it will improve food safety and agricultural health.

36. Modern market infrastructure provides an efficient tool for increased value added in

agriculture and is an essential part of developing vertically coordinated supply chains. In Moldova there is a critical need for increased storage capacities9, particularly cold storages and controlled atmosphere storages, collection points, field cooling facilities, packing houses dealing with post-harvest treatment, grading, sorting and handling of horticultural produce. While the private sector should be the driver of such investments, the state should highly encourage them through committed policy support and public good provision.

37. Agro-processing is another essential mechanism for increasing agricultural value

added. Agro-processors could serve as the dynamic element that the agricultural sector needs, by transmitting market signals from the ultimate markets to the farm gate. As part of this process, they may offer modern agricultural technologies along with financial incentives, thus enabling farmers to meet their contract requirements. So far, however, the Moldovan agro-processing industry has not fully succeeded in ensuring this role. Most agro-processing operations, especially small and medium enterprises, face difficult constraints in many areas, including technology, finance, management, marketing, logistics, and regulatory burden. If sufficient numbers of enterprises succeed in the face of these constraints and grow rapidly, this stream could become the dynamic element of the ag sector.

38. In spite of above-average growth rates over the last decade, the agro-processing

industry has not yet stepped on the path of sustainable development. Agro-processing accounts for half of the Gross Industrial Product, and this share has remained pretty stable over

9 A Cold Chain Study conducted by USAID/CNFA in November 2004 estimated that about 70 percent of the fresh fruits and vegetables produced in Moldova are sold during the harvesting season and without the benefit of refrigerated storage.


20

the last decade. While being on the rise since 2000 with impressive annual growth rates of 15-18%, growth of the agro-processing industry has slowed down to 5% per annum in 2004, and then took a steep downward path in 2006 as a result of the wine sector crisis (which is the dominant sector with a 40% share in GAPP) (see Figure 13 and Annex 4/T.4.1). A few hundred firms operate in agro processing, and the most important products include wine, fruit and vegetables, meat, and dairy products. Agro-processors generally source their raw material from domestic supplies, one exception is the meat industry, which imports most of the meat and offal raw material (since domestic stock is more expensive than imported frozen meat).

Growth in agro-processing has been driven mainly by the oils and fats industry, wine industry and dairy industry. The worst performing industry is tobacco10. The wine industry growth has already proven its un-sustainability and vulnerability to economic downturns. The impressive growth of the oils industry (over 30% p.a.) should also be regarded with concern, because it is driven by the export growth of one single product (sunflower oil) produced by one single local enterprise that has a market share of over 90% of domestic oil production. The least concentrated industries that exhibit a somewhat better export market diversification are the dairy and fruit & vegetable industries (see Annex 5).

39. Investments in agro-processing are highly

concentrated in the wine sector. During 2000-2006 agro-processing has attracted over 330 million USD in fixed capital investments, figure that has been built up of annual amounts that started at 13 million USD in 2000 and rose up to 70 million USD in 2006 (Annex 1). Agro-processing annually attracts between 10 and 20% of total investments and accounts for approximately half of investments that go into the industry. As Figure 14 clearly shows, the lion share of these investments went into the wine and spirits industry (≈ 60%), while the fruit and vegetable industry came second with a share of 9% in the total figure (see also Annex 4/T.4.8).

Since the late 1990s, a wave of investment, primarily from Russia, has occurred in the wine and distilled spirits industry. Additional recent investment in the wine industry has come from the United States, Germany, and France. Investment in meat and dairy production has come primarily from Belgium and Holland. Fruit and vegetable industry has attracted investments from the United States.

10 This is the only industry that is still a state-dominated monopoly, suffering from many inefficiencies, including under-utilized capacities, high costs of production, low produce competitiveness.

Figure 13. Industry growth rates, 2000=100%

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006

2000=100%

Industry , total API

Figure 14. Fixed capital investments

in agro-processing, avg.03-06 Meat

4%

Tobac.

5%

Other

food

18%

Fruit+

veg

9%

Dairy

4%

Wine+

spirits

60%


21

40. Agro-food exports account for the majority of

Moldovan exports, but are increasingly

approached by agro-food imports. The net agro-food trade, although still positive at 20-30%, has been steadily declining over the last decade (see Figure 15 and Annex 2), this pointing out the weaknesses of the domestic food industry to satisfy the increasing requirements of domestic consumers, in terms of both quality and range. The most export-oriented products are wine and spirits, as well as fruit and vegetables, both fresh and processed: only these two categories account for nearly 40% of Moldovan exports. Very high RCA11 indicators for these two categories rank Moldova among the top 10 countries in the world specialized in the export of these products (see Annex 5/T.5.5).

41. To achieve stable growth in agro-food exports, Moldova should diversify and increase

access to high value markets. The CIS countries are Moldova’s most important partners in agro-food trade, accounting for about 60% of its total agro-food exports. In CIS, Russia is by far the major destination of Moldova’s agro-food produce. Romania is an important neighboring market as well. Approximately 20% of Moldova’s export goes to the industrial countries of the European Union and the United States (see Annex 5/T.5.10). The EU-oriented food products fall in the fruit and vegetable category and include nuts, dried and frozen fruits, as well as juice concentrate.

It has become clear over the last decade that trade with traditional CIS partners is not fully transparent and does not guarantee stable export markets. In 2005 and 2006, sudden bans by Russia on imports of Moldovan wines and spirits, horticultural and livestock products have emphasized the need for urgent export diversification. Increasing exports to the EU would help achieve this diversification and provide access to higher-value markets. Therefore, meeting the requirements of global food supply chains is the challenge that Moldova’s agro-food sector is facing today.

42. The bottom line is that for rural poverty reduction to be sustainable then it must be

primarily market-driven, and this means aiming for an agricultural sector that is

competitive, especially in the export markets. When the local supply will satisfy the international demand and Moldovan agro-food products will be able to compete on international markets, then Moldovan agriculture has high chances of becoming a profitable business, provided the value chain links are strong and based on long-term partnerships. Growing agricultural incomes will enable the development of non-farm activities in rural areas, since the farming population will create a demand for various products and services, and will be able to actually pay for these (which is not the case today). Wider job opportunities in rural areas and higher profitability of farming operations will stimulate the most productive ones to remain in agribusiness, thus enhancing sector efficiency and driving sector growth. In fact, the development of other non-farm sectors on the basis of a profitable and competitive agricultural and agribusiness sectors is the path towards country’s sustainable development and growth.

11 RCA – Revealed Comparative Advantage – compares the share of a given sector in national exports with the share of this sector in world exports. RCA values above 1 indicate that the country is specialized in the sector under review.

Figure 15. Evolution of agro-food exports and

imports

0

200

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006

million U

SD

Total exports

Agro-food exportsAgro-food imports


22

1.2.2. INDUSTRY

43. Industry is an important sector in Moldovan economy with a relatively stable share in

GDP. For the first time in 2005, the Industrial GDP outran the Agricultural GDP, which has been declining since 2000. In 2006 the industry share of GDP accounted for 14,4%12 (Figure 16, Annex 8), registering a decrease as compared to 2005 mainly due to the wine sector crisis. The industrial sector is dominated by the manufacturing industry that produces around 80% of the GIP. Producing almost half of the GIP, the agro-processing industry is the most significant sector of the manufacturing industry.

In 2000-2006 exports practically tripled and reached at the end of the period 600 mill. USD (except agro-processing products13), which is 57% out of all exports of goods.

In 2005 industry employed almost 12% of labor force, the labor productivity being three times higher than in agriculture and lower than in services sector.

44. In 2000-2005, the industry had higher growth rates than those of GDP, however the fall

of 2006 demonstrated the volatility of this growth. The GIP growth rate has been more volatile than the growth rate of GDP and this means a higher sensitivity to factors of influence (Figure 17). The GIP overall growth in 2000-2006 accounted for almost 57% (Annex 9/T.9.2.), when the average annual growth rate was almost 8%. Starting with 2003 the GIP growth rate has seriously decreased, while in 2006 the GIP decreased by 7% as comparing to the previous year (Annex 9/T.9.2.). That fall is mainly due to the dramatically decreased wine production (enforced by Russia’s import restrictions), which had a negative influence on the performance of other connected sectors. For ex. glass and paperboard industries decreased by 8-9% as compared to the previous year.

Meantime, some industrial sectors have had a greater performance, mainly due to penetration of other markets, for ex. production of medical and optical equipment (107%) or textiles production (18%), while others succeeded due to “affiliation” to growing sectors, for instance, to construction – like mining industry (22,5%) or production of construction raw materials (10-13%) (Annex 9/T.9.2.). However, these sectors do not have a significant share in the industry, so their growth has not compensated the fall in production of key industries.

12 Only for large enterprises (employees >20 persons and sales > 1 million MDL). 13 Agro-processing industry is described in Section 1.2.1. General indicators of industrial sector development analysis include the above mentioned industry, except cases where the text provides otherwise.

Figure 16. Significance of Industry for the

Moldovan economy

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2001 2002 2003 2004 2005 2006

Industry share in GIP, %

Industry labor force as % of total

Non-food Industrial exports as % of total

Figure 17. Growth of GIP and GDP

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2000 2001 2002 2003 2004 2005 2006

GDP, % GIP, %


23

45. Industry growth has not contributed to

creation of new jobs within the sector. During the analyzed period the total number of industry employees slightly increased, after which in 2005 it decreased slightly below the level of 2000. At the same time, the overall growth rate of the sector was 68% due to investments in technologies and equipment. The growth of the sector unsupported by new jobs has lead to substantial increase in labor productivity within the industry. For instance, 10 out of 21 industry sub-sectors have raised their labor productivity by 2-3 times within a 5 year period (Annex 9 / T.9.3.) Growth of productivity was accompanied by much higher increase of wages: in certain sectors the average monthly wage increased by 3-4 times comparing to 2000 (Figure 18, Annex 9/T.9.10). Investments in modernization of industry sector and accelerated transfer of innovative technologies are drivers of sustainable development.

46. Industrial enterprises are facing deficit of skilled labor force. The deficit occurred mainly due to emigration of people in other states and to some extent, outflow of labor force from industry into other sectors with higher incomes (construction, trade services). Industry faces lack of technical and engineering employees and skilled workers. Also, the difference between the level of students’ knowledge in education institutions and that of real necessities of the industry sector is increasing.14 Anyway, the industry might supplement its labor force from agriculture, where remuneration is lower, which does not mean that the same labor force does not see the services sector (the same construction or trade) or emigration as a more attractive probable destination that is better paid than industry.

47. Decreased volume of investments (in relative terms) is preventing the industry sector from sustainable development. The overall volume of investments made in the industry over 2000-2006 has reached 807 mill USD, which is almost 20 times more than in 2000 (Annex 9/T.9.7.). However, the share of industrial fixed capital investments is decreasing (from 45% in 2001 to 30% in 2005 – Figure 19), because of their re-orientation towards the services sector, where the profitability is higher or increasing. The industry investment growth rate is higher than in agriculture, but is lower than in services. The structure of fixed capital investments by sub-sectors shows that the agro-processing industry was the biggest beneficiary accumulating 44% of total industrial investments in 2005, followed by PHGW Sector, 27% (Annex 9/T.9.6). The light industry should be mentioned (textiles, apparel and footwear), which attracted foreign investors (especially, from Italy) due to cheap and qualified labor force. Textile enterprises have made steps forward in the value chain, offering goods

14 Industry Development Strategy for the period up to 2015.

Figure 18. Growth of average monthly

nominal wage

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2000 2001 2002 2003 2004 2005 2006

Mining industry, lei

Manufacturing industry, lei

PHGW Sector, lei

Wide-economy, lei

Monthly subsistence level per capita, lei

Figure 19: Share of sub-sector investments

as % of Industry investments

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005

Other sub-sec tors

Pow er, heat, gas and w ater supplyJew elry

Non-metallic prod-s (glass , cement etc )Publishing and printing produc ts

Apparel and furs produc tsAgro-processed produc ts


24

for the European fashion industry15; however, they haven’t reached a sustainable level of development. That is because investors can anytime shift the textile production in lohn to places where the labor force is cheaper.

Meantime, there are sectors that have not attracted any investments within the analyzed period of time: medical and optical industry, metallurgic industry and production of other transport means (less than 1 mill. lei in 2000-2005). Insufficient investments, beside other deficiencies, lead to higher production costs, and eventually, to decreased competitiveness of products.

48. Poor infrastructure prevents establishment and development of industrial enterprises. The communications sector delivers qualitative services increasingly growing in the last few years. The energy sector does not limit the access to consumption. However, covering consumption depends completely on imported energy resources, and this produces risks for the entire Moldovan economy. The poorest infrastructure sectors are roads and water supply. Goods are transported mainly on railways and roads, where river and sea ways are unavailable, which would be less costly to use. At the same time, almost 70% of roads are in poor shape16, and that leads to at least higher financial and time costs. The water supply infrastructure is old and needs significant investments for renewal and enlargement of the water/wastewater network.

49. The implementation of international standardization and quality requirements will provide new opportunities. The Moldovan market has a low absorption capacity of goods due to its small size. This makes domestic producers operate toward exports. While the competition is high on external markets, implementation of quality management systems like ISO etc. is becoming an imperative not only for the survival of local enterprises, but also for their extension and diversification on external markets as well. There are two reasons that are retaining enterprises from implementation ISO: (i) high price, „insupportable” for small enterprises and (ii) market/markets do not require the products delivered be in compliance with this standard. In general, the second condition would be good enough for implementation of ISO within a developing enterprise. Regulatory reform, signing agreements on commercial preferences GSP+, CEFTA and free trade with CIS countries and other states could consolidate the efforts on competitiveness building of domestic products. Quality systems are currently implemented by some Moldovan export enterprises; however their number is still relatively small.

50. The competitiveness of domestic goods is still being adversely affected by endogenous and exogenous factors. These include: - high rate of amortization of equipment and facilities, - low investments, - use of power-intensive technologies, - poor infrastructure, - lack of strategic management and marketing skills, - high costs and short terms of loans, - failure in partial or total compliance of domestic products with international quality

standards, - high prices on energy resources and dependence on their imports, - scarce labor force, - high costs of ISO implementation, - issues related to legal framework.

15 Assessing Competitiveness in Moldovan Economy, USAID-Bizpro, July, 2004. 16 Assessment of road network is an integral part of the WB document „Revision of public expenditures 2006”.


25

The growth of purchasing capacity of population (due to increasing inflows of remittances) has generated a higher demand for industrial products, especially consumer products. In terms of competitiveness, domestic industrial products are often losing in the competition with imported products on quality vs. price characteristics.

51. The volume and the structure of exports confirm the low capacity of industry to add value and meet the needs of external markets, as well to substitute imports to some extent. Non-food industrial exports are characterized by a small set and volume of exported goods as comparing to imports. Only some sectors have an increased export capacity (Annex 10/T.10.2.), other groups of products are insignificant as share of total exports. Thus, apparel and accessories accounted for 19% out of total exports in 2006 and are far from other groups of products, mainly due to massive production in lohn and their further re-export. Apparel is followed by electrical machines and apparatuses with 4% of exports. On the other side, production of paper and paperboard, footwear and furniture had the highest annual average growth rates (over 40%), which surpassed the same rates of the world exports by 4-5 times (Annex 10/T.10.3.).

RCA indicators show that Moldova is specialized in exports of some groups of industrial products, including skins, apparel and accessories, carpets; however it is far from world export leaders. Although Moldova imports practically the same categories of products, the net trade balance is positive and significant only for apparel and accessories, articles of leather, footwear and carpets out of those selected (Annex 10/T.10.8.). That means that the majority of domestic industrial products does not (or it does partially) substitute foreign products on local market.

It is important to mention the extremely small share of high value products in exports (optical and medical apparatus and instruments, electric and electronic equipment). That brings to light the fact that the local industry is mainly oriented to exports of low value added products. This situation is common to low income countries. In the regional context, Moldova does not differ too much: the share of industrial high-tech exports in total industrial exports in 2000-2005 is practically the same as that of Romania and slightly below than that of Ukraine (Annex 1). Comparing similar economy group of states, Armenia and Georgia, the situation is different: Moldova outran Armenia by 2-3 times, but it was surpassed by Georgia by almost 10 times, the share of which in 2005 is slightly below the level of high income countries (export of spare parts for planes and helicopters amounted in 2004 and 2005 almost 78 şi 88 mil. USD).

52. The low diversification of export markets and products determines the high sensitivity of economy to external shocks. This is well illustrated by the case by Russian Federation’s import restrictions on agro and wine products, where the decrease of the wine production by half has lead to the 9% fall of industrial production. Almost half of industrial production is exported to CIS countries and the other half – to EU and South-Eastern European countries. The best diversification of products is in the apparel and accessories, and electrical machines and apparatus sectors (Annex 10/T.10.10). Nevertheless, the share of the first 3 export markets of the above mentioned sectors (and also for the other sectors) is higher than 80%, which might adversely affect exports by 27% if an hypothetical shock of restrictions on one market occurs.

Figure 20. Export and Import of non-food

industrial products, thou USD

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2001 2002 2003 2004 2005 2006

Export Import Deficit


26

Figure 21. GIP per capita by regions, thou lei

2441

4434

6211

3339

1289

10728

0 2000 4000 6000 8000 10000 12000

UTA Gagauzia(160 mii pers)

South (550 thoupers.)

Center (1070thou pers.)

North (1020 thoupers.)

Chisinau (780 miipers.)

Avg. per country(3581 mii pers.)

Source: Annual Report on Evaluation of Implementation of Economic Growth and Poverty Reduction Strategy 2006 (draft)

The same issue is valid for other sectors, especially for leather items and paper and paperboard products, since they have 3 and respectively, 4 export markets.

The level of diversification of export products is better than that of markets (Annex 10/T.10.9.). At the same time, it shows the stringent necessity of investments in technologies, innovations and new production lines, especially of products with high value added and others. This will not only decrease the sensitivity to external shocks, but will also generate capacities of substitution of imported goods.

53. Territorial polarization of industrial enterprises is a driver neither for regional development (especially of rural areas) nor for alleviating poverty. In 2006 in Chisinau city (where 22% of Moldovan population is living and 56% of fixed capital investments have been made) operated 250 large enterprises (out of 684, Annex 9/T.9.8.), which employed 48% of industrial personnel and produced 50% of industrial production. Other enterprises (the majority of which are manufacturing agro-products) are located in small towns. The poverty rate in small towns is the highest17, because the majority of enterprises do not operate or operate at low capacities; and inhabitants do not have land parcels in order to feed themselves from agriculture.

In rural areas only 6% of economically active population is employed in industrial sector, where wages account for 55-80% out of the country average level in the industry, depending on rayon18. Thus, there are significant disproportions in industrial development between the regions and the capital (Figure 21). Eventually, population moves to the capital or emigrates abroad.

54. The regional development of the industry, especially in villages and small towns, will have a greater impact on poverty reduction. Stabilization and even growth of poverty rates in these areas is an alarm that requires attention on the necessity of qualitative changes within the main sectors of these areas – industry and agriculture. Services have no room for development and extension in areas with low demand or low purchasing capacity. The agro-processing industry should take on the main role as a driver and starting point of sustainable development of regions due to its strong relationship with agriculture, which eventually would lead to countrywide poverty reduction. The above-mentioned changes are closely related to investments in these areas and increasing competitiveness of productive sectors of Moldovan economy.

17 Moldova: Poverty Update, WB Report, No 35618-MD, June 2006. 18 Industry developments strategy for the period up to 2015..


27

1.2.3. SERVICES

55. Services sector represents the largest sector of Moldovan economy for the last five years, and, arguably, the most important factor in poverty reduction due to the major

contribution to economic growth and above average wages. Particularly high rates of growth have been registered in such sectors as constructions, transportation and communications, which showed a cumulative growth of above 120% over the last five years, thus increasing their share in the overall services sectors’ gross value added. Services’ share in GDP increased to 56% in 2006 from 54% in 2005.

In the regional context, Moldova’s services share in GDP shows a greater growth, which may suggest some competitive potential at the marco- level, taking into account the relatively well skilled labor still present on the market, despite the huge outflows in the recent years.

56. Moreover, Moldova’s trade in services becomes more and more important, exhibiting

an increase of about 2.7 times in total volume of trade during the last 10 years, thus

reducing the trade deficit in this sector to zero. Taking into account that as of last year the trade deficit in services was reduced to almost zero, we may conclude that the competitiveness of Moldova’s services sectors in the regional context is on rise.

Especially this holds true with the trading partners from the CIS countries, with which Moldova registered a positive trade balance, with only one exception – Belarus. This is not the case with the trading partners from EU, which may lead to the conclusion of a weaker competitiveness of Moldova’s services sectors with more mature services sectors from those countries. First five trading partners (Figure 23) in the services area are: Belarus, Germany, Romania, Russia and Ukraine), which cumulated about 40% of the trade in services with Moldova in 2006.

Figure 22: Share of major services sectors in 2005 and 2000

Trade20%

Other

52%

Constructions

6%

Transport and communications

22%

Constructions6%

Trade

26%

Transport and

communications20%

Other

48%

Source: NBS

Figure 23: Trade balance in services with the major

trading partners

-15

-10

-5

0

5

10

15

Germany Romania Russia Ukraine Belarus Other

Source: NBM


28

57. One of the peculiarities of the services sectors in Moldova is their concentration in

urban areas, which contributed to the diminishing rates of poverty in towns. Together with constructions, the services sector employs about 29.1% of the workforce, with a major contribution to the GDP. This shows an increased productivity in services sectors comparing to that one in agriculture and industry. Despite slight reduction in labor force in the services sectors after the financial crisis from 1998, this diminuation was insignificant and quickly bounced back, with new jobs being created in services during the last three years, surpassing the pre-crisis level in most of the services sectors. Also, the services’ sectors exhibit a relatively stable employment rates across the sectors with some insignificant deviation for the trade and hotel services.

58. Services sectors are driving force of the internal demand and consumption by introducing new types of services such as mobile communication, financial services (consumer credits and leasing), which leads to the increased volumes of trade with industrial goods (electronic goods for households). Services sectors are more attractive for foreign investors, including the local ones, due to the relatively cheap but qualified labor force, which makes some types of services to be competitive at the regional level (ex: transportation). Services sectors also benefit from the increase in the internal demand generated by the growing volume of remittances (ex: construction sector), and, at the same time, positively influence other sectors through secondary effects such as boosting local industries of building materials.

59. During the last decade the average salary in almost all services sectors surpassed the

national average per economy (Figure 24), especially in financial services, construction, as well as transport and communications thus having a major contribution to the poverty reduction in Moldova. The average wage in most of service sectors are higher then that in agriculture and industry. However, the rates of growth of nominal wages are mostly below the labor productivity indicators, which raises the question of sustainability, despite that in several sectors such convergence is already noticeable, especially in the financial services.

60. Services sector proved to be more

resistant to the external shocks. One of the leading indicator of sector competitiveness, particularly for a mall open economy such as Moldova’s, is the growth of its exports both in terms of goods and services. Taking into account the latest external shocks that affected Moldova’s trade in goods (financial crises in 1998 and restricted market access for the agricultural goods and wines to Russia in 2005-2006), services sector proved to be much more stable to these shocks.

Figure 24: Average monthly salary by services sectors

0

500

1000

1500

2000

2500

3000

3500

4000

1998 1999 2000 2001 2002 2003 2004 2005Average per economy ConstructionTransport and communications Financial servicesReal estate

Figure 25: Evolution of foreign trade in services

0100

200300

400500

600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

USD m

illion

-15.0

-10.0

-5.0

0.0

%

export import trade deficit as % of total trade

Source: NBM


29

Firstly, the decline in total trade in services, (Figure 25) was much smaller (-10.6% in 1999) than that observed in trade in goods (-35.3%) registered in the same year.

Secondly, the recovering period was shorter - (two years ) - to surpass in 2000 the pre-crises level of trade in services (1997), compared to six years (in 2003) which were necessary to reach the level of trade from 1997, not to mention that for the exports of goods it took even one year longer (2004) to reach the pre-crises level, which was not the case of exports of services.

Thirdly, the trade deficit in services was reduced to almost zero (Figure 26) during the last decade, in contrast with the trade balance in goods, which more then doubled in negative terms during the same period reaching a deficit of over USD 1.6 billion.

Moreover, unlike the situation from the trade in goods, Moldova’s trade in services exhibited, with just one exception in 2003, a higher export growth rates than those of import thus showing a long-term competitiveness of the services sectors in general in the regional market. Although, a closer look at the driving sectors has to be carried out in order to better understand the underlying strengths of the Moldova’s services export potential on international markets.

The same conclusion concerning the overall resistance to shocks is applied to the export of services, which was exhibited in the first years after 1998. Besides the fast recover, the growth rates since then were mostly higher then those registered for the exports of goods (Figure 27).

Moldova’s accession to the World Trade Organization (WTO), and signing of free trade agreements within the South-Eastern Europe Stability Pact and CEFTA creates new opportunities for services expansion, however, may trigger a tougher competition from much more mature services sectors from the neighboring countries.

61. Services sector also showed a

higher rate of return for the

investments, and during the last decade attracted most of the investments in fixed assets from both domestic and foreign sources (Figure 28). Although, from the point of view of foreign direct investments, services do not count for the majority of the FDI flows, their

Figure 26: Export/Import growth rates in services

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: NBM

Figure 27: Export growth rates in goods and services

-40%-30%-20%-10%

0%10%20%30%40%

1998 1999 2000 2001 2002 2003 2004 2005

export growth goods export growth services

Figure 28: Share of investments in fixed assets in services sectors

0%

10%

20%

30%

40%

50%

60%

70%

1998 1999 2000 2001 2002 2003 2004 2005


30

share is rapidly increasing.

Transport, communications, and trade are amongst the most attractive services sectors for FDI. While the actual number of companies with foreign direct investment within these sectors is still fairly small, they provide most of the FDI both in absolute and relative value among services sectors.

The fact that the share of FDI in the trade is diminishing provides some arguments that investors are oriented towards more long-term investment objectives. Although equity capital continues to play a major role in the structure of FDI, foreign companies with investments in Moldova have tended to credit their own businesses rather than invest in new equity capital to reduce risks.

However, the trend will change soon after enactment of new legislation in insurance sector, providing for a sharp increase in the required capital of the companies, as well as tightening of the prudential norms. For the banking sector appearance of the major international players on the financial market such as Societe

Generale (France) and Veneto Banca (Italy) will bring not only a foreign competition but also a higher standards for services in these areas. The major investors in the services remain USA, UK, France and Luxemburg, as well as traditional partners from Russian Federation.

11..33.. SSEELLEECCTTIIOONN OOFF SSEECCTTOORRSS FFOORR FFUURRTTHHEERR AANNAALLYYSSIISS

62. Moldova in transition is slowly moving from an agriculture-based nation to a more

industrialized and services-dominated economy. Most of the poor presently live in rural areas and are engaged primarily in agriculture that so far exhibits a low productivity and therefore offers low incomes. Fast growing services in urban area have been taking on part of the labor force willing to leave both agriculture and the less comfortable rural zone. Industry, although also on the rise, is currently in an adjustment process struggling for produce and market diversification, and therefore yet unable to absorb significant additional labor that is in search of out-of-agriculture alternatives. As a result, the out-of-country labor migration that has began in early 2000 still goes on, at a slower pace though. Moldova’s development prospects therefore critically depend on country’s ability to stop and reverse the labor drain pattern.

63. Supporting Moldova’s transition towards a diversified and developed economy would

require building on country’s comparative advantages (in agriculture and agri-business) as

well as grasping prospective market opportunities (in services). Poverty reduction efforts are believed to have broader country-wide effects with emphasis on rural areas if the focus is put on:

(i) Spurring agricultural growth and productivity,

(ii) This to be further supported by a dynamic and expanding agro-processing industry, which in addition to adding value to agricultural produce, also provides additional non-farm employment opportunities in rural areas and small towns.

(iii) Growing services should complement this process as active absorbers of labor, while enhanced business activity and investments in rural infrastructure would give a “rural” direction to the expansion of the services sectors. This would also allow for a higher

Figure 29. Distribution of investments in fixed assets by

services sectors

0%10%

20%30%

40%50%60%

70%80%

90%100%

1998

1999

2000

2001

2002

2003

2004

2005

Constructions

Real estate services

Finacial services

Transport andcommunications

Hotel and restaurants

Trade


31

penetration of financial services into the rural areas, along with the growth in consumption.

64. The rationale presented above, complemented by sub-sector based analysis (both qualitative and quantitative), has led to the selection of the following sub-sectors for further in-depth analysis, which are seen as potential drivers of growth with the highest impact on poverty reduction in Moldova. These are:

� Fruits and vegetables, both fresh and processed;

� Wine;

� Transportation services

65. Poverty reduction efforts in rural area and small towns will

be best rewarded through the sustainable development and growth of the fruit and

vegetable sector, both fresh and processed. The indicator-based analysis of agriculture and agro-processing clearly puts forward the following three categories: fresh fruits and vegetables, processed fruits and vegetables and wine (see Annex 7). Fresh fruits and vegetables rank highest among primary agriculture sub-sectors and fresh fruits confirm their top position in export markets. Wine and processed fruit and vegetables are the winners in agro-processing and exhibit a very high degree of export orientation: according to 2005 world export data, Moldova ranks top-3 in the world in the export of beverages and spirits and top-4 in the export of processed fruit and vegetables, showing extremely high specialization levels in the export of these products (see Annex 5/T.5.5).

Fruits and vegetables are suitable for production all over the country, thus potentially showing a broad country-wide impact on poverty reduction. The wide range of fruits and vegetables that can be grown in Moldova ensure sufficient diversification and offer the necessary safety net to farmers income. The international demand is also highly favorable for fruits and vegetables, both fresh and processed, due to increasing tendencies worldwide towards healthy life styles and diets that are strongly associated with fruit and vegetable consumption. Not to forget that increased local production of fresh fruit and vegetables is an excellent opportunity for import substitution (the imports of fresh produce, especially fresh vegetables, have sky-rocketed over the last years in response to rising demands of urban consumers).

Developing a market oriented and competitive fruit and vegetable sector, both at the level of production as well as processing, represents a great challenge, but targeted investment and innovation coupled with stimulating state policies can do the job. Further detailed analysis will reveal the current state of the sector, its comparative advantages, both current and potential, as well as identify the major constraints inhibiting sector growth in an attempt to separate between constraints that are best addressed by the private sector and those to be dealt with by the state.

66. Analysis of non-food industry (section 1.2.2.) has identified the textiles and apparel (TA) as the most performing and promising sector (annex 12). As top position in non-food exports, net trade, diversification of export products and market concentration, TA sector hires almost 16% of non-food industrial labor force (annex 11). Competitive advantages of TA are relatively low cost of labor and closeness to European market. Finally, it could be seen as reasonable to select the TA sector for detailed analysis and identification of major constraints that prevent it from development.

FRUIT & VEGETABLES

WINE SECTOR


32

But inter-sector evaluation of „finalists” from agriculture and API versus those from non-food industry brought to light the wine sector, analyzed in section 1.2.1. Comparing to other API sectors wines have taken the III place (see the adequate comments in the previous paragraph), but comparing to TA sector wines are net superior (see the table below).

Year 2005 Textiles+apparel (TA) Wines

Volume of production, million lei 947 4031

Value of exports, million USD 194 278

Share in MD Exports, % 18 25

Average number of industrial-productive employees, thou persons

12 15*

Number of large enterprises 59 129 Source: NBS * - including producers of strong drinks.

Wine is a product of national strategic interest of Moldova. Employing only 15% of industrial-productive labor force, it comes up with 1/4 of export revenues. Moreover, despite the TA sector, development of wine sector involves development of other sectors like primary agriculture (grapes), paper and paperboard industry (labels and paperboard boxes), glass industry (bottles) and printing industry (printing labels). Taking into account that a relatively big share of population from the Center and South of Moldova cultivates vineyards and delivers grapes to nearby wine factories, the impact on regional development and rural poverty reduction would be significant.

However, the toughest arguments against selection of TA sector come up from the character of production in lohn. So, development of the TA sector is extremely fragile, and its presence in Moldova depends directly on the cost of labor. If the cost increases, investors, mainly Italians, would shift the production to those states, where the labor is cheaper. This process took place in other states, where the production conveyed in transit firstly Baltic countries, then Slovenia, ex-Yugoslavia, Hungary, Check Republic, Bulgaria, Romania, Poland. There is a risk of increasing the labor cost in Moldova, because the standards of life are increasing due to consumption, imports and remittances.

Taking into consideration all advantages and disadvantages of the wine sector and the TA sector, as well their significance for economy and population of Moldova, the wine sector has been

selected for detailed analysis and identification of major constraints that prevent its

development.

67. From the entire array of services, the transportation sector is the

closest to the material production of goods by ensuring logistics for the their movement

from producers to consumers via communication ways (road, railways, water or air). In addition, passenger transportation represents the link between the economic activity and social life of the community, by ensuring the mobility of the workforce within the national economy. The share development of the transportation sector does not guarantee the economic growth, for that being necessary such factors as reduction in transportation costs and increase its safety; favorable business climate and developed auxiliary services. The improvements in these factors would lead to the transportation sector becoming a promoter of economic expansion. In turn, the economic development will increase the need for transportation services both in quality and quantity terms.

TRANSPORTATION


33

68. Taking into account the share of the agro-industrial sector in the national economy of

Moldova, the role of transportation sector becomes more relevant by ensuring the access of

multiple, and geographically dispersed, small producers of agricultural goods to the

markets, as well as processing and wholesale centers for their merchandise. On the other side, similarly important is the ensuring the supply chain with various factors of production for the agricultural producers and processing industry with such items as fuel, fertilizers, as well as delivery of necessary services to them.

69. The importance of the transportation sector for the national economy derives from its

contribution to the Gross Domestic Product (GDP), which during the last several years has

grown from 7.3% in 1998 to 12.1% in 2005, as well as from contribution of the transportation sector to the Gross Value Added, which increased substantially from 8.7% in 1998 to 14.4% in 2005. Also, the transportation sector employs the largest number of workforce among the other services sectors, being comparable with the number of employees from industry.

On average, for the countries of South-East Europe it is characteristic a share of about 10% of the transportation and communication Sector in GDP, which is somewhat above the average for the Central European countries19. Although the statistics from this region, including the Republic of Moldova, does not make a distinction between the transportation and communication sectors, we may conclude that this indicator for the Moldovan economy is within the regional average, and registered a higher growth in the last three-four years.

19 Comparative Analysis of Regulatory Measures in the Services Sectors in South Eastern Europe – Transport, Vienna, 2003


34

CHAPTER 2. IN-DEPTH SECTOR ANALYSIS

2.1. FRUIT AND VEGETABLE SECTOR

Summary of Findings

70. The diamond approach applied to analyzing the fruit and vegetable cluster has

revealed the current status of the sector, the constraints inhibiting its growth, as well as the

opportunities and challenges that lie ahead. A brief snapshot of the F&V sector is presented in Figure 1 below. The under-developed fresh sector could quickly catch up and achieve international competitiveness if investments in innovative agricultural technologies and production techniques (intensive orchards and vineyards, greenhouses, new high-yielding varieties), irrigation infrastructure and marketing infrastructure (cold storages, packing houses, etc.) occur at an accelerated pace. The processing sector, much more advanced in its development as compared to the fresh sector, is currently a significant player on export markets and has excellent opportunities for expanding its presence there if three major areas of concern are properly ensured: adequate raw material supply, availability of skilled (and young!) labor force, and development of new products with high market demand. Thus, both fresh and processed sectors vitally depend upon modernization of primary agriculture.

71. Using the Constraints Analysis classification of constraints, the conclusion of this in-

depth sector study is that the four major constraints for the Fruit and Vegetable Sector are

human capital, market infrastructure, innovation and competitiveness, as well as

investment and business climate. Identified constraints of the F&V sector are briefly

summarized below (see also the text highlighted in red in Figure 1 below):

� Inadequate irrigation infrastructure, poor water quality, poor roads increase the cost to businesses. Irrigation is seen as the greatest constraint to growth of the vegetable sector. � Under-developed market infrastructure impedes the Moldovan fresh produce from reaching the high-end markets in CIS and EU. � Standards that are not adjusted to EU regulations and unavailable EU accreditation block the development of sector capacity to penetrate these high value markets. � Shortage of long-term finance aggravates the problem further. � Scarce human resources, especially lack of skilled labor force, is strongly connected to the weak education system that is highly detached from the real sector needs and requirements. � The connection between research-education-extension and ultimately the real sector is weak and non-responding to sector demands in terms of new technology and skill development. � Restricted access to imported plant varieties hinders quick and easy transfer of innovation down to the farm level. � Rent-seeking behavior of various state control and inspection bodies is still quoted as an essential negative factor discouraging businesses. � Last but not least, beneficial and highly needed FDI flow is hampered by the restriction on ag land ownership.

72. Most identified constraints can and should be addressed by the Government. The majority requires insignificant financial resources but essential political will in form of policy actions and institutional rearrangements. Key constraints that require large financial resources on behalf of the state are irrigation infrastructure20 and standards harmonization. Market

20 State-managed irrigation infrastructure covers the pumping stations and the distribution systems (balancing reservoirs and the underground pipe network).


35

infrastructure (cold stores, packing houses) and part of irrigation infrastructure (i.e. on-farm irrigation equipment), on the other side, should be private-led investment initiatives. The state, preferably in collaboration with donors, should support and encourage these types of investments. Successful business models are critically important acting as effective catalysts for investments and triggers for the mass replication of these success stories. This is the challenge that presently lies ahead the Moldovan fruit and vegetable sector.

Figure 30. The Competitive Diamond: Fruit and Vegetable Sector

Related and

Supporting

Institutions

Demand

Conditions

Factor

Conditions

Structure,

Strategy and

Rivalry

� Achieving reliable raw material supply is a big task that processors handle through both cooperation with farmers and expansion of own production.

� Ag inputs are widely available, but plant variety choice is limited due to the registration restriction.

� Locally produced packaging materials do not fully meet sector demand.

� Machinery and equipment are imported and competition on this market is insufficient.

� Research and education institutions are week and not connected to the needs of market participants.

� The private / public dialogue is ad-hoc and unorganized.

� A modern F&V fresh sector is in an incipient stage of development in Moldova. Vegetable production → needs investments in irrigation and greenhouses. Fruit production → invest. in cold storages and packing houses.

� The export oriented FVI has two major concerns: secure raw material supply and expanding markets.

� Competition within the sector is regarded as open and healthy.

� Minor rent-seeking actions of state bodies increase the costs of doing business.

� FDI is relatively low but increasing and highly valued. Restriction on ag land ownership is a constraint to FDI.

� Favorable natural resources: good climate, rich soils → flavorful & tasty products.

� Scarce human resources, both skilled and unskilled. Lack of young skilled labor force in small towns. Unsatisfactory level of technical knowledge and skill.

� Capital resources generally available dependent upon collateral availability. Long-term loans are scarce.

� Infrastructure deficiencies constrain sector development. Electricity, gas and communications are satisfactory. Inadequate water quality requires additional resources. Irrigation is largely un-available, but highly required. Road condition is generally poor, but not critical

to F&V enterprises.

� World markets for F&V show very favorable demand trends.

� Importers (both EU and CIS) demand high and consistent product quality, steady and timely supply, complete product specifications, high-quality packaging, EurepGAP for fresh and HACCP for processed produce.

� Export prices of Moldovan F&V products are significantly lower than world export prices. The gap is especially high for the fresh products.

� Non-harmonized standards, weak labs and certification bodies, as well as lack of EU accreditation are major constraints to sector integration in the international trading system.

� Active participation in regional exhibitions is an important export promotion activity and

learning tool.


36

FACTOR CONDITIONS

73. Favorable natural resources, particularly climate and high native soil fertility, make

Moldova well suited to growing temperate fruits and vegetables. Survey respondents have unanimously confirmed this, indicating that the combination of good climate and rich soils contributes to a flavorful taste of Moldovan fruits and vegetables, this being regarded as an important attribute of quality that should be particularly valued and built upon in developing sector’s competitive advantage and country’s unique proposition. The opinions of some CIS importers that have dealt with Moldovan produce come to confirm these reports, indicating that Moldovan fresh products are “particularly juicy, tasty, sweet and regarded as healthy” in spite of multiple problems with the quality and packaging21 (to be discussed further in the following sections).

Insufficient rainfall during the critical growing period (late spring and summer months) calls for the need of irrigation, which is considered absolutely necessary for cultivation of vegetables in Moldova. Hails and acid rains are also threatening successful fruit and vegetable production. Protected field vegetable production is a good way to cope with this type of negative climatic factors. The firm opinion of respondents involved in vegetable production is that greenhouses represent the future of Moldova vegetable sector.

74. Scarce human resources, both skilled and unskilled, has been recognized as a great

constraint in the fruit and vegetable sector, and was confirmed and emphasized by each

and every respondent. It has been reported that unskilled labor force for seasonal agricultural works is not widely available in rural areas. Respondents indicated the need to involve a great deal of time, effort and money in finding and keeping the unskilled labor force. Processors that have own production indicated to collect workers every day by bus from an area of 30-50 km distance from their field, and it often happens that workers drop out while replacements are hard to find. Some companies use financial incentive schemes to stimulate workers to come to work every day, but even these schemes are not effective enough. Others reported to have established contacts with schools and universities in order to engage pupils and students for agricultural works, because local labor is not available. Training farmers and/or agricultural workers has been reported as a widespread practice adopted by most businesses.

The scarcity of unskilled labor in rural areas is obviously the result of out-of-country migration, while the reluctance of the remaining labor force to engage in relatively low-paid agricultural works22 suggests the availability of remittances that may considerably reduce the attraction of the local offer.

Finding skilled labor force in rural area is an even harder problem. Some joint ventures reported that upon the start-up of their businesses they had to hire foreign specialists in agronomy, production technologies and even engineering, due to the inability to find the necessary high-skilled professionals locally. After having trained the local staff, the foreign experts had been replaced, while their services are still used for various occasions. Most companies indicated to collaborate with universities by engaging University professors as consultants in various technical fields of production and processing. These consultants also offer trainings/ workshops for the skilled labor force, when required. In some cases the equipment suppliers serve as a source of training for the skilled labor force as well. The general opinion is that the level of

21 Source: USAID/ADP Market Studies available on-line at www.export.acsa.md. 22 The wage per day for unskilled seasonal ag works presently varies between 80 and 150 lei and includes lunch and transportation. This is an increase by 1.5-2 times as compared to the previous year 2006, and triple (or more) with respect to 2005.


37

domestic technical expertise, both in production but especially in processing, is rather low and requires additional training and a higher skill level.

Another problem indicated during interviews is the lack of young skilled labor force willing

to live and work in small towns (where most agro-processing enterprises are located). This oftentimes explains why older people of retired age remain in high management positions longer than required and cannot be easily replaced. The acute lack of young skilled human capital in rural areas induces large companies to think of some incentive-based approaches for stimulating the educated labor force to return to their home towns after graduation. Companies also reported the need to establish closer links with universities and vocational schools towards adjusting their curricula so that it better addresses their current requirements for skill and knowledge development among the young workforce. So far, these are just intentions that have been articulated by some of the large companies, and which hopefully will be pursued by them in the near future.

75. Capital is generally available for lending and largely utilized by all enterprises that can

offer collateral. Most of the larger operations reported to have no problems accessing bank credits, as long as they can offer the required collateral. It has been reported that the 2006 wine crisis has freed some of the bank resources that were largely available to other industries, including the fruit and vegetable sector. However, smaller enterprises that cannot provide collateral (particularly hard collateral, such as real estate) have limited access to bank credits or cannot obtain loans in the required amount. This has been emphasized as an important constraint to their development and further expansion.

Still, interest rates are considered too high and the borrowing term - too short. All respondents indicated that the 19-20% interest rate on bank credits (offered in MDL) is too high. Credits for longer-term periods (five years and more) are generally not available from own resources of local banks, but are greatly needed by the private sector (for the purchase of equipment in particular). Only one large cannery (100% foreign company) indicated to have had no problems with accessing a five-year loan from a local bank. Donor credit lines do partially solve the “term” problem. Credits made available through IFAD programs and the WB RISP have been mentioned as sources of long-term credits (up to 10 years) available to rural SMEs.

Another mechanism for coping with the lack of long-term resources has been indicated by some enterprises - the purchase of equipment in leasing. Although a needed alternative of investment credit, the leasing sector, however, is at its incipient stage, with over ninety percent concentrated in vehicle leasing, and remotely reaching the private sector to satisfy machinery/equipment needs. Nevertheless, there is indication that the leasing market is ready to take a turn towards development of commercial leasing by diversifying its produce portfolio (to include tracks, construction equipment, agri-business equipment)23. Some donor-financed leasing programs are currently bridging this gap in certain sectors, such as the 2KR Japanese Program, targeted to leasing of agricultural equipment.

A part of the inadequate access to finance problem is the mis-communication between

banks and clients. Clients are not active enough in pursuing available bank products, and often base their conclusions on out-dated anecdotal evidence without directly approaching the bank. Banks, on the other side, are merely commencing the path of pro-active marketing, and there is much to be done not only in actively promoting and advertising their products so that the information is widely available to potential clients, but also in learning to structure products

23 Information reported by leasing companies.


38

tailored to client needs. With regard to the collateral problem, the strong banking competition24 has encouraged many banks to step out of their “comfort” zone and take on more risk, and there is a general trend within the banking sector to “soften” the collateral requirements, in particular concerning “hard” collateral and move towards more liquid security. In addition, regulatory changes25 have allowed commercial banks to structure collateral-free lending products to the micro and small business sector. In order to resolve the term problem, banks have attracted credit lines from international organizations, such as EBRD, IFC and BSTDB, as well as from donors WB and IFAD that are currently functional and highly demanded. Insufficient awareness and/or asymmetric information on the finance market possibilities and opportunities suggest essential gaps in communication on both the supply and demand sides.

76. The current infrastructure status does present a constraint to business development. The supply of electricity and gas has been reported satisfactory, although the price is considered too high. Communications have a good coverage, are widely available and do not present a problem. All respondents-processors reported that the quality of supplied water (for use in production) is poor, this imposing higher costs on them due to the need to acquire water refining stations.

Poor and outdated irrigation infrastructure has popped up as a critical issue for the future

successful development of the fruit and vegetable sector. As mentioned above, irrigation is an absolute must in vegetable production, and is highly recommended for orchards and even vineyards. All respondents indicated to be using (or their suppliers-farmers have been using) irrigation for the production of vegetables, and reported serious intentions to install drip irrigation systems for the orchards in the near future. It should be noted, however, that countrywide irrigation is highly unavailable, this critically constraining the development and growth of the fruit and vegetable sector in Moldova (see Table 1). Recent statistical data reveal that only between 5 and 10 percent (or approximately 10,000-20,000 hectares) of previously (pre-1990) irrigated land is currently irrigated.

The poor and constantly deteriorating pumping plants and deficient distribution systems do not encourage the private sector to invest in new small-scale irrigation equipment. The EU Food Security Project has addressed the irrigation constraint in Moldova by supporting the renovation of pumping plants, on one side, and facilitating the procurement in leasing of on-farm irrigation equipment by the private sector, on the other side (see more details on this in Annex B).

24 Strong banking competition has been driven by the large number of banks (15) as compared to the size of the local market, as well as the entry of foreign banks that has lead to growth of bank capital resources. 25 In 2005, the National Bank of Moldova allowed commercial banks to provide loans without collateral up to 30,000 MDL for micro enterprises and up to 75,000 MDL for small enterprises.

“This year I could not irrigate my 30 hectares of table grape vineyards because the state could not stick to its part of the deal by supplying the water in the reservoir so that I could further use it for irrigation.”

Table 1. Irrigated vs. non-irrigated vegetable yields

[tons per hectare] Vegs Non-irrigated

(with fertilizers)

Irrigated

(with fertilizers)

Tomatoes (transpl) Tomatoes (seeds) Sweet pepper Eggplant Cucumber Peas Cabbage (early) Cabbage (late)

27.0 29.8 13.7 11.8 8.6 8.4 20.9 38.8

68.1 58.2 36.2 32.1 22.5 14.2 34.0 87.2

Source: P.Patron “Joint action of ag intakes in vegetable production”


39

The road condition is poor but not critical to F&V businesses. All interviewed companies admitted that the road condition is poor in Moldova, and to some extent this does affect their businesses, fresh fruit operations in particular. However, when asked to prioritize among various constraints, most respondents indicated road infrastructure as the last item on the constraints list, while lack of finance, lack of human capital, lack of irrigation and market infrastructure had emerged as the key constraints of the fruit and vegetable sector, as of today.

STRUCTURE, STRATEGY AND RIVALRY

77. In the past Moldova was one of the largest producers and processors of fruit and

vegetables in the former Soviet Union with most of the production exported to other

republics. For this reason, Moldova had the good fame of country’s “orchard” (since Moldova was particularly known for its fruit and wine production). The collapse of the old system and disruption of the existing state-controlled distribution chains along with Moldova’s becoming an independent state in early 1990s had led, among many other disturbances, to shrinking agricultural production and obviously agro-processing. Changing land ownership structure, annulled subsidies, lost markets and general economic crisis that persisted throughout the past decade are just few reasons for the sector decline.

The adjustment process was difficult and lengthy with the private sector slowly evolving and learning on how to operate in a market economy and how to produce according to market demand. F&V sector recovery began in early 2000 in response to increased economic activity and investments in the sector, development of financial markets, improvements in agricultural markets for inputs and outputs, rebuilding of market linkages and grasping new market opportunities. However, significant untapped potential still lies ahead the Moldovan F&V sector. Enhanced competitiveness of Moldovan F&V products, both fresh and processed, will ensure stable and expanding markets to producers and processors, concomitantly transforming Moldovan agriculture into a highly productive and profitable business.

78. Production of fruits and vegetables for the fresh market offers the highest returns to

agricultural producers. The fruit and vegetable sector consists of two key sub-sectors, fresh and processed. The processing sub-sector includes four major groups of products: canned, dried, frozen and juices (see also table below). Production of fruits and vegetables for the fresh market offers the highest returns to agricultural producers and is thus the most profitable, if the necessary high quality is ensured. Production of these products for the processing industry offers lower returns to farmers, but requires somewhat lower quality products, and thus lower production costs. Within the group of processed F&V, frozen products offer the highest value to producers. Next in the list are dried and pickled (part of canned) products, while other preserves (pastes, jams, other nes products) as well as juice concentrate require relatively low quality raw material.

Sector Sub-sectors Product groups Value to ag producer

FRESH Fresh High value

FRUIT &

VEGETABLES

PROCESSED

Frozen

Dried

Canned

Juices

Medium to high value

Medium value

Low to medium value

Low value

79. The two sub-sectors, fresh and processed, have different value chains that largely

reflect their very different development statuses at the moment and different market

segments (see Figure 31 below). Due to scarce market infrastructure (cold stores, refrigerated


40

distribution chain, packing houses) most of the fresh produce is marketed during the harvesting season, and a relatively small portion is stored in refrigerated warehouses in order to be sold in off-season26. Major clients of fresh producers are traders, intermediaries and exporters that usually come to farmers’ gate and buy large tracts of fresh produce, offering relatively low prices. [Some producers prefer to directly sell their products in open markets (since they are not happy with the prices offered by intermediaries), but this involves additional time, effort and costs.] The fresh produce is further sold either on the local market (mainly open markets, food stores) or exported. At the moment a relatively small portion of domestic fresh produce reaches local supermarkets. This is because the domestic produce quality/appearance is largely inadequate for the high-end market segment.

Canning enterprises and drying plants have different value chains due to different products and different target markets (Figure 31). Canneries’ products target the consumer market, both local and CIS. Moldovan canned products reach the markets mainly through distributors that further place Moldovan products in supermarkets and other food stores in the target markets. Moldovan dried products, on the other side, target mainly the EU wholesale market. Also, some quantities of domestic dried fruits in retail packs reach local retail chains, but this market is rather small. [More discussion on these industries is presented throughout this section.]

26 A Cold Chain Study conducted by USAID/CNFA in November 2004 estimated that about 70% of the fresh fruits and vegetables produced in Moldova are sold during the harvesting season and without the benefit of refrigerated storage.

Figure 31. Value Chains for the Fresh and Processed F&V Sectors

FRESH PRODUCERS

Cold storages

Traders, intermediaries

Openmarkets

Supermarkets

Food service

Exporters Importers

END CONSUMER

DOM

DOM

DOM

EXP

Large Producers

CANNERIES

Ag Producers

Own agproduction

ForeignDistributors

Local Distributors

Direct SalesCompany Stores

END CONSUMERFood Stores

Supermarkets

FRUIT DRYERS

Ag Producers

Own agproduction

Exporters …

END CONSUMER

Importers

Products:CannedFrozenJuices

Processingplants

Super-markets

…

Retail pack

Ind pack


41

80. A modern sector of fresh fruit and vegetables, based on advanced

technologies and market oriented, is currently at an incipient stage of development in

Moldova, but has good opportunities for growth. The Moldovan fresh fruit production is still highly export oriented, although the number of export products is limited, including mainly apples, but also table grapes, plums and smaller volumes of peaches, apricots, cherries and sour cherries. Fresh vegetables, on the other side, have become net importables in Moldova within the last decade, due to the failure of local producers to supply early- and off-season vegetables for the growing consumer market (determined by low access to irrigation, lack of greenhouses).

The current export markets of Moldovan fresh fruit and vegetables are CIS countries as well as Romania. Trade with these countries benefits from historical ties, extensive ethnic networks, similar standards and regulations, as well as regional and bilateral trade agreements. High EU requirements for quality, safety and volume do not yet allow Moldovan fresh produce to enter those markets. As of today, probably none of Moldovan companies can supply EU with the volume of fresh produce that would justify investments in the rigorous EurepGAP certification or British Retailer’s Code of practice.

81. Presently Moldovan fresh products are generally positioned on the lower end of their

target markets, being sold primarily in wholesale markets, most often in poor packaging and poor overall appearance, with part of the product being bruised and/or damaged during transportation. USAID/ADP Market Studies indicate that “Moldovan apples do not meet the requirements of the high-end market and thus do not reach most of the supermarkets. Although being tasty and rather cheap, they bring too many problems: high waste, poor packaging, unsatisfactory grading, etc. Due to these problems, they are being traded by smaller wholesalers and sold at the open bazaars.” Similar conclusions can be found in all market reports that cover various fresh products from Moldova in different target markets, such as Romania, Belarus, Ukraine, Russia, as well as Latvia and Germany (these two countries are much less familiar with the Moldovan produce). A summary of suggestions to Moldovan exporters of fresh apples expressed by importers in three target markets (Russia, Lithuania and Germany) is presented in Annex C.

This is happening because modern market infrastructure, including cold storages and packing houses, is highly underdeveloped in Moldova. There are approximately 150 cold stores in the country (all private), most of them built during the Soviet times. Presently only half of them are functional, and not more than 20 are relatively new modern cold stores built after 2000 (some with the support of donors27). Of these, larger-capacity cold stores (over 1000 tons) are few in number, about 5-7 for the whole country, which is estimated as highly insufficient. There are only 3 controlled atmosphere storages that allow for longer storage periods. As to Moldova’s packing capabilities, these practically do not exist. Presently there are only 3 enterprises in the country that dispose of automatic packing lines for some products, and there is no one large modern packing house with multiple packing lines and refrigeration rooms. All respondents recognized the critical need for packing houses in order to add value to the ag produce and improve market access, indicating, however, that large investments and significant know-how are needed for starting-up such a business. Some respondents reported to seriously consider this for the near future.

27 USAID funds (provided through PFCP and ADP programs implemented by CNFA), as well as funds of the Dutch Government had been provided (as matching grants) for the renovation of some cold stores in Moldova.

FRESH

As of today, there is no one single large modern packing house / export centre in Moldova!


42

82. There are, however, positive signs of quality changes arising in the fresh produce sector

of Moldova. Commercial-type production of fruit and vegetables is slowly evolving in response to favorable market signals and increasing interest of investors, both local and foreign. Local producers of high-quality fruits and vegetables that produce for the high-price segment of the market indicated that they practically have no competitors on the domestic market, while the demand for their produce is extremely high. This is an explicit indicator of current under-development status of the fresh sector in Moldova, which has, however, plenty of room for further expansion. The local market for vegetables is capable to absorb large quantities of year-round fresh vegetables, and if local producers were able to provide them, this would minimize the need for imports. Therefore, expanding the greenhouse sector and applying modern production techniques is seen as a prerequisite towards building a competitive fresh vegetable production sector in Moldova that is able not only to satisfy the local demand, but also compete in export markets.

Fruit producers showed very optimistic about the opportunities of the fresh fruit sector of Moldova, indicating that the success is guaranteed if the focus is put on the right varieties, advanced technologies and irrigation. Many interesting ideas and future investment plans had been articulated with regard to developing high-tech super-intensive orchards and table grape plantations of demanded varieties (especially seedless) with access to drip irrigation. Fruits that are seen as highly perspective and demanded by the market are pears, seedless table grapes, peaches, apricots, cherries, plums (certain varieties), as well as various types of berries.

There is a widespread agreement among producers of fresh fruit and vegetables that innovative production, although essential, is not sufficient in today’s world. Production developments should necessarily be supplemented with cold stores and packing houses that complete the produce chain and add significant value to the produce.

83. The fruit and vegetable industry is a traditional industry in Moldova that is highly export oriented and currently struggling for the diversification of products

and markets. Presently the industry consists of 7 large enterprises that produce 70-80% of the FVI output, and approximately 90 small and medium enterprises that contribute another 20-30% to total output. 3 out of the 7 large enterprises (LEs) produce over 80% of LE output, these are Natur Bravo (that has three plants in Cupcini, Floresti and Ungheni), Orhei Vit and Alfa Nistru (see Figure 32). Of the 90 SMEs, approximately 50 are canneries and 40 are fruit drying plants, but only about half of them were functioning in 2006 (see Annex 14).

Fruit and vegetable processing enterprises are widely and

evenly distributed across the country, with most of the

plants located in small towns. F&V processing units are present in almost every rayon, and the concentration is somewhat higher along the Nistru river where irrigation possibilities are better (see the map in Annex 14).

All enterprises of the fruit and vegetable industry, both large and small, are 100% private

entities. Orhei Vit is fully owned by Development Group USA and Natur Bravo is 100% foreign company owned by the US Western NIS Enterprise Fund (a financial investor). There are some

PROCESSING

Figure 32. FVI Structure, 2006 Anenii

Noi

1%Cosnita

10%

Natur-

Bravo

26%

Orhei-Vit

27%

Alf a-

Nistru

13%

SMEs

20% Calarasi

2%Olăneşti

1%

Source: MAFI

“If you have a quality fresh product, there is no problem to sell it: local buyers (either exporters or retailers) are queuing to get it!”


43

smaller canneries and drying operations that have attracted FDI from Holland, Germany, Belgium, US, Cyprus.

The range of FVI products can be grouped in three large categories: juices, including juice concentrate, that take over about half of total FVI output, canned vegetables with 30% and processed (canned and dried) fruits with 20% (see Figure 33). Frozen products are produced in insignificant quantities so far in Moldova28. The full list of FVI products by enterprise is provided in Annex 13.

Most of the FVI output is exported, exports accounting for

over 90% of domestic output. Both large and small processing enterprises are highly export oriented businesses. CIS countries, Russia and Kazakhstan in particular, are the main markets of Moldovan canned fruit and vegetables. Canned fruits, however, had showed a greater success (as compared to canned vegetables) in penetrating the EU market (see Table 2). Fruit juice concentrate is sold primarily on EU markets (Germany and Austria), while ready-made fruit and vegetable juices in consumer packs go to CIS. Dried fruits and nuts (in industrial packs) are mainly oriented to the EU wholesale market. Relatively small quantities of frozen vegetables are exported primarily to CIS, while frozen fruit take the EU road.

The canning of vegetables and fruits represents a long standing industry in Moldova and is relatively well developed. Foreign distributors and supermarket chains are the main clients of Moldovan canneries on the target markets. Company representations are also present in some markets, such as Russia, Kazakstan, Romania, but direct sales are a small portion of total sales. The interviewed enterprises indicated to export their produce mainly through distributors, who also serve as their major source of information with regard to requirements and changing demands of the target markets. In addition, large companies conduct market studies on some of their target markets on regular basis. Large canneries produce primarily under own label, but also work with private labels. Smaller companies indicated to produce largely under private labels. Companies reported that the Moldovan canned produce is currently positioned in the lower-to-middle price segment, depending on the product.

Interviewed canneries pointed out that their main competitors on the export markets are Asian countries and China (for the low-price market segment), as well as Hungary and Bulgaria (for the medium-price consumer). In order to successfully compete on the export markets, the companies apply competitor-specific strategies targeted to the two market segments. Competing with Asia for the price-sensitive low-end consumer requires minimizing the cost of production, while the

28 See a larger discussion on frozen produce further in this section.

CANNERIES

Figure 33. FVI output by group of

produce

Juices

50%

Canned

v egs

30%

Dried&

canned

f ruit

20%

Source: NBS

Table 2. Export Market Destinations of Moldovan F&V

products, 2006

CIS Russia EU Romania US

Dried vegs 3% 0% 46% 25% 12%

Dried fruit 18% 0% 81% 5% 0%

Frozen vegs 80% 79% 20% 19% 0%

Frozen fruit 15% 15% 76% 1% 0%

Canned vegs 94% 73% 6% 4% 0%

Canned fruit 64% 34% 30% 6% 1%

Juices 31% 6% 68% 3% 0.1% Source: NBS


44

competition with Western countries for the medium-price consumer requires raising quality and safety standards, as well as improving marketing techniques.

The frozen business practically does not exist in Moldova. There are only two enterprises (Alfa Nistru and Ecoprodrosmol) that currently produce small volumes of frozen fruit and vegetables. There are reports that two other large companies (Natur Bravo and Orhei Vit) have been recently installing quick freeze processing lines with the intention to start production in the near future. All canneries reported that the freezing business is seen as a prospective investment opportunity that offers high margins and has excellent market perspectives. Most of them indicated serious intentions to get involved in the quick freeze production.

Fruit drying companies have different markets and different products. Dried produce is exported exclusively in industrial package (10, 8 or 5 kg, depending on client requirements) to the EU markets: Germany, France, Holland, Belgium, Baltic States, Check Republic, Slovenia. Smaller drying businesses generally do not get engaged in export operations and sell their produce to local large dryers, who consolidate large volumes that are further sold to importers in the EU (wholesalers, distributors, processing plants). A few local companies created their own brands for dried fruits in consumer (retail) package for the local market. These products are present in local supermarkets, successfully competing with similar imported products, but are in the lower price range. Companies plan to further develop these brands in the neighboring countries, Romania and Ukraine, by means of regional supermarket chains. Accessing the EU market with local brands in retail packs is not considered a viable option at the moment due to high costs involved. Falling agricultural subsidies and price supports in the EU is seen by some Moldovan dryers as a window of opportunity for larger and deeper market penetration.

84. The private sector regards the competition within the industry as overall open and

healthy, but relatively minor rent-seeking actions of state authorities pose additional costs

on doing business in Moldova. All respondents, especially the smaller enterprises, had complaints about multiple minor-type harassments encountered in dealing with various state institutions. Examples include intermittent visits to the business site of various control and inspection bodies, police stopping the tracks on the road way too often, certification bodies delaying the issue of certificates, customs authorities delaying the clearance procedures too long. These are all examples of rent-seeking behavior on behalf of state bodies that increase the cost of doing business in Moldova. Although all respondents agreed that corruption within state authorities reduced significantly over the recent years, various bureaucratic abuses are still present and they clearly discourage businesses.

In addition, the justice system was reported as highly untrusted by businesses and a major barrier to investments, especially foreign. There was another issue emphasized by respondents involved in export operations that concerns the NBM policy of keeping the national currency artificially high and constantly on the rise with respect to the US dollar and euro – this was reported to be seriously hurting the domestic exporters by causing them essential losses at currency exchange.

85. All companies-respondents emphasized that FDI is highly important and welcome,

considering it a great tool for the transfer of technology, skill development and new market

DRYING

FREEZING

“The basic fact that the state clerk cannot be found in his office during work hours is the first window of opportunity for corruption to step in, because in order to speed up the process the businessman has to make the effort to get hold of the clerk and then reward him for his time and assistance. In such a way state officials “help” you to be grateful to them.”


45

perspectives. The Moldovan fresh business has so far attracted some foreign investments from the US, Holland, Germany and Turkey (exact figures are not available). The interviewed joint ventures indicated that FDI has brought along innovation, such as new varieties (i.e. 20 new varieties of table grapes had been brought from the US), advanced technologies (i.e. hydroponics production, year-round production), new skill development (foreign experts training local specialists). The largest cannery in Moldova, Natur Bravo, indicated that the change in ownership has lead to major staff changes in the core team and resulted in a new marketing team that has been working on shifting the market orientation of the enterprise away from Russia towards more reliable and higher value markets (by developing new products, actively searching for partners in other markets).

Contradictory opinions have been expressed regarding the restriction on ag land ownership

by joint ventures. Some respondents consider that long-term leasing of land is a good alternative to land purchase, while selling land to foreigners opens up certain risks. Others, on the contrary, see this restriction as a major constraint to foreign investments in agriculture, indicating that allowing foreigners to own land would somewhat balance other risks that the country has (high macroeconomic risks, political risks, deficient judiciary system), and serve as a major attraction point for foreign capital that is so much needed by the sector. This would also accelerate the development of domestic land markets and land consolidation, while land in private ownership could be used as collateral when accessing bank credits, which is not an option in case of land leasing.

DEMAND

86. World market prospects are very favorable for the

fruit and vegetable products, both fresh and processed: annual growth rates of world export volumes account for 10-15% (Annex 15). The lion share in world F&V exports goes to the fresh products that account for 52% of the total. Canned products take about 22%, juices - 12%, while the frozen and dried products have a relatively smaller share of 7 and 6% respectively. Comparing the world picture to the Moldova structure of F&V exports, it is easy to notice the under-development of the frozen sector in Moldova (see Table 3).

87. The annul CBI reports on EU markets for fresh and processed fruit and vegetables

indicate that today’s consumer preferences with regard to food and nutrition uphold

enhanced fruit and vegetable consumption, being focused on the following principles29:

� Safe food [Food products should be safe and eating them should not result in any risk to health.] � Healthy food [These are food products that are low in fat, sugar and salt content.] � Organic food [Recent food scares made many people concerned about the safety of food and the effects of intensive farming on the countryside and on the environment in general.] � Fruit and vegetables [The growing interest in the consumption of fruit and vegetables in the EU food market is caused by the fact that fruit and vegetables contain vitamins and natural antioxidants that help prevent heart diseases and cancer.]

29 Source: Fresh Fruit and Vegetables, EU Market Survey 2005, CBI; Preserved Fruit and Vegetables, EU Market Survey 2005, CBI.

Table 3. Structure of F&V

Exports: Moldova versus World

[2005, %]

Moldova World

Fresh 52.1 51.8

Frozen 1.1 7.1

Dried 5.3 6.3

Canned 21.0 22.8

Juices 20.4 12.0 Source: NBS for Moldova data and ITC for

world data.


46

� Environment consciousness [Food production, especially primary growing, should be environment-friendly.] � Convenience [European people are working more and more in jobs outside their home, have busy social lives, and, therefore, have a growing need for convenience meals.] � Tracking and tracing [With the help of good chain management and control within the chain, end-product processors are able to supervise all kinds of aspects of fresh F&V and products derived from them. The F&V processing industry is increasingly paying attention to chain management and labeling systems, through which products can be traced back to the producer.] � Internationalization [As the world is increasingly turning into a global village, culinary traditions from other continents tend to be more widely accepted by European consumers, increasing the demand for ethnic and exotic ingredients.]

All these trends are interlinked, shaping the global demand within the fruit and vegetable sector. Increasing demand for convenience products spurs demand for ingredients used in ready-to-eat meals. Internationalization of taste increases demand for exotic ingredients. The need for safe and traceable food ingredients provides exporters in developing countries with opportunities to catch on to these trends.

88. Market studies30 indicate that requirements and preferences of the high-end CIS

markets are similar to those of EU, in terms of both importers and end consumers. The high-end CIS consumer is less sensitive to produce price, but highly sensitive to produce quality, appearance and safety aspects. The low-to-medium income consumer is rather price-sensitive, and cares much less about the produce safety and quality characteristics.

A strong tendency towards concentration and consolidation can be noticed in the global horticultural trade, both on the buyers’ and suppliers’ level. As a result, the demand for consistent volumes and qualities of fresh produce increases, causing firms to introduce procurement methods that manage the supply chain more efficiently. EU importers as well as CIS importers targeting the high-end market segment of both fresh and processed F&V have similar requirements towards their produce suppliers that focus on:

� Consistent and high product quality according to importers specifications; � Steady and timely supply of products; � Reliability in supply and honoring agreements with the trade partners; � Complete product specifications; � High-quality packaging to reduce waste and losses; � EUREPGAP certification for fresh products and HACCP certification for processed foods; � Open communication.

In terms of quality, it would be a challenge to surpass the requirements that customers in the EU demand as minimum standards. Although price will always remain a major competitive tool, it is certainly not the only instrument for outranking competitors.

89. Fruit and vegetable importers in developed countries face multiple problems with their

suppliers from developing countries, and Moldovan suppliers do not make an exception.

30 Source: USAID/ADP Market studies (www.export.acsa.md).

“Ukrainian high-income consumers would not bother too much about the price of the apples. The colour of the fruits, their shape and size, as well as the taste, are much more important factors. For lower-income buyers the price is the key factor when choosing specific varieties. For this reason they prefer domestic or Moldovan apples because these are cheaper. “

Source: The Ukrainian Market for Fresh Apples, Target Market Confirmation Study, CNFA/ADP, 2006.


47

The 2005 BCI Market Report on Preserved Fruit and Vegetables points out these major problems related to quality inconsistencies, delayed deliveries, uncertainty of agreements, non-compliance to produce specifications and overall poor communication with buyers (see box below). These general supply problems are also specific to Moldovan exporters of both fresh and processed F&V, as indicated by USAID/ADP market studies. In addition, Moldovan exporters of fresh produce had been warned of the critical need to address a number of key issues (as emphasized by surveyed importers in target markets, both CIS and EU):

• grow the plant varieties required by the market;

• dispose of the technical know-how in the field of modern production technologies, including production in protected field;

• ensure a fast and reliable refrigerated distribution chain;

• ensure proper storage of the fresh produce to preserve its value and enable longer-term supply;

• improve sorting & grading techniques to avoid mixing products of different size, shape and condition in the same batch;

• use modern packaging (preferably European) to improve waste indices and losses during handling and shipping;

• ensure appropriate conditions for transportation of produce (refrigerated trucks, etc.).

These “recommendations” coming from the demand side have clearly emphasized the current weaknesses of the Moldovan fresh produce sector - deficiencies in production, but especially the under-developed market infrastructure - concomitantly putting forward the opportunities and challenges that need to be overcome so that the sector can meet the growing demands of the target markets.

90. The options on the EU market of preserved F&V are limited for exporters from third

countries and offer a relatively narrow window of opportunity there. The 2005 CBI report on preserved fruit and vegetables indicates that the opportunities for exporters of processed products from developing countries lie in the following positions in the supply chain:

• suppliers of preserved F&V ingredients to the food processing industry in the EU countries; • suppliers of preserved F&V in bulk to packers in the EU that pack in consumer and food service units; • subcontractors for the food processing industry and retail organizations, which process fruit and vegetables and pack them in consumer and food service units according to strict specifications and under their customers’ labels in the EU.

91. A quick comparison of prices obtained by Moldovan and World exporters of similar

fruit and vegetable products clearly show that Moldovan products are in the low-price

segment and have a long way to go to reach the world prices. The gap is particularly high for the fresh products (see Table 3), thus confirming the revealed constraints concerning low quality of domestic fresh produce, shortage of post-harvest handling and non-compliance to international standards. The price gap is almost non-existent for two categories of products – dried fruits and juices – that are standardized commodities on the world markets and Moldovan exporters that comply with the basic standards are regular price takers in this particular case. It is worth

“The major problems faced by importers in the Netherlands in importing preserved fruit and vegetables from developing countries are the following: • Quality of shipment is not in line with samples sent; • Delayed delivery; • Exporters want to change agreed payment and delivery terms; • Pesticide residues exceed permissible limits; • Paperwork and bad communication.”

Source: Preserved Fruit and Vegetables, EU Market Survey 2005, BCI.


48

mentioning that Moldova’s price dynamics (2005 to 2006) is encouraging for all F&V export categories, suggesting possible signs of sector development in the right direction.

92. Current Moldovan standards based on

the old GOST system are not harmonized

with EU requirements – this is a serious

impediment to produce and market re-

orientation. Much of Moldova’s legal, regulatory, and institutional framework for food safety and SPS remains tied to the GOST standards of the former Soviet Union. Moldovan public services still use these standards as their basic framework for monitoring, surveillance, and inspection. Actions are being taken to shift from a GOST-based system to one based on international standards appropriate to a market economy and more effective in protecting human and agricultural health. It is important to mention in this context that approximately 90% of these standards relate to agricultural products. The harmonization progress is however very slow, since there is limited capacity, expertise and resources to carry out this massive task (see Box 1 below for more detail).

Box 2 below presents the different standard requirements for fruit and vegetable products of the two Moldova’s major markets - EU and CIS. EU standards for market access are clearly different from the GOST system, and currently Moldovan public services for food safety and SPS management lack the technical capacity to provide all the necessary certifications required by the EU market. GOST standards in general form an obstacle to market access (other than CIS) as they are not recognized in market economies. The high-end CIS markets already require supplies that comply to some of the EU mandatory (and even voluntary) standards, and it is expected that this trend will continue and intensify in the light of general market globalization and convergence of consumer preferences and requirements worldwide. As international supermarket chains are already taking market share from smaller shops, it is very likely that the market segments

Box 1. Excerpt from the WB Report/2006 “Moldova: Managing food safety and agricultural health: An

Action plan”

“…A major part of Moldova’s primary legislation dealing with sanitary and phyto-sanitary measures has already begun to converge with international and particularly European legislation. The task now is to develop technical regulations and voluntary standards related to SPS and food items. THIS IS A HUGE TASK. Existing GOST rules must be reassessed for compatibility with international standards principles and whether they contribute to market access and private sector development. Ultimately, these rules must be abandoned, replaced, or changed to voluntary standards. New bylaws based on international standards principles and regulations (when and where benefits exceed costs) must be developed. The operating implications of the revised rules for quarantine and inspection must be identified, and changes to daily enforcement practices must be communicated and implemented. The Ministries of Agriculture and Health fall short in number of staff, knowledge, and expertise (in market economic principles, risk assessment, economic evaluation, and language skills) to do this work adequately within a period of 3 to 5 years, meaning a task force supported by international expertise will be necessary. Priority should be given to products with greatest export potential and to higher-volume import products that pose substantial human and agricultural health risks.”

Table 3. Export prices of F&V products: Moldova

versus World [USD per ton]

MD-2005

MD-2006

World-2005

MD as % of World, 2005

Vegs

fresh 208 229 635 33%

frozen 628 554 894 70%

dry 127 152 368 35%

Fruits

fresh 331 456 792 42%

frozen 590 679 1.265 47%

dry 1322 1767 1.695 78%

Processed F&V

canned vegs 601 655 909 66%

canned fruits 486 506 1.244 39%

juices 700 885 753 93%

Source: NSB, ITC


49

accepting products produced according to former GOST standards will shrink and will offer lower prices than will be attained in segments requiring international standards.

The large producers recognize the importance of standards and do consider implementing ISO and EurepGAP in the near future, indicating that this is becoming a critical necessity within the general traceability requirements not only of the sophisticated EU markets, but also the high-end CIS markets. All interviewed processing companies reported to have implemented ISO certification standards and HACCP plans for a major portion of their operations. The large canneries have their own testing laboratories that are accredited by the Moldovan Accreditation Center. These private laboratories usually have better basic infrastructure than do the state central laboratories. However, state laboratory tests are still required for harmonization and certification purposes. All respondents recognized that the state labs are under-funded, poorly equipped and lacking trained staff, thus in a difficult position to provide quality service, while the reliability of issued certificates is rather questionable.

93. One major constraint mentioned by respondents is the lack of EU accreditation

available from Moldovan certification bodies. The National Centre for Accreditation has mutual recognition agreements (MRAs) with CIS countries and several countries in the region, but no agreement has been achieved so far with the EU. This issue is linked to the complex problem of legislation harmonization and reform of the regulatory system that includes the development of technical regulations and voluntary standards (see Box 2). Bringing standards and technical regulations for the export-oriented products in line with EU regulations, is a prerequisite to enhancing Moldova’s capacity to penetrate the EU market.

94. Moldovan F&V businesses are active participants of regional exhibitions that are seen

not only as a useful export promotion tool, but also a great learning exercise. Most agribusinesses in Moldova participate in the annual Farmer exhibition held in Chisinau. Processors reported that they regularly participate in regional exhibitions, such as Prodexpo and

Currently there is one single apple producer (Codru ST) in the country that has recently received EurepGAP certification, which enables the enterprise to access high-value EU markets.

Box 2. F&V Standard Requirements by market: EU versus CIS

EU CIS

Fresh

F&V

Mandatory standards: - EU Marketing Standards (for quality and labeling) - Certificate of Origin - Maximum Residue Levels (MRLs) - Phyto-sanitary certificate - Conformity Certificate Voluntary Standards*: EUREPGAP, HACCP, ISO 9000, 9001

Mandatory standards: - GOST Standards, including various certificates: NOT HARMONIZED TO EU MARKETING STANDARDS Voluntary Standards: - EU Marketing Standards; - EUREPGAP

Processed

F&V

Mandatory standards: - EU Regulations on products, labeling, approved additives, pesticide residues. - HACCP (mandatory since 2006) Voluntary Standards: ISO 9000, 9001; BRC

Mandatory standards: - GOST Standards: NOT HARMONIZED TO EU REGULATIONS FOR FOOD PRODUCTS Voluntary Standards: HACCP, ISO 9000, 9001

Source: BCI Reports on Fresh F&V and Preserved F&V for 2004 and 2005; CNFA Market Studies.

* Voluntary standards are often required by the high-end importers and retail chains.


50

World Food in Moscow, Astana Food and World Food in Kazakhstan, Anuga in Germany, SIAL in France. Producers of fresh produce indicated to participate in IFA Fresh Produce in Moscow, Indagra in Romania, Fruit Logistica in Germany. This is done on individual basis by use of companies’ own resources (possibly with some donor support in some cases), while the state is generally not involved in this process. Donor projects supporting some export promotion activities for the F&V cluster include the USAID Agribusiness Development Project, EU Support to MIEPO project, German-Moldovan Partnership Project.

RELATED INDUSTRIES AND SUPPORTING INSTITUTIONS

95. Moldovan producers and processors of F&V depend largely on imported inputs. Most of the inputs utilized by fruit and vegetable producers in Moldova are imported, only some seeds and basic packaging are produced domestically. Processors, the next link in the value chain, also largely rely on imported inputs, except for the raw material that is either produced by the enterprise itself or sourced from farmers (see the diagram below). Thus, both producers and processors face the world prices for their inputs and should be efficient and competitive enough in order to be able to receive the world prices for their outputs.

96. Raw material supply was reported as a major problem,

emphasized by all processors and producers that act as aggregators and traders of fresh

produce. No respondent declared “no problem”, everybody indicated to have encountered difficulties with the quality, quantity, timing, consistency, price uncertainty, as well as the reliability of raw material supply. Processors expressed two different, and rather opposite, views on addressing this problem. Some processors have own agricultural production that ensures a certain portion of their raw material needs (particularly the high-value raw material), and reported the intention to further expand their own raw material base in order to lower their dependence on farmers. Others have a different strategy: they rely exclusively on farmers and are not willing to engage in agricultural production, since this is a different risk that they are not ready to take over.

All processors reported to be working with rather large farming operations that can offer large quantities of products of relatively consistent quality. Their intention is to further reduce the number of suppliers and focus on a few that are large enough and reliable enough. Processors that rely mainly on farmers for their raw material supply had showed confident that the solution is in building long-term partnerships with agricultural producers through regular training coupled with

Own ag

prod (seeds,…)

Processin

g equip (IMP)

Packagin

g (DOM + IMP)

Transpor

tation

(DOM)

Ag raw

material (DOM)

PROCES

SOR

Fert &

Chem (IMP)

Ag mach

& equip (IMP)

Irrig

equip (IMP)

Packagin

g (DOM + IMP)

Seeds (DOM + IMP)

PRODU

CER

RELATED INDUSTRIES


51

advanced payments in form of seeds and equipment (for harvesting and irrigation) that is costly for farmers to purchase.

97. Agricultural inputs are widely available on the market, while the choice is limited for

some items. Main agricultural inputs include seeds and seedlings, as well as fertilizers and chemicals. All of these are generally available from importers and local distributors of international companies, while seeds and seedlings are also produced and traded by local firms as well as state research institutes. No problems have been reported with the supply and range of fertilizers and chemicals. The supply of seeds and seedlings is not a problem either, but the variety choice – is. The issue is that imported plant varieties, which are not yet registered in Moldova, cannot be sold on the market and need to go through a mandatory testing and registration procedure that currently takes 2 years for seeds and 6 years for seedlings (see also Box 3 below). This allows the local state research institutions that produce seeds and seedlings to maintain their share of the market, which otherwise would rapidly decline.

This limitation has been reported as a major constraint by many respondents (both producers and processors). Some large enterprises have reported to have found ways to go around it by collaborating with the State Commission31 for the admission on new un-registered varieties into production for so-called “testing purposes”. The list of varieties temporarily admitted for “testing in production conditions” is annually published in the National Registry of Plant Varieties and presently includes 32 grape varieties, 48 fruit varieties and no vegetable varieties. Respondents admitted that oftentimes they do take the risk of planting un-registered varieties of both seeds and seedlings, which usually get on the local market through smuggling.

Most interviewed businesses consider that the state should allow

unrestricted access for seeds and seedlings from EU by eliminating

the mandatory registration requirement and letting the private

sector assume all uncertainty risks. This, in turn, would allow for the transfer of high-yielding, disease-, pest- and drought-resistant varieties down to the farm level in no time, thus stimulating productivity enhancements through innovation in Moldova. More conservative opinions have argued that the state should be the one to assume the responsibility of eliminating all risks associated with introduction of new varieties into the country and must keep the mandatory registry, however, seeking to maximally reduce the testing and registration period and simplify procedures involved in this process.

98. Machinery and equipment utilized by Moldovan fruit and vegetable producers and

processors are imported, mainly from the EU, but also CIS and other countries. Enterprises

31 State Commission for plant variety testing is the state authority subordinated to MAFI that authorizes the registration of new plant varieties.

Box 3. Except from the WB Draft Report “Steps to improve farmer access to new technology and rebuild

Moldova’s seed industry” (Chisinau, June 28, 2007)

“…Moldova seed companies have delayed and uncertain access to varieties from EU and CIS markets. The delay is caused by the current practice to test varieties for several years before the National Council decides whether or not to allow seeds of the variety to be sold in Moldova. In this way, COMPANIES LOSE YEARS. For vegetable varieties that are sold in EU markets for only a few years, this is an impossible situation. By the time Moldova

approves the variety, it is no longer available…”

“A few years ago I have planted an orchard with seedlings of un-registered varieties that have been recently registered.”

“The investments I make in my business represent my own risk, so why does the state impede me from assuming the risks of planting a new variety

that has high potential.”


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usually work with the local representations of equipment suppliers that are scarce on the domestic market. The low competition among these firms reflects on the quality of their service - many respondents mentioned weak guarantees upon procurement and inadequate service during utilization (including lack of spare parts) as important deficiencies in their business.

Agricultural machinery and equipment, including irrigation equipment, is crucial for the modernization of the F&V sector of Moldova. During the 1990s and early 2000s there has been a process of rapid deterioration of the existing stock, while replacement investments were relatively limited because of the high costs involved. Presently there is a tendency in replacing some of the outdated stock of agricultural machinery, the process being largely supported by donors. One of the most successful projects in this area is the Moldova-Japan 2KR project (initiated in 2001) that has been ensuring a continuous renovation of the machinery fleet in Moldova. The offer includes tractors, harvesters and irrigation equipment that can be purchased in leasing under favorable terms.

99. Higher-quality packaging materials utilized by the F&V sector are not produced locally

and should be imported. All respondents indicated that they import at least one or two packaging items, which either cannot be found locally or their quality does not meet clients’ requirements. For example, cans are imported from Hungary and Ukraine, some high-quality cardboard boxes are imported from Turkey, glass jars for premium quality pickled products are brought from Poland, Bulgaria or Ukraine, and high-quality film comes again from Ukraine.

100. One area that did not get any complaints on behalf of the respondents is the transportation: no problems have been encountered in dealing with the transportation companies that apparently are plenty on the local market and quite responsive to clients’ needs and requirements.

101. Another area of concern is the quality of domestic research

and education institutions, as well as the inter-connection between research, education,

extension and their link to the real sector comprised of producers and processors. All respondents agreed that the under-funded research institutions are weak in Moldova and the general perception is that they lost any touch with the needs of the economy. The widespread opinion is that Moldova should take the path of country-follower when it comes to science and research and become rather pro-active in seeking to adopt, utilize and implement domestically as much as possible of latest technologies created by developed economies. Education is also seen as a week element and it is judged based on the insufficiently skilled labor force, as well as the lack of necessary skills required by the processing industry in particular. In the same time, the collaboration with Ag University professors (as consultants and trainers) reported by most respondents is found quite satisfactory and based on long-term partnerships.

The greatest problem, however, and this was emphasized by each and every respondent, is the lack of connection between the four variables – research-education-extension-real sector. The system connecting the four groups is not presently functioning, although is absolutely essential for Moldova’s agribusiness development and growth. Building the liaison between these areas

SUPPORTING INSTITUTIONS

Research

Education Extension

REAL

SECTOR

Weak link:

Research-

Education-

Extension→

Real Sector


53

would also help to clearly see the current weaknesses of each area in particular and find ways to overcome these.

102. A private / public dialogue does exist, but is rather sporadic and unorganized. Interviewed associations and large enterprises reported overall positive interaction with the Ministry of Agriculture on various policy- and business-related issues. In the same time, smaller businesses reported no communication with state field institutions. Instead, some producers indicated to be members of UniAgroProtect32 that is their representation in the dialogue with the state. Uniagroprotect has been also indicated as an important source of information regarding available donor assistance projects in the sector. ACSA, the rural extension network, has also been mentioned as a good source of production advice, marketing info and business plan development.

Large enterprises indicated that they do communicate among themselves when necessary, although are not members of a field-related association. Various attitudes had been expressed about the need of a sector association and there was no strong opinion in favor of it. It has been acknowledged that some sort of private / public dialogue does exist, but each enterprise does it individually. Large processors admitted, however, that if a situation requiring joining efforts has arisen, they would be ready to act together in order to effect a change.

Concluding Remarks

103. Significant untapped potential lies ahead the Moldovan F&V sector. Concerted effort to enhance competitiveness of Moldovan F&V products, both fresh and processed, will ensure stable and expanding markets to domestic producers and processors, thus transforming Moldovan agriculture into a highly productive and profitable business.

Both fresh and processed sectors critically depend upon modernization of primary

agriculture. The under-developed fresh sector could quickly catch up and achieve international competitiveness if investments in innovative agricultural technologies and production techniques (intensive orchards and vineyards, greenhouses, new high-yielding varieties), irrigation infrastructure and marketing infrastructure (cold storages, packing houses, etc.) occur at an accelerated pace. The processing sector, much more advanced in its development as compared to the fresh sector, is currently a significant player on export markets and has excellent opportunities for expanding its presence there if three major areas of concern are properly ensured: adequate raw material supply, availability of skilled (and young!) labor force, and development of new products with high market demand.

Bringing standards for the export-oriented F&V products in line with EU regulations and achieving EU accreditation are prerequisites to enhancing Moldova’s capacity to enter the EU market. This will serve a dual aim by supporting the penetration of high-end CIS markets that have similar requirements to those of the EU.

104. Using the Constraints Analysis classification of constraints, the conclusion of this in-depth sector study is that the four major constraints for the Fruit and Vegetable Sector are

human capital, market infrastructure, innovation and competitiveness, as well as

investment and business climate. Accelerated investment flows, local but especially foreign, could rather quickly spur innovation and enhance competitiveness by building new skills, modernizing market infrastructure (including irrigation) and driving quality standards while seeking to respond to the demand of international markets. Therefore, removing obstacles to

32 UniAgroProtect is the union of large and medium agricultural producers with 15 regional associations.


54

investments and improving the domestic business environment is a key pre-condition. Identified constraints of the F&V sector are briefly summarized below:

� Inadequate irrigation infrastructure, poor water quality, poor roads increase the cost to businesses. Irrigation is seen as the greatest constraint to growth of the vegetable sector.

� Under-developed market infrastructure (cold stores and packing houses) impedes the Moldovan fresh produce from reaching the high-end markets in CIS and EU.

� Standards that are not adjusted to EU regulations and unavailable EU accreditation block the development of sector capacity to penetrate these high value markets.

� Shortage of long-term finance aggravates the problem further.

� Scarce human resources, especially lack of skilled labor force, is strongly connected to the weak education system that is highly detached from the real sector needs and requirements.

� The connection between research-education-extension and ultimately the real sector is weak and non-responding to sector demands in terms of new technology and skill development.

� Restricted access to imported plant varieties hinders quick and easy transfer of innovation down to the farm level.

� Rent-seeking behavior of various state control and inspection bodies is still quoted as an essential negative factor discouraging businesses.

� Last but not least, beneficial and highly needed FDI flow is hampered by the restriction on ag land ownership.

105. Most identified constraints can and should be addressed by the Government. The majority requires insignificant financial resources but essential political will in form of

policy actions and institutional rearrangements. Key constraints that require large financial

resources on behalf of the state are irrigation infrastructure33 and standards

harmonization. Market infrastructure (cold stores, packing houses) and part of irrigation

infrastructure (i.e. on-farm irrigation equipment), on the other side, should be private-led

investment initiatives. The state, preferably in collaboration with donors, should support

and encourage these types of investments. Successful business models are critically

important acting as effective catalysts for investments and triggers for the mass replication

of success stories. This is the challenge that presently lies ahead the Moldovan fruit and

vegetable sector.

33 State-managed irrigation infrastructure covers the pumping stations and the distribution systems (balancing reservoirs and the underground pipe network).


55

2.2. WINE SECTOR

Summary of Findings

106. Detailed analyses of the wine sector, using the method of Competitive Diamond, reveals the actual state of the sector and the domains, in which the Government and the business

follows to put efforts with the aim of obtaining competitive advantages. The wines sector is a developed sector, in which investments have conducted the exports, to its biggest extent towards CIS markets. The massive concentration of wines exports on the market of Russia, has determined the fragility of industry development. The interdiction of March 2006 imposed by Russia as for the importation of wines from Moldova was caused by entering of the sector into a profound crisis. The efforts of the Government of re-opening the Russian market have not been successful by now. On the other hand, increasing the existent share on other markets and the penetration of new markets, which, in common, would assimilate the volume of „Russian” export, is not possible in the „urgency” regime. Exports volume recovery at the level of the year 2005, as well as their increase, is possible in the case, in which cardinal strategic measurers on various dimensions are implemented, directed to final and as rapid as possible liquidation of constraints described succinctly in the figure 33.

107. The most important constraints in the development of the wine sector are the following (based the Methodology of Constraints Analyses):

(i) Human capital: - Qualified and non-qualified labor force deficit; - Insufficient and outdated level of specialized education.

(ii) Financial capital: high cost and insufficiency of credits for the term of 10+ years, that procrastinates re-equipping and modernization of enterprises;

(iii) Market infrastructure: - Weak institutional capacities of the NCVQAP - Non-adjustment of national standards to the EU requirements and to other high value markets;

- Inefficiency/lack of actions for promoting the image of the country and of local wines; - Low quality of the raw material (grapes);

(iv) Innovations and competitiveness: - Education and scientific research are „far” from the necessities of the winemaking business;

- Lack of implementation of production technologies in the style of the „New World” in order to be able to compete on high value markets;

(v) Business climate: - Unsuccessful design of the state trade mark, which imposes additional investments into equipment;

- Increased costs of doing business: state trademark, certification, technological instructions, licenses etc.;

- An inadequate system of technological instructions, - Lack of trust in the judiciary system.

Results of wine sector analyses differs to certain extent from the results of Constraints

Analyses. This is due to the micro-economic character of the sector survey compared to the macroeconomic character of Constraints Analysis. The results correspond for the financial capital (with the idea that the high inflation generates high cost of credits) and the business climate (licenses, brands, certificates, trust in the judiciary system) and do not correspond for


56

the human capital, infrastructure (the quality of roads and wastes of energy are not significant for the winemaking enterprises) and innovations and competitiveness.

108. The Government can solve a good part of identified constraints, with various costs and terms. So, the most expensive activities would be: (a) strengthening of institutional capacities of the NCVQAP or even of a few laboratories on the whole territory of the country (short term), (b) national standards adjustment to the EU/other states’ requirements (short/medium term) (c) modernization/actualization of the system of technological instructions (short/medium term). Other constraints of the task of the Government might be removed by adoption of decisions and reformulation of sector policies. Diminution of inflation, which would lead to decrease of the cost of borrowed capital, represents a permanent special concern of the Government, NBM and the IMF. The rest of constraints can be solved with the efforts of private business.

109. Re-launching and sustainable development of the wine sector could contribute to poverty reduction in rural areas. In the following 5-7 years wineries will continue procuring grapes from agricultural producers. At the same time, selection of suppliers depending on the quality offered and the solicited price and more efficient cooperation of winemaking enterprises with them will take place. The tendency of planting by enterprises of their own vineyards will stimulate this process. Most probable is that as a result, a part of the population / agriculture households would not be able to sell grapes if they did not cooperate for improving the quality and optimizing costs. At the same time, the development of enterprises will create new work places, non-qualified (vineyards processing) and qualified (wine factories). The demand might be covered on the account of the labor force - former suppliers of grapes.


57

Figure 33. Competitive Diamond: Wine Sector

Connected

and

Support

Industries

Demand Factors

Strategy,

Structure,

Competition

� Vineyards degrade rapidly and have a low productivity. Government grants support at planting vineyards.

� Enterprises plant own vineyards to control quality and production costs. The quality of grapes acquired from the population is unsatisfactory.

� Certain raw materials are produced locally; auxiliary materials and winemaking equipment are imported. Competition in the domain is healthy.

� Efficient cooperation between winemaking enterprises within associations is lacking.

� The efforts of wine business associations and of the Government for promoting wines and the country image are insufficient.

� Enterprises do not insure vineyards. The Government grants support.

� Participation to exhibitions, forums, trainings and other events contributes to enterprises development and promotion on

other markets.

� State – excessive role, with elements of interference, monopoly and un-loyal competition. Presence of the state in commercial enterprises’ capital, existence of state enterprises.

� Local competition is considered as “calm” and healthy.

� Presence of investments, foreign and local, is significant, but insufficient for finalizing modernization and re-equipment.

� The opinion on the restriction of procurement of the agriculture terrene by foreign investors is contradictory.

� Favorable climate and soil. � Lack of irrigation is not a problem.

� Insufficiency of qualified and non-qualified labor force.

� Personnel fluctuation reduces the training effort.

� Education and scientific research are overrun and are not connected to the requirements of the business.

� Credit resources exist. There are no problems with the collateral.

� The cost of resources is high. Insufficiency of credits per 10+ years’ term.

� Leasing is underdeveloped. � Infrastructure is satisfactory. Quality of traffic roads is poor but is not critical.

� Roads quality affects the wine-making tourism.

� The risk exists of blocking railways access to CIS markets.

� Fiscal and customs legislation is acceptable; the cost of license is high for small enterprises.

� Lack of trust in the judiciary system.

� State trade mark – major constraint, which imposes additional investments and expenditures.

� Inadequate technological instructions.

� Cooperation with foreign experts, chronic dependence on

them.

� Production is mainly exported to CIS markets.

� Excessive dependence on the market of Russia. Importers often fix the prices.

� Enterprises diversify exports, but do not possess a short/medium/long term strategy for getting out of the crises, and the export prices policy is inadequate.

� The reduced volume of the internal market is a problem, but not critical.

� Low capacity of reorientation to the preferences of consumers on the high value markets. The production of wines in the „New World” style is necessary.

� The standardization system is adjusted to the requirements of Russia, and does not correspond to the EU requirements.

� Weak institutional capacities of the NCVQAP and high certification costs.

� High cost of ISO implementation.


58

FACTORS

110. Moldova benefits of adequate soils and climate conditions, in most part favorable for growing grapevine. The main regions for cultivating are the Center and the South of Moldova, where the temperature regime contributes to obtaining qualitative grapes34. The main type of table grapes is Moldova, white types of wine grapes: Aligote, Rkatiteli, Sauvignon, Chardonnay – in total about 45% of the plantations (annex 16); red types of wine grapes: Isabella, Merlot, Cabernet Sauvignon, Pinot Noir – about 37% of the plantations. In total in 2005 the white types of wine grapes were situated on 60% of the wine grapevines plantations.

111. The lack of irrigation of the plantations is not conceived as a major problem. The soviet times irrigation system does no longer exist or is in majority destroyed. Actually in Moldova there are pump stations and pipe network covering almost 145 thou ha of irrigating land, where only 29 thou ha are effectively irrigated35. The vineyards irrigated surface is insignificant and constitutes 50 ha out of 144 thou ha of in bearing vineyards. In general, during the time vineyards have not been irrigated, because on one hand there were sufficient atmospheric precipitations, and on another hand the „guaranteed” sales of wine on CIS market and Russia especially did not raise the question on productivity of vineyards. Although in an average and long time perspective this can come back to the attention of the grape producers and wine enterprises. The increasing risks of longer draught36 can negatively affect the productivity of vineyards. In the context of increasing wine competition, winemakers could invest more in capillary irrigation systems. As a result, the vineyards productivity could rise by min 30-50%.

112. The shortage of qualified and unqualified labor force tends to be a major constraint. This conclusion is different from that of the Constraints Analysis. During the last 4-5 years, wine factories have been systemically facing with the physical lack in the regions of unqualified labor force, necessary for seasonal working of vineyards. The seasonal labor force is employed for the period of February - October for some technological works37, where the average wages are 50-70 lei/day. The need for additional labor force depends on the surface of enterprises’ vineyards. One of interviewed companies stated that employment of 50-100 workers increases the monthly costs of labor by 20-50%. Taking into account the fact that wine factories tend to increase the area of owned vineyards, the shortage of unqualified labor force already is a problem and tends to become a major constraint in development. Some enterprises are trying to figure out this issue (box 4). The wine industry was also in a constant need of specialists of medium and high qualification (operators, mechanics, engineers, management and marketing specialists etc.), that constantly leave abroad looking for a better paid job. The Russian wine export crisis from March 2006 has stimulated the process. As a result of sharp decline in wine output, as well as because of uncertainty of job continuity, some medium-qualified specialists have emigrated seeking better paid jobs, and the others, especially high-qualified specialists, have accepted job offers at existent and newly formed wine factories in Russia Ukraine, Romania and Bulgaria. At those factories the middle aged labor force finds stability, and the younger labor force finds stability and higher

34 Although, in the last few years were registered low temperatures of -15..-28 ºC as well as bellow 0 degreases during late spring, which affected significantly the quality and productivity of the grapevines. 35 The Government Agency „Apele Moldovei” has contractually agreed for irrigation of almost 34 thou ha of agricultural land. 36 MAAPI is saying that the draught from May-July of the current year didn’t affect the production of grapes, and high temperatures contributed to better quality by raising the grape sugar. Other experts say that the draught affected the grapes’ quality. The Hydro-meteo State Service states that the draught may take place in the next year too, due to its biannual character. 37 These are shortening and fastening the vineyards, weeding, sprouting and harvesting.


59

wages. Reopening of wine exports on Russian market may initiate the increase of labor force shortage, first of all of medium and high qualification.

113. The young labor force fluctuation reduces substantially the effects of investments in training. The low salary does not keep the labor force at the enterprise. The wage is different at state-owned and private enterprises. Presently, the monthly salary of a high-qualified specialist of a state-owned enterprise slightly exceeds 3000 lei, and about 300-400 USD at private companies; the wage of a middle-qualified specialist varies between 2000-2500 lei no matter of the enterprise ownership. Young specialists receive even lower salaries at the beginning of their activity. Because of low salaries, which are not enough for purchasing an apartment/house, young people leave the enterprises searching for a better paid job, even if this one is not related with the qualification obtained. And all of these, regardless the investment in their professional training. Therefore, the enterprise is forced to employ other young specialists. Thus, the enterprises are imposed to hire new young specialists, but it is not sure they wouldn’t leave it later.

114. The students’ knowledge is insufficient, outdated and not adjusted to the needs of the wine business. The students’ knowledge base is insufficient and outdated in some fields of production technologies, because of the 20-30 year obsolescence of technical-scientific base of specialized education institutions, where the insufficiency of public investments became already chronic. Thus, enterprises are forced to invest own financial, human and time resources to improve the knowledge of youth up to the required level38.

115. The business should take on the role of catalyzing vector of the education process, based on the knowledge received from markets. There is no strategic collaboration between education institutions and wine enterprises aiming to adjust the study and research programs to the actual needs of the wine business. That would reduce the amount of investments and the period of time required to “update” the young specialists. As exception serves only the acceptance by the enterprises of students for practical training and offering of material/financial support to respective institutions. Enterprises could initiate different projects, thus involving professors, researchers, and students and taking advantage from researches’ results and high knowledge level of employed graduates. This is possible providing the government would invest in improving the quality of the education process in education institutions, as well as would make efforts to promote the cooperation of the latter ones with producers and stimulate the respective investments (expenditures) within the public-private partnerships.

116. Wine enterprises require financial resources for renewal of machines and equipment, planting of vineyards, purchase of grapes and other raw and auxiliary materials for processing and storing of wines. Large enterprises, highly capitalized, make investments from their own

38 An enterprise stated that a freshly employed graduate is taught by an experienced worker for 2-4 years, after which the young specialist is able to work independently.

Box 4. One of the interviewed enterprises stated that employs seasonal labor force for performing agricultural technological works on about 750 ha of own vineyard plantations. The company is facing several problems: (i) lack of labor force, so that the company hardly finds 500-600 persons in the villages adjacent to

plantations, the rest of the active population being left for Chisinau or abroad; (ii) a major part of “available” labor force is totally unqualified, and even this part has the intention to leave

for the capital city or abroad to be able to support their family in the village. For such work, the enterprise pays in lei an average monthly salary of about 100 US dollars. To attract and keep the local labor force the company intends to introduce a social program that would lead to the decrease of

expenditures of seasonal workers and would partially ensure their families with foodstuffs of first need.


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resources or from their shareholders. But, the seasonal nature of the activity forces the producers, regardless of their size, to apply for operational and investment resources on the credit market. During the interviews conducted wine enterprises stated that there are no problems related to procedures and documents needed, but to the cost and maturity of extended credits.

117. Enterprises consider the cost of credits as very high, and the term – as insufficiently long. These factors do not allow them to develop in the rhythms imposed by the conjuncture on the sales markets, especially the external ones. This fact indirectly looks like the conclusions of the Constraints Analysis39, which defines inflation as a major constraint in the economic development of the state. Presently, winemaking enterprises borrow resources in Lei mostly from commercial banks with nominal interest rate of 19±2% annually, plus banks’ commissions in amount of 3-4%. As a result, the cost of attracted resources oscillates between 20-25% annually. The winemaking business understands that the interest rate depends on the inflation rate, the nominal level of which in 2006 exceeded 14 % as well as on the bank margin, which on average constitutes 5-6%. The term of 5-7 years for the investment credits is considered insufficiently long, to contribute to a sustainable development. Banks can grant „long” credits from the account of attracted resources from the IFI and/or from their own capital40. SMEs benefit from IFI resources. For example WB has granted to SMEs credits in amount exceeding Lei 5 million through the RISProject. Beneficiaries of IFI resources of the viticulture-winemaking sector are agriculture enterprises which plant grapes plantations, and less - the small winemaking enterprises, which procure winemaking equipment and/or plant vineyards. But the majority of winemaking enterprises are big and do not frame into the respective categories of potential beneficiaries. Bank deposits do not serve as sources of financing „long” credits, because money is invested mostly for short (0.5-1 year) and medium (2-3 years) term at an interest rate equal to inflation plus 3-4%. Still, the real interest rate41 for credits and deposits in Lei granted in Moldova is being situated at a reasonable level comparative to the real interest rates of the similar countries and of those of the region42. In this context, the role of the Government and of the NBM is to diminish the inflation rate through anti-inflationist policies and to ensure the stability of other macro-economic indicators.

118. Insufficiency of own resources impose certain enterprises, especially with local capital (state or private), to upgrade the equipment in a more lent rhythm than they would desire,

and the constraint for the cost and the term of the capital just amplifies this problem. Delaying of upgrading the equipment moves away in time the obtainment of the following competitive advantages: wines’ quality increase, rapid reorientation of the production processes in accordance with the new requirements of the market, work productivity increase43 and production costs’ diminishing. A producer has suggested that an eventual exemption from the VAT and customs taxes of investments in fixed capital and in grapes plantations would attenuate the negative implication of the constraint of capital.

119. Credits in foreign currency are granted just for imports. Certain experts support the idea allowing granting credits in foreign currency to local economic agents for internal payments purposes, in order to benefit from small interest rates (presently 10-12% annually). But, in the case of elimination of this restriction, the increased demand for currency credits would lead to the

39 Preliminary Report on constraints analysis in economic development, Government of Moldova, June 2007. 40 Certain IFI, like IDA, BERD and others grant credits of 5-10 years to banks and other non-bank financial institutions for supporting the SME. 41 The real interest rate is calculated as a difference between the nominal interest rate and the nominal inflation rate. 42 Preliminary Report on constraints analysis in economic development, Government of Moldova, June 2007. 43 One interviewed companies said that if it were automatized certain productive processes, the output would increase to some extent, but it would had to fire almost 150 employees.


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increase of their interest rate, as a result of interest rates increase for currency deposits. So, benefiting from cheaper currency credits would have a short term character and would not solve in the medium term and long term perspective the problem of increased cost of credits in Lei. Moreover, granting of credits in currency could lead to dramatic decrease of the purchasing power of the Leu. That means, that the increased attractiveness of currency deposits would definitely convince the population and the economic agents to keep their savings in currency and namely in this type of banks accounts, transferring the currency risk and the risk of inflation on the shoulders of the banks. Massive procurement of currency (in order to be deposited in banks) might stimulate the decrease of the exchange rate of Leu. As a result, the prices of imported goods, expressed in Lei, might increase significantly. As the economy of Moldova is dependent on the imported energy resources (and also because of massive imports of other products), their increased prices in Lei would rapidly influence the increase of prices for local goods. Additionally, inflation might overrun the ceiling-levels established in the strategic economic documents, fact that, above to all, would deteriorate the relations of Moldova with the IMF and other donors/investors.

120. Leasing might replace currency credits at the procurement of equipment, but, for the time being, the respective services market is at the initial stage of development. Presently, equipment is not transacted on the leasing market, just automobiles in proportion of 80-90%, the rest of the market belonging to agriculture equipment and machinery. The big winemaking companies do not hurry to procure winemaking equipment in leasing, because the credits are more advantageous: the annual interest rate of currency credits (the equipment is imported) is smaller by 1-2% than the leasing payments, and is about 10-12%; the terms do not differ significantly, and the companies have own goods which can be accepted as collateral. Still, leasing would be convenient to small companies, which do not own goods that could be pledged (with the exception of the equipment procured in leasing) and which forecast sufficient and stable cash flows. The international leasing market is more attractive than the local one and offers services with 5-6 % annually, but foreign companies do not trust in solvency of their partners in Moldova, fact aggravated by the actual crises in winemaking business.

121. Interdiction of Moldovan wines on the Russian market has deteriorated the quality of winemaking credit portfolio of the banks. Winemaking companies have registered losses as a result of the Russian interdiction, in total amount of approximately USD 200 million. The losses are expressed in blocked batches of wine or wine destroyed on the territory of Russia, raw materials and materials procured and un-utilized, bottled wines sold at substantial reductions, interest rates to outstanding credits and others. The complicated financial situation of the winemaking enterprises makes problematic reimbursements of credits at maturity. According to the information of the AAMV the amount of credits granted to the winemaking sector is almost Lei 700 million. Presently, negotiations with the commercial banks are underway in order to restructure credits and avoid insolvency of winemaking companies.

122. In general, the infrastructure is not a major constraint for wine factories, even if some elements are not satisfactory. Producers do not encounter major difficulties regarding the quality and access to electricity, water supply and sewage, gasification system and telecommunications. The extremely bad quality of roads is also not being considered as a critical constraint, which is different from findings of the Constraints Analysis. However, this affects the


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wine tourism, and Moldova’s image, which could become an important source of revenue for wine-makers44.

123. The cost of transportation is a significant factor for external markets sensible to prices, as wine markets are. In general, the transportation cost depends on the mean of transport and distance to final destination. For example, the cost of transportation for 1 wagon with 45000 bottles to Moscow city (1630 km) is about 4100 US dollars.45 In Russia and some CIS countries wines are delivered mainly by railroad. In other CIS states and on the European markets the wines are delivered mainly by trucks. Motor transport is more advantageous on short distances, 300-400 km or small lots. If exports to Europe increase, more vehicles meeting the European standards will be required. This might create some constraints and generate additional costs. Ukraine, as a direct channel toward Russia and other CIS states, can significantly affect the physical access of Moldovan wines to these markets (box 5), as well set up requirements that increase the final price per bottle of wine delivered. For example, Ukraine requires financial guarantees for wine in transition, which cost is about 2% of the value of dispatched lot. There have been mentioned no additional incidental costs.

124. The general legal framework, with some exceptions, is not a major constraint for enterprises. Viticulture and wine-making activity (except for wine and viticulture products of households of population for personal consumption) are conducted according to the Law on vineyard and wine, nr. 57-XVI dated 10.03.2006, the Program for redressing and development of viticulture and wine-making in years 2002-2020 approved by the Government on 07.10.2002, other legal and regulatory acts.

125. Tax and customs legislation has been improved in the last years and do not represent major constraints related to administration and refunding of taxes, official and unofficial financial costs, customs clearance procedures, timing etc. The wine business stated that the Government has made some progress on both directions, and the financial discipline has improved. The major

44 In May 2004 the Government approved the National Program “The road of wine in Moldova”, in which tourist itineraries were established to wine factories, churches and cloisters, natural reservations, museums etc. Some wine factories have created a special infrastructure in order to foster the wine tourism: they have equipped tasting halls with separate cuisines, places for storing bottles etc. 45 This includes the payment for guaranteeing the security of the wine transported. Cargo insurance is not included in that price and may be additionally agreed.

Box 5. In September 2006 the authorities of Ukraine stopped the traffic on the railroad through Moghiliov-Podolsk, the only railroad line by which Moldovan merchandises, including wines, were transported to CIS countries. The official reason was the reparation works of the bridge nearby. Previously, Moldova refused the railroad transportation through Transnistria, because of the impossibility to ensure the integrity of merchandises. As a result, Moldovan merchandises were deprived of physical access to CIS markets. Some experts stated that the suspension of traffic through Moghiliov-Podolsk was more a political constraint, related to the relations of Moldova with Russia, than a technical difficulty. Thus, Moldovan companies have incurred direct losses as a result of stopping of wine deliveries to Belarus, Kazakhstan, Kyrgyzstan, Uzbekistan or Tajikistan. Several months later, the railroad circulation was resumed. Presently, Moldova transports merchandises also by the railroads through Transnistria. In 2007 the Government initiated a project for construction of the railroad line Cahul-Giurgiuleşti to foster the transportation of merchandises through the Port of Giurgiuleşti (under construction), as well as to link by railroad the Centre of Moldova with the South, avoiding the circulation trough Transnistria. The Project is to be finalised by the end of 2008. However, not all the questions regarding the investment efficiency of this project are settled, taking into account its competition with the Port of Odessa (Ukraine), located approximately at the same distance from Chisinau as Giurgiulesti, but which represents an important hub of international transportation of merchandises in

the Black See.


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practical difficulties related to refunding of VAT on exports have been liquidated, and those still existing are insignificant. The STI permitted in 2003 all exporters (including wine-makers) to pay other taxes and fees on the account of VAT to be refunded, which made the procedure more attractive. So, in 2006, about 63% of applicants for VAT refunding made use of this permission of the IRS46. The term for repatriation of export revenues was increased from 90 to 180 days from the date of delivery. Thus, this is not anymore a major problem and relieves enterprises from subjective fines for infringement of repatriation provisions, especially taking into account that these ones were caused by importers

126. The activity on production/storing/wholesale of alcoholic production is subject to licensing. The cost of the license has been increasing and decreasing with different altitudes during all past years, stopping now at 20 thousand lei per year. It is the same for all enterprises, no matter of ownership or size of the enterprise, or if it produces, stores and/or is a wholesaler of alcoholic products. In this context, an USAID report stated in 2004 that the cost of the license, which does not take into consideration the size of wine enterprises, leads to increase of cost of doing business, especially of those small.47 Thus almost 50 small enterprises of the wine sector are now being affected.

127. Upgrading of the access system could contribute to promoting Moldovan wines on external markets... In January 2007 was introduced the state trade mark with the aim of controlling the exported bottled wine. At the same time, the trade mark offers to consumers from other states the possibility to access complete information on the procured wine (the producer, the country of origin etc.), introducing the number of the trade mark at the address www.vinmoldova.org. The mentioned system seams to double international tracing standards of logistic chains of goods, for example, of those approved by CS1 for wines.48 These standards offer the opportunity to find out, on the bases of bars and codes system, all the participants to the value chain of the procured wine: from the producer of grapes to the retail trade agent. The on-line access represents an advantage of the access system and will be solicited, only in the case of adequate information of external consumers about its existence, as well as on faultless operation of the system of on-line data supply. Otherwise the system might become, at least, useless.

128. … but the ineffective dialog between the Government and the wine business on implementation of the trademark has created a sharp administrative constraint in the

sector. Practical implementation of state trademark involves procurement costs (0,2 lei/piece) and supplemental investments of the producer in special equipment (box 6). This would consume the financial resources, still scarce, affected by the exports crisis in Russia. Due to the lack of the

46 WB Report „Cost of state regulation of enterprises activity”, May 2007. 47 Report on Evaluation of the competitiveness in the Moldovan economy, USAID, BIZPRO-DAI, April 2004. 48 GS1 (ex-EAN International) is an international organization that develops and adopts standards on international and inter-sector supply and demand chains. The Wine Supply Chain Traceability was developed by GS1 members: wine association and winemaking enterprises from France, Great Britain, RSA, USA and others. The GS1 standard system is the most widely used logistical standard system. GS1 has its headquarters in Brussels (Belgium) and Princeton, New Jersey (USA) and holds offices in more than 100 states (www.gs1.org).

Box 6. The regulation approved by the Government on 26.12.2006 specifies that the trademark should be pasted vertically on the bottle, by overlapping the thermal capsule so that by opening the bottle the mark is to be broken. But the mark can be pasted only on one side of the bottle due to its relatively small size (6 x 1 cm). For pasting of these trademarks the existent equipment of enterprises can not be used, as this one is designed to stick stamps/marks sufficiently long, from top-bottom direction, and not laterally, by pasting them on the both sides of bottle’s neck. The attempt to use this equipment to paste the new marks has resulted in tilting of bottles

from the assembly-line.


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respective equipment, producers are forced to stick the mark manually, thus increasing the cost and reducing by 2,5 times the labor productivity. Moreover, several producers stated that the legislation of some importing countries (for example, Ukraine) does not allow for the simultaneous existence of their trademark and of another state’s trademark on the wine bottles traded in the country. The solution to this dilemma has been identified in our discussions with wine enterprises: the trademarks should be longer, and this would allow using the existent equipment for sticking them. AAMV is looking for an optimal solution to this issue.

129. The system of technological instructions is voluminous, ambiguous, old and rigid. The legislation requires that each type of wine must be produced in accordance with its technological instruction, elaborated based on national standards. These standards are developed based on soviet GOSTs and are adjusted only for the Russian market. Instructions are approved by NIVW. An interviewee stated about the extremely rigid position of the NIVW: some enterprises have been imposed to require new instructions and pay for them, just for changing one word in the name of an older wine that had already a technological instruction. The cost of a new instruction varies between 10–20 thou Lei and is paid by the producer, which increases the cost of doing business. Presently, in Moldova there are about 4 thou technological instructions, the actual number of the types of wine being less. Many of these are doubled in essence (same wines with a bit changed names); others are old, because those types of wine are not produced anymore.

130. Interviewed enterprises told that foreign experts are an important source of information related to external market tendencies and consumer preferences, wine production and depositing technologies, equipment and technological innovations on raw and auxiliary materials (enzymes, fertilizers, preservatives etc). But the majority of wine enterprises can not afford contracting of foreign experts, due to the crisis they are passing through, except certain wine companies that can afford their services. Cost of the expert services is 20-30 thousand USD. Presently, companies can benefit from the assistance of the USAID Project Competitiveness Enhancement and Enterprises Development and TACIS MIDA-MIEPO Project, in form of services of external wine experts. Experts from France, Italy or other states with wine traditions are contracted on short-term basis, within the grapes collection, processing and wine-making period. During this period the external consultants are managing the technologists teams, training them when required. Companies that contracted individually the experts are benefiting of their services after the contractual term. Another source of information is sending of employees to specialized trainings outside the country, participation to different local and external events: exhibitions with sales and/or specialized, business forums.

131. The situation of the research system is the same as that of the education system: the technical and material base is outdated; research and studies are far away from the wine business real needs. The main cause is lack of investments. The poor institutional framework of NIVW could be one of the factors that have led to higher prices for approval of technological instructions. If NIVW were adequately financed from the beginning, it would provide research-development services, sell inventions etc. It would replace by that the foreign offers, and create a work front for a large set of scientists, researchers and specialists not only from the wine sector, but from related sectors too.

STRUCTURE, STRATEGY, RIVALRY

132. Moldova was considered „the main wine producer” of the USSR. The sector has reached the highest level of development in the years 1980-1985. The vineyards, planted on an area of approximately 220,000 hectares, where producing an annual volume of 1,150 mill. tones of


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grapes, of which approximately 42 million DL of wine were produced49. The results were possible due to the multiple efforts made: renewal, enlargement and protection of plantations and of the grapevine, modernization of the fixed capital, existence of highly qualified specialists and of the research in the sector, and not lastly, the existence of the „guaranteed” market for the harvested grapes and the produced wines. Two important events after 1985 have put the beginning of the crises in the sector: (1) fight against alcoholism, initiated by M. Gorbaciov and the collapse of the USSR at the beginning of 90s. The situation was aggravated in the next years by the formation of Moldova as independent state, passage of the economy of Moldova (and of the rest of the USSR states) through the transition period to the market economy, as well as by the harsh climate conditions during a few years. As a result, the level of demand of wines on traditional markets decreased – the former USSR countries, vineyards areas have diminished and degraded, the quality and the production volume of wines diminished significantly. Many winemaking enterprises have found themselves on the brink of bankruptcy.

133. Privatization of winemaking enterprises in the 90s has stopped the bankruptcy of the sector and has created conditions for survival. A difficult period followed, during which the winemaking enterprises had to adapt to new conditions of organization of profitable businesses, to confront the chronic lack of financial resources, to (re)gain partners and establish the needed relations. Massive presence of Russian investors in the sector has alleviated many of the appeared problems, among which the most important was the sales market. The relations of investors with intermediaries and retailers, supported by the preferences of consumers for the traditional Moldovan wines, have confirmed the market of Russia as a strategic export direction.

134. After the declaration of independence, Russia was the main sales market for Moldovan wines. Exceptions are the enterprises with European or American capital, the exports portfolio of which is more diversified. Still, the Russian market is in continuous transformation, the process taking proportion in the last 5-7 years. Preferences of certain categories of consumers are changing, and this was observed by the world producers of wines. Unfortunately, the owners and management of Moldovan enterprises have noticed this fact too late, whilst being sure as for the unlimited and permanent Russian demand for wines from Moldova. The aggressive penetration of the Russian market by the European and American winemakers with wines adapted to the new preferences has created a strong market competition. The quota of Moldova on the market of Russia was in decrease in the last few years, but that is due to the market volume increase and presence of other states. However, the “quieting and promising fantasies” of Moldovan enterprises did not allow them to orient timely to market changes, to improve quality and, finally, to increase the competitiveness of wines. The interdiction applied in March 2006, even if it could have a certain political aspect, raises important questions as for the issue of Moldovan wines’ quality.

135. The wine value chain is different for collection-processing-producing stages and remains the same for distribution stage. Some wine factories collect grapes from agro-producers, produce bulk wine, pack it to local bottling companies or export it to be bottled by foreign companies. This phase assures a small value added, and some companies are trying to increase it by positioning on the nearby segments in the value chain: plantation of own vineyards and purchasing of bottling equipment (fig.34). Other companies, more developed, harvest grapes from their own vineyards, cover the grapes deficit from the agro-producers, and operate all processing stages of grapes and producing/bottling of wines, getting a bigger value added. The distribution and trade segment of the value chain is the same for both types of enterprises, because it doesn’t belong to them.

49 The Program on renewal and development of viticulture and wine-making in 2002-2020.


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136. The need of making more efficient the use of financial resources led to separation of the production system from the distribution and trade systems. The existence of the distribution and trade systems within the wine companies would complete the value chain and would generate major profits. Unfortunately companies do not have sufficient financial resources for maintaining of these systems. The producers have 1-2 authorized distributors for the local market and separately some partner-importers for each of the external markets. Partnership contracts are signed for long periods. The set of products and regions of service are divided between the distributors. The maximum margin allowed for local distributors is fixed at about 15%. Some producers are not present on the local market and have concentrated only on exports.

137. Government holds an important role in ensuring sustainable development of the wine sector. Thus, the policy of the state on strategic development, exports promotion, administration on behalf of the state of the capital shares in the winemaking enterprises etc. is implemented by „Moldova-Vin”. AAMV has got 3 types of enterprises under its management (see figure 35). The idea was expressed, according to which the Government holds an excessive role in the sector, due to the attitude inherited from the Soviet period and that this role does not correspond any more to the realities of the actual winemaking market. So, the Government needs to review its position in the wine sector, in order to boost the sector’s re-launching and development, by moving towards markets’ requirements.

138. Maintaining some wine enterprises in the state property is the policy of the state, oriented towards maintaining national values in producing and consuming the wine. For instance the Wine Company “Cricova” SA, local leader in producing sparkling wines (almost 40% in 2005), is declared by the law as an object of cultural-national patrimony of Republic of Moldova. This status is extended on the oenotheque, galleries and underground structures, constructions and the related land, except equipment and operational capital. The Company was privatized in 1995, and shares were transmitted in the property of the Government. The enterprise

G r a p e p r o d u c e r s

O w n g r a p e s

P r im a r y w in ef a c t o r ie s

B o t t l in g e n t e r p r is e s

C o m p le t e w in ee n t e r p r is e s

L o c a l D is t r i b u to r s

F o r e ig nIm p o r t e r s -D is t r i b u to r s

N ig h t c lu b s

R e s t a u r a n ts ,b a r s

F o o d s t o r e s

S u p e r -m a r k e ts

W h o le s a le r s

P r o d u c e r s ’s to re s

E N D C o n s u m e r s

W h o le s a le r s

Fig. 34. The value chain for Moldovan wines


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has benefited a few times of different types of assistance from the State. The activity is running normally; the profitability is under 10% due to certain infrastructure objects maintained by the Company.

139. The wine sector is highly fractioned. The wine and strong drinks sector is represented in total by 203 enterprises producing and/or exporting alcoholic products (table 5), including 11 in which the State holds 32-100% of the capital and out of which 2 (one from Russia and one from Ukraine) are in an insolvency stage (fig.35). The wine sector is represented by 177 enterprises.

Table 5. Categories of economic agents from the wine sector, 2006 Nr./o Category Number of enterprises

1. Primary wine-making enterprises50 75

2. Bottling enterprises 35

Including with State share 4

3. Primary wine-making and Bottling enterprises 67


4. Alcohol producers, vodka and other strong beverages 14


5. Exporters (non-producers) 12

Total 203

Source: AAMV

Fig. 35. The Government of Moldova role in the wine sector

50 Primary wine making means collection and processing of grapes and production of wine as raw material.

GOVERNMENT OF MOLDOVA Agroindustrial Agency „Moldova-Vin”

State Inspectorate on Supervision of Alcohol

Production

National Institute for Viticulture and Wine-making

National College for Viticulture and Wine-making

Quality Wine Company "Mileştii Mici", vll. Mileştii

Mici, rn. Ialoveni

State Organizations& Enterprises

Food Products Company, Balti

Center for tracking the ethilic alcohol and alcoholic products

National Center for Verif. of Quality of Alcoholic Products

Wine-viticulture Company "National-Vin”, Chisinau

Briceni Alcohol Factory, Briceni

Town of Wine, Chisinau

Joint Stock Companies

Wine Company "Cricova", Cricova, mun. Chişinău, 100% state property

State Institutions

„Barza Alba”, Balti, 100% state property

"Euro-Alco", Chişinău 32% state property

M.E. "Bautwerk", Briceni 51,04% state property

"Vinuri Ialoveni", Ialoveni 60,414 % state property

"Chirsova", Chirsova, rn. Comrat,

65,15% state property

"Aroma", Chişinău 100% state property


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140. Large enterprises are drivers of sector development. Despite high fractioning, there could be observed some large companies dominating certain segments of the market. Local and foreign investors from Russia, USA, Romania, Germany, France etc. are present in the capital structure of private wine enterprises. The sector is dominated by some large companies (fig.36, 37). These have modernized partially/totally the equipment for producing and depositing wines and concentrated on the quality of grapes.

Large enterprises are drivers of the sector development. In 2006 126 LE employed 75% of industrial-productive employees of the sector, and in 2005 they produced almost 87% of the total production (annex 4 / table 4.7)

141. Restriction on purchasing arable land by foreign investors generates contradictory opinions. Some experts are supporting the cancelling of the restriction in order to stimulate foreign investments in agriculture and agro-processing (including viticulture and wine-making). Others are in favor of the restriction, stating that it is actually possible to invest in the land which could be rented for 99 years, and that some investors could speculate over the land price, promoting later the change of the land destination from arable to construction land. The final decision will be taken by the Parliament.

142. The political and economic instability and non-attractive investment climate for a long period of time did not favor the entrance in Moldova of a world known strategic investors with producing technologies, management and market strategies and suppliers. In Armenia for instance, the French company „Perno Ricard” is present holding 40% of the wine production and promoting the Armenian brands on the European market. A similar situation is in Georgia. On the

Fig. 37 Grape wine champions, thou dal, 2005

Alte71%

Wine International Project5%

DK Intertrade5%

Lion Gri5% Acorex Wine

Holding4%

Vinăria Bostavan

5%

Asconi5%

Source: AAMV

Fig. 36 Sparkling wine champions, thou dal, 2005

397153

157

75

71

80

88

- 100 200 300 400

S.A . "Cric ova"

О.M. " V ismos " SA

SA "Bas v inex "

SA "V itis Hînceş ti"

Î.S. "Mileş tii Mic i"

SA "Nis -Struguraş "

A lte

Source: AAMV

"Sredneuraliski vinzavod", Sredneuralisk, Russia, (insolvency procedure)

Lvov Wine Factory "Moldvinprom", Ukraine (insolvency procedure)


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other hand, according to some estimations, about 80% of the local wine production is held by the Russian investors51.

143. Businesses consider the local competition as tough and healthy… Interviewees did not mention any major issues related to unfair competition. They stated that the local market is already divided, stable, the entry is limited and everybody knows his clients.

144. … except cases of state interventions. This is the case of using the principle of “one window” as a temporary solution to re-starting wine exports to Belarus markets (box 7). This case does not comply with World Trade Organization principles, member of which is Moldova. Another case took place in 2004, when the government informally imposed the wine factories to accept grapes and wine with reduced quantity of sugar from population and companies, due to early autumn degreases (grapes Lidia, Isabella, Moldova etc.). As a result of these kinds of interventions the businesses trust less in the proper functioning of state institutions. Moreover, some experts paid attention to lack of trust in the judiciary system, the security of the business being jeopardized. In essence, these represent major constraints to strategic development of enterprises.

145. Even though there are long term partnership relations, sometimes the

exporters meet difficulties with payments in

time by importers. Importers often make the condition of payment, only after selling a part of the delivered lot. Exporters hold the entire risk of non-payment. Some cases have taken place when the payment constituted only 50-60% of the value of delivered lots. The delays are often longer then 3 months, making an additional pressure on the cash flow of the exporter. The exporter is imposed to obtain short term operational credits, often with higher interest rates then usual, which create pressures to increasing the cost of final products. Some exporters use the bank guarantee mechanisms in export operations with their partners. Other bank products are not largely used, due to lack of trust between the partners, low business culture etc.

51 Report on Evaluation of the competitiveness in the Moldovan economy, USAID, BIZPRO-DAI, April 2004.

Fig. 38. Wine exports by types of wine, thou dal

-

50,000

100,000

150,000

200,000

250,000

300,000

2001

2002

2003

2004

2005

2006

ian/mai 2007

Sparkling w ine Grape w ine Wine material

Sourse: NBS

Box 7. In April/May this year the export of bulk wine to Belarus was conducted through the Moldovan-Belarus an mixed company „Moldbelvin”, as a solution to the issue of stopped experts during the first 3 months of 2007. From the Moldovan side the enterprises was founded by the private company„Agro-Vin Bulboaca” SRL, which was selected to represent Moldovan interests within the new company „Moldbelvin”..The selection process was totally nontransparent, no tenders were organized, and no procedures were respected according to the public acquisitions legislation. Benefiting from the special status, „Agrovin-Bulboaca” was purchasing bulk wine from producers at one price and selling it at a bigger price, getting the difference. Producers were disadvantaged twice: (i) they couldn’t get the export prices to their products and (ii) they had to pay VAT on deliveries to the „Agrovin-Bulboaca”. Although there was the restriction in force, some producers succeeded in exporting individually a specific quantity of bulk wine to Belarus. The total exports of wine to Belarus within April-May through „Moldbelvin” comprised almost 340 thou dal out of 815 thou dal.


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DEMAND

146. Grape wines dominate in the structure of winemaking exported products. Exports increased in 2001-2005 based mainly on this type of wine, whilst exports of sparkling wines and the wine material did not modify significantly (fig.38). In 2006 wine exports decreased by approximately 42% compared with 2005, and in the first 5 months of the year 2007 exports have constituted just 11 % compared to the level of the year 2005 (annex 17 / table 4).

147. Wine industry is mainly oriented to exports. Wines production is traditionally exported in proportion of 94-96 %. Until 2005 export of wines from Moldova exceeded 1% of the total world annual exports (table 6), placing 9th-12th among the biggest world exporters. The main direction of wines were the CIS markets, the champion being Russia, which in 2005 imported a record quantity of wines in the last 6 years, the value of exports exceeding USD 200 million (fig. 39). In 2006 exports of wines to Russia did not exceed ¼ of the level of the year 2005, due to intense deliveries during the period before the interdiction in March.

Table 6. World wine & vermouth’s market, thou USD

Years Moldova Exports

World Exports

Moldova share in World exports, %

2001 156,378 13,197,701 1.2 2002 171,939 14,677,035 1.2 2003 216,380 17,901,680 1.2 2004 250,597 20,301,641 1.2 2005 279,190 21,067,239 1.3 2006 161,768

Source: ITC, www.intracen.org, NBS 2006 data.

148. The closing of the Russian market has led to the increase of wine exports to other states, but did not compensate sales lost on Russian

market. So, in 2006 exports have doubled to Ukraine and the EU (especially to Germany, Latvia, Poland and Slovakia) and have increased approximately 9 fold to other states (Romania) (fig. 39). In 2006 exports to Belarus and other CIS states remained at the level of the year 2005. The increase of the value of exports to other states in 2006 has compensated just 1/3 of exports’ decrease to Russia. In the first 5 months of the year 2007 the exports to Ukraine and Belarus amounted 1/3 and respectively, ¼ of the level reached in 2006, followed at a small distance by exports to other CIS and EU states (including Romania and Bulgaria).

149. Moldova and Georgia were replaced on the Russian wine market mainly by Russian wines and to a smaller extent, by the wines of other countries. According to the information of the Union of Participants to the Alcohol Market (UPAM, Russia)52, the share of Russian wines on the internal market has increased from 46% before the crises to 65% after the crises. Thus, the common brands of local wines have increased in price by Rubles 30-40 ruble, and were replaced on their price segment by wines of lower quality. The increase of Russian wines quota was

52 UPAM (Rusia), www.newizv.ru/news/2007-07-27/73291/.

Fig. 39. Value and destinations of wine exports, thou USD

0.0

50000.0

100000.0

150000.0

200000.0

250000.0

Rusia

Ukraine

Belarus

Other CIS states

EU

Other states

2005

2006

Jan-May2007

Source: NBS


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conditioned, also, by the impossibility of Bulgaria to replace completely Moldova, in spite of its quota increase on the Russian market. In the first quarter of this year the quota of Bulgaria for imports to Russia has exceeded 31%, followed by France (≈19%), Spain (≈12%) and Italy (≈ 9) (table 7). In the context of general decrease of imports, Russian specialists remarked the significant increase of the imports of the wine material, which explains the increase of local production of wine. So, if the import of grapes wine in 1st quarter of the year 2007 has decreased by 29% compared to the first quarter of the year 2006, and the imports of sparkling wines increased in the same period by 70%, then the imports of the wine material practically doubled53.

150. The Russian related wine export crisis has brought to light certain strategic deficiencies of the Moldovan

wine sector … The huge capacity of ease assimilation of Moldovan wines by the Russian market needed no significant wine promotion efforts from the business. The success has been guaranteed by positioning of wine into the lowest segment, which is priceless but voluminous. However, the wine quality was not always the highest. Very often importers were fixing the maximum price per bottle for producers, for example at 0,7-1,2 US dollars. Thus, producers were forced to use raw and auxiliary materials of lower quality, and certification laboratories had to “close their eyes” to certain indicators. According to some experts, exports in Russia were possible only due to personal relations with importers, avoiding any investments in promotion. Inefficiency or more often, the lack of marketing actions, like promotions, presentations etc. have directed the consumers to newer wines, more prestigious, of better quality and at the same price level (Spanish, Bulgarian, French, Italian etc.). Weak popularization and often lack of country image, especially outside the East European countries reduce from the very beginning any efforts on setting up of partnership relations. Moldova is not associated with its wines on European and international markets, like Germany with their cars or Switzerland with their banks, watches and chocolate. Also, Moldova does not have a “wine signature” to favorably differ from other producers.

151. …and has reoriented the strategic objectives of producers.

a) in short term: sales increase of bottled wine on internal market are forecasted to grow annually by 5%-10%; exports increase to Romania (the market increases annually by approximately 40%), Poland (+26%), Ukraine (+8%), Belarus (+13%), Kazakhstan (+13%), Kirgizstan (+55%)54. The return on the more selective market of Russia is being expected (which is annually increasing by 14%), but most probable it will take place only with quality and brand wines on the low – medium price segment.

b) in medium and long term - penetration/ increases of shares on the markets of Great Britain, Germany, China, USA, Canada and Northern Europe. Some wine makers stated that it would be very difficult to penetrate the EU markets because of lack of contacts with local partners. Lack of facilities trough GSP+ and CEFTA reduces the prices’ attractiveness. Experts consider that preferences have not been given in order to protect the internal EU market, which is oversupplied by own and New World wines. Locally, enterprises will continue

53 Ibidem. 54 International Trade Center, www.intracen.org, 2003-2005

Table 7. The main wine importers to Russia, Q I, 2007.

# Country Share in imports

1 Bulgaria 31.4%

2 France 19.3%

3 Spain 12.3%

4 Italy 8.8%

5 Germany 6.9%

6 Chile 6.7%

7 Argentina 3.7%

8 Ukraine 3.5%

9 Hungary 2.9%

10 RSA 1.0%

Source: UPAM (Russia)


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making efforts on own supply with grapes, re-equipment and upgrading of production processes aiming to diminishing production costs and control over the quality of goods.

152. During the interviews, it was also mentioned the issue of strong Leu, which could diminish revenues from wine exports. These concerns are based in the case of exports expressed in USD or Euro, which have been the most volatile in the last 7 years (fig. 40). At the same time, it should not be forgotten, that the majority of exports have been made to Russia, the transactions having been expressed in USD. Exporters could have encompassed certain losses due to the strengthening of the Leu towards the Euro or the USD only in certain periods of time, for example quarter III/03 – quarter IV/04 for exports expressed in USD. The evolution in the first half of the year 2007 of the Euro and of the USD indicates us the fact that exporters have not been advantaged when exporting the stock wines of the year 2006.

153. Consumer preferences differ from country to country. Preferences of West-European consumers are based on dry wines with minimum 13% alcohol content, often enriched by fruit tastes and other tastes. Unlike West-Europeans, East-European consumers prefer sweet, semi-sweet and desert wines. In this context, certain experts said that the segment of ex-socialist Diaspora from European and American countries, who really buy the Moldovan wines in those countries, will be very soon satisfied and has no major growth capacity. Despite that, the wine companies are very optimistic about these markets and set up strategic views on the following priorities:

a. Acceptance by retail networks, b. Competitive prices within the low-middle segment, c. Wine promotions.

On the other hand, the bottled wines market of Russia is becoming more and more sophisticated, due to the increase of the payment capacity of the population and the prestige of consumption of European wines and of those from the New World. Kyrgyzstan prefers grape wine and does not import vermouths, which is different from Kazakhstan, of which vermouth market is growing faster that that of grape wines. The Romanian market is growing vertiginously on grape wine segment and slower on vermouths. Russia, Ukraine, Azerbaijan and Romania are significantly increasing the volumes of imported bulk wine and of wine-making material. These countries are investing into their own production of wines.

154. European consumers prefer more wines from the New World. This is the reason why in Europe, the biggest exporter and consumer of wines in the world, prices are decreasing because of oversupply of wines, especially from the New World. So, in the EU the consumption of local wine decreases (especially of French ones) on the bases of the increase of consumption of wines of the “New World”. In the last years the Council of Europe has granted compensations to winemakers for distillation of unsold wines reserves. But in the nearest future EU plans to stop

Fig. 40. MDL official exchange rate.

0

2

4

6

8

10

12

14

16

18

Q III-IV, 99

Q III-IV, 00

Q III-IV, 01

Q III-IV, 02

Q III-IV, 03

Q III-IV, 04

Q III-IV, 05

Q III-IV, 06

EUR ROL/RON RUB

UAH USD

Source: NBM, www.bnm.org Note: The exchange rate of MDL to ROL/RON (Romania) takes into account the denomination of the latter.


73

this practice, as well as to apply more drastic measures for increasing European wines’ competitiveness compared to those from the New World (box 8).

155. The prices of wines exported from Moldova did not register big fluctuations in the period

2001-2005, because the biggest part of wines was assimilated by Russia and other CIS countries, considered „stable” markets for the Moldovan wines, positioned traditionally on the low price segment (fig. 41). This „win-win” situation was favorable for producers and importers, where the small profit per unit was multiplied by the big volume of exports. The increase of prices in 2006-2007 is mainly duet to increase of prices to raw materials, transportation, energy resources, as well to reduction of exports to Russia and penetration of non- traditional markets with small batches (0,1-3,0 thousand DL) at significantly increased prices. This tactics was applied by winemaking companies, in the desperate trial to compensate the sooner the possible the sales lost in Russia. It is understandable the complicated financial situation of the winemaking companies, which have encompassed losses because of the Russian interdiction and/or which still have wines in stocks. But the detailed analysis of exports indicates a chaotic situation in the exports prices policy of the winemaking companies. This leads us to the conclusion, that exporters have not developed a marketing strategy for short/medium/long term, including an adequate policy of prices, which would take into account the crises in Russia, would indicate the method of liquidation of appeared internal problems and would contribute to diversification and strengthening of strategic positions on external markets. So, the use of the tactics „of rapid major profits” instead of the tactics „lower profits, but increasing, in the context of a sustainable development”, have led already in 2007 to diminishing the imported quantities on external markets or even to the refusal of importing any more (Fig. 39).

156. The reduced volume of the internal market represents an important, but not critical problem in the development of the sector. This fact was mentioned by all persons interviewed. On the internal market, industrial wines compete with home-made wines, wines of farmers sold on local markets and imported wines, actually of small quantity. The quality of industrial wine is higher, but consumers often prefer home-made wines or those produced by farmers, which are sold at reduced prices. Also, wines compete on the internal market with strong drinks with relatively reduced cost (e.g. vodka). Producers intend to undertake efforts of increasing the culture of wine consumption, and the Government is expected to undertake actions to counteract contraband with strong drinks. The interviewed specialists are forecasting the annual increase of the internal market by 5%-10%.

157. Non-adjustment of Moldovan standards to EU standards represents a major constraint in the access of wines on high value markets. While delivering to the EU, producers are bound

Box 8. The European Commission initiated in June 2007 a project to reform the wine industry of the EU, in order to maintain the market share compared to the producers from the “New World” (Australia, USA (California), Chile and South Africa). In this order of things, some of the proposed instruments are the reduction of surfaces of the less efficient vineyard plantations with circa 200 thousand ha (from a total of 400 thousand ha) and payment of allowances to farmers that destroy their own plantations. The project is

under discussions.

Fig. 41. Wine export prices, USD/dal

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2001 2002 2003 2004 2005 2006 2007

Sparkling wine Grape wine

Wine material

Source: NBS


74

to certify wines at the certification body of the importing country. This is because the NCVQAP, being authorized to issue certificates for the export market (Russia, the EU – certificates VI 1, and others), does not possess necessary capacities for performing complex specific analyses. But deliveries can be effectuated only after certification of wines in accordance with national standards. Thus, certification costs increase arithmetically. Moreover, the producers are obliged to own laboratories certified within the NSAPC. Large enterprises own well equipped laboratories and qualified personnel, which permanently verifies the physical-chemical and taste indicators of the produced wines. Ulterior, the state certification comes just to confirm the results of the effectuated analyses by the laboratories of the enterprises. Thus, in the case of deliveries to the EU, the wines are practically examined three times: by the laboratory of the enterprise, by the certification body of the importing country and by the NCVQAP. Certain enterprises (especially the large ones) are unsatisfied with the lack of trust of the state in the winemaking business, by imposing the obligation of national certification, in the conditions when (i) the wines are certified in the importing country and (ii) the state certifies the laboratories of enterprises. The solutions would be (i) adjustment of national standards to the EU requirements and (ii) establishment of the voluntary character of state certification of wines, produced by enterprises, the laboratories of which correspond to certain strict criteria.

158. Implementation of the new system of state mandatory certification of wine products represents another major systemic constraint in the development of the sector. The infrastructure of certifying services was restricted from 5 to 1 provider (lab) - NCVQAP, controlled by AAMV. But this enterprise is facing a stringent deficit of institutional, human and financial capacities (Box 9). This leads to delays of the certification and to failure in analyzing sophisticated indicators required by the EU standards. As a result, financial and time costs have substantially increased, and the delivery contracts are jeopardized (Box 10). Additionally, some specialists raised the issue of breach of antimonopoly legislation, by investing exclusive functions only to NCVQAP laboratory.

159. The increased cost of voluntary certification determines the relatively low number of wine enterprises that have implemented the quality management systems ISO 9000 and ISO

22000. This is minimum of 20 000 euros and can be afforded only by big enterprises. Presently ISO and IFS standards are implemented in 22 alcohol production enterprises out of 191, some enterprises being in the process of implementation. USAID offers free assistance in this field to all soliciting wine enterprises, covering 50% of the certification cost55. Preparing and auditing (certification) of the enterprise is done by specialized private companies, on contractual basis. Producers choose by themselves the consultants in the certifying services and auditors, mainly depending upon the price criteria. Both the consultants and auditors can be from Moldova or from abroad. One of the wine-producers interviewed told us that the process of preparing and certification of his enterprise was done by Moldovan companies, because of the lower prices comparing to the ones solicited by international companies.

55 USAID Project “Competitiveness Enhancement and Enterprise Development”

Box 10. „We were accepted by a British network of about 15000 supermarkets to expose our wines for selling. We were ready to fulfill the fixed condition of delivering the products within 10 days. But due to certification this

became basically impossible.”


75

RELATED AND SUPPORTING INDUSTRIES

160. The quality of vineyard plantations is low and the rate of degradation continues to be

faster than the one of plantation. In 2006 the area planted with vineyards constituted about 150 thousand ha, out of which 140 ha are fruitful. These include vineyards of table grapes (table 7)

Table 7. Vineyard plantations, thou ha

1998 1999 2000 2001 2002 2003 2004 2005 2006

Vineyards, including 166 154 149 154 152 149 146 148 150

- fruitful 157 147 142 150 148 143 138 140 140

Source: NSB

Vineyard plantations has significantly decreased from 220 thou ha in 1985 (see the Chapter “Strategy”) to about 140 thou ha in 2006. There were different reasons of reduction: „the fight against alcoholism” during the times of Gorbaciov, collapse of USSR and breaking of commercial relations in the following periods, natural disasters, lack of investments etc. Presently, ¼ of vineyards need to be rooted out (fig. 42), 90 thou ha are more than 16 year aged (fig. 43, annex 17 / table 1) . The Government makes efforts on renewal the viticulture, aiming to have 100 thou ha

Box 9. Up until autumn of 2006 the testing and certification of alcoholic products (including wines) was done by 4 laboratories certified by MSS, situated in the cities Chisinau, Balti, Cahul and Ciadir-Lunga and also by CNVCPA (Chisinau). The conclusions of the activity analysis of respective laboratories and their relationships with the producers (especially, after the ban on exporting wine products to Russia) were the basis for the decision to concentrate the state control on certifying alcoholic production in one enterprise – CNVCPA.

Although the amount of work increased enormously, the enterprise was not sufficiently equipped in order to test qualitative and within minimum time the collected proofs. Thus, CNVCPA lacks adequately trained staff for fulfilling the solicited works, which takes longer time on collection and processing of proofs. At present the minimum time required for processing is of 2 days/proof, the maximum capacity is of 70 proofs per day. The regulations establish the maximum term of 3-5 days per testing/certification. In reality the procedure takes 1-3 weeks.

The main devise of testing is older then 10 years and it not only takes a long time, but it is not foreseen for testing some physical-chemical parameters that are required by present quality standards of many importing states. The rest of the equipment are worn out not only morally and physically, but also, can not meet the present requirements of testing in accordance with the international standards.

The system of collecting the proofs. The procedure of collecting the proofs by the worker of the laboratory directly from the enterprise out of the respective consignment is welcome. But the CNVCPA is serving all the producers from Moldova and it does not have the necessary staff and cars in order to go at the same time to different enterprises. Moreover, the old system provided that the whole consignment of a certain type of product was certified (ex. 100 thousand bottles), but the new system provides that each lot is certified (1 product) destined for delivery (ex. The lot can be loaded in 1 truck, 5 trucks – 5 lots – 5 certificate x 1200 lei = 6000 lei. The influence of the cost of certification upon the price of one bottle of wine is bearable in case one truck is loaded with one type of wine. In case of delivering with one truck more types of wine in small lots, the cost of the certification increases significantly the price for one delivered bottle.

The increase of the number of clients, as well as collecting the proofs from the lots for delivery created the insufficiency of depositing spaces of the collected proofs.

Even though the services are rendered for a payment, the enterprise doesn’t have sufficient financial resources for buying regularly the necessary materials for laboratory testing. This is a result of the lately increase of the price for these materials.

It is necessary to point out that the issues mentioned above are relevant in the situation of decreased soliciting of certificates, due to the lack of exports to Russia. Restarting the exports, as well as requests to check some sophisticated indicators by Russia or other countries, in the present situation of the CNVCPA, could lead to slowing down significantly or even blocking the certification process.

„Viticulture must be together with winemaking.”


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of vineyards in 202056, replacing old plantations and those that will get older during the time. In this context it worth mentioning the EU intention on reducing of vineyards as one of measures toward increasing the competitiveness of own wines (box 8).

161. The average productivity of vineyards is low and decreasing due to the advanced

age and failure in processing with chemicals according to the plant protection

technology (Annex 3, table 3.9). Vineyards reach the maximum productivity within the period of 7-20 years. Nevertheless, “the crop is inversely proportional to the quality. The old vineyards that must struggle to survive tend to produce the best grapes that have the potential to offer the best wine, provided that they are protected against diseases. Ideally, profit maximization requires an optimal compromise between crop and quality”57. The total output of grapes in 2006 reached 466 thou tones and decreased by 10% as compared to 2005 (table 4). Also, the average output of grapes is decreasing.

Table 4. Output of grapes*

1998 1999 2000 2001 2002 2003 2004 2005 2006

Total output of grapes, thou tones

343 465 704 505 641 677 686 519 466

Average output, chintals / ha

22 31 50 34 43 47 50 36 32

Source: NBS * Note: including table grapes.

162. Wine factories tend to create/increase the areas of own vineyards, trying to

reduce the production costs and improve the quality of grapes, in the same time, taking advantage of the financial support from the state58. The average acquisition price of wine grapes in 2006 was 2.55 lei. The share of grapes cost in the effective cost of a bottle of wine (less taxes) is about 30-40%.

56 The Program on renewal and development of viticulture and wine-making in 2002-2020. 57 Report on competitiveness evaluation in the economy of Moldova, USAID, BIZPRO-DAI, April 2004. 58 For 2007 the aid for supporting the creation of vineyard plantations constitutes 25 000 lei/ha (about 2000 US dollars), which can be increased by 5-15 thousand lei depending upon the planting stock. The aid is considered to be insufficient, taking into account the initial investment of at least 10 000 US dollars per 1 ha of vineyard till the harvesting year (the fourth). In the same time, wine-makers pay special taxes to the fund for viticulture revitalization.

Fig. 42. Industial vineyards’ quality, 2006, thou ha.

26

60

27

Good

Satisfactory

Unsatisfactory (to be rooted out)

Source: AAMV

Fig. 43. Industial vineyards’ age, 2006, thou ha.

1113

71

18

1 - 4 years 5 - 15 years

16 - 25 years 25+ years

Source: AAMV

„5-7 tones of grapes per ha is not profitable anymore.”


77

163. Producers are not satisfied with the quality of purchased grapes, especially the

ones from the population. The sorts are often mixed, the grapes were not protected according to established technologies (because of the lack of money), were not harvested on proper time etc., thus, the qualitative parameters being significantly affected. Businesses mentioned the necessary governmental effort toward training/extension services to farmers in terms of new plant protection technologies, chemicals, suppliers etc. Presently, the large enterprises harvest their own grapes and purchase only the necessary quantity from other companies and population. The average acquisition prices for wine grapes are presented in the table below:

Table. 5. Average acquisition prices for wine grapes 2000 2001 2002 2003 2004 2005 2006

Lei/kg 1.37 1.77 2.27 2.86 2.25 2.98 2.55 Source: NBS

The interviewed wine-makers stated that is practically impossible to significantly increase the acquisition prices of grapes due to tough price competition on external markets. Often the wine enterprises pay the money with a 6-12 month or longer delay. The practice of enterprises purchasing grapes from population would be reduced significantly in the following years, because of production need satisfied out of own grapes59. Thus, structural changes on this segment of wine-making will motivate the population and economic entities to reassess the medium and long-term perspectives of viticulture: they could join and offer larger quantities of grapes of high quality at reasonable prices, or could leave this segment.

164. In the raw and auxiliary materials supply sub-sector there is a healthy

competition, and wine-makers do have the possibility of selection. There are different raw and auxiliary materials used in the production process. Ferments, preservatives etc. are used in the processing and depositing stage, whilst bottles, labels paperboard boxes are used at the bottling and packaging stage. The cost of all materials, except grapes (less respective taxes) constitutes ≈25-30% of the cost of a bottle of wine. Some raw materials are local: labels are printed at private typographies, paperboard boxes are of Chisinau Paperboard Company or „Moldcarton”S.A, and bottles are produced at the Chisinau Glass Container Company or Floresti Glass Factory. If wine companies are not satisfied with the local supply (for example, there is a lack of specific bottles as souvenirs), they are imported from other countries, for example Romania. There are companies that have purchased equipment for bottles production. All the chemicals (adjuvant, ferments, enzymes) and cork are imported. Interviewees said no problems with import of all this stuff. Every company has its own long term suppliers. They keep up-to-date the wine companies about the latest innovations in their sectors, so producers have the possibility of decision between old and new offers.

165. There is no room for cooperation, when a harsh internal competition takes place

in the small local market. The enterprises do not join their efforts for purchasing raw materials and thus, do not get bulk discounts. According to opinions of some producers these efforts will not take place in the nearest future because of competition. For instance, some producers draw attention to the unique form of the bottle, buying equipment for their production or ordering special bottles to foreign producers. However, there are some exceptions: a company told us that 2-3 times a year they join with another 2-3 companies for purchasing specific raw materials. The discount amounted almost 5%. Generally, deliveries are also done individually. There is lack of efficient cooperation also within the Union of

59 Some producers implement investment programs for planting of vineyards, according to which in 4-7 years they will not need anymore to buy grapes.


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Producers and Exporters of Wine and the Union of Oenologists.60 Cooperation within the Gild of Winemakers is more intensive, where members are cooperating with MIEPO and other organizations on export promotions, participation to exhibitions etc.

166. The insurance system in the Republic of Moldova is developing, but the

agricultural enterprises do not hurry to take advantage of insurance services for

agriculture. The small amount of insurance premiums for agricultures reveals the underdeveloped nature of this market segment (annex 17 / table 2). Farmers lack money, information or do not believe in repayment of insured amounts. The Government subsidizing of the insurance of productions risks in agriculture, starting with 2005, raised the interest of farmers for this service, confirmed by almost a 16 fold increase in the amount of insurance premiums in 2006 as compared to 2005. A wine company related that it has already taken advantage insuring its vineyards.61

167. The wine export crisis from Russia has generated the necessity of consolidation

the efforts of the Government and of the winemakers’ community as for intensifying

the actions of promoting wines on external markets. Increase of shares on the actual markets and penetration of new markets, accompanied by wines’ quality and competitiveness increase should be established as major objectives in the promotion policies implemented by the Government and the winemaking business. In the actual situation, the Government follows to assume the role of leader in uniting the efforts of all the participants to the winemaking industry. The success of Moldovan wines, which “plunged” into international competition, will be determined by the production of wines in the „New World”62 style, cooperation with participants to the respective markets and promotion of an intelligent branding campaign. Overcoming personal interests, consolidation of efforts and efficiency of the activity of wine business associations might constitute a success of intra-sector cooperation and a significant support to the promotion process. A good example in this sense could be the opening of Wine Houses on external markets, in which the whole range of local quality and brand wines would be present. Businesses should understand that the emphases need to be changed from the concept of “traditional production of wine” to the concept of “winemaking business”. The business with elite wines is considered an attractive domain for investments, with an annual return of 10%-12%, in which the prices do not fall, but, vice versa, go up. The only thing, which might lead to the decrease of elite wines’ prices, could be the global recession.

168. Although successfully undertaken, the efforts of MIEPO and AAMV do not

constitute a sufficient contribution of the Government for promoting the image of the

country and of wines on external markets. A few enterprises interviewed supported the idea, that the Government does not undertake sufficient efforts to promote the image of the country abroad. There were situations, when the leaders of the local market were asked “But who are you?” or “Moldova, or otherwise Maldives (islands)?” MIEPO has limited resources63 for organizing a bigger number of external events. The events like “Moldova presents”, Wine Festivals, presentations within embassies and forums and other events organized by MIEPO with the contribution of donors (embassies, sponsors, AAMV), are

60 At present, the members consider the activity of these unions absolutely inefficient, because of the priority of personal interests of the company as a detriment of the common interests of all members and external image of the state. 61 For 2007 the Government subsidized 80% of the insurance premium for agricultural cultures 62 The „New World” group consists of Australia, USA (California), Chile and South Africa. The production style of the „New World” is described in the Report on competitiveness evaluation in the economy of Moldova, USAID, BIZPRO-DAI, April 2004 and refers to quality and style. 63 The 2007 budget of MIEPO is of approximately Lei 3 million and is financed from the state budget.


79

insufficient for the promotion of the image and for successful penetration of external markets. Mini-studies performed by TACIS experts for MIEPO, as well as direct contacting of buyers has opened the access to certain markets. The buyers (wholesalers and big retailers) visit Moldova on MIEPO and other private companies’ invitations. They have solicited visits to a range of enterprises, which produce the demanded types of bottled wines. However, the actual efforts of attracting foreign buyers are insignificant and sporadic. The enterprises are skeptic as for the contribution of the Government in reorienting exports on external markets, and are basing only on their capacities. In this situation, the business will be bound to increase the budgets for advertising.

169. During the interview, MIEPO mentioned the insufficient activism of winemaking enterprises in modernizing the knowledge on marketing, management, production and storage technologies, as well as of establishing new relationships within the process of exports’ promotion. In this sense, more active are only the members of the Winemakers Guild, who have achieved certain events with the assistance of MIEPO. The impression is being created, that many other winemaking enterprises are expecting to return on the Russian market at previous conditions. They do not plan any internal strategic improvements in order to be more competitive and closer to the market. Considering the last events aiming to cancelling the interdiction, returning on the Russian market would be possible only with high quality wines, of which quality will be strictly examined by both countries.

170. National64 and international exhibitions with sales are recognized by

winemakers as very important, because they contribute to promoting wines on local

and external markets, to finding out the new preferences of consumers, as well as the

establishment of partnerships. Often, within these exhibitions, tastings are organized, with awards attributed to the best wines. Quality and branded wines of local producers are often awarded at these competitions. In certain cases local enterprises take part individually at events, in other cases their products are exposed by importers-partners. Participation to specialized winemaking exhibitions, forums, seminars leads to accumulation of new knowledge as for technologies and production and storage equipment (box 11), innovations in these segments, more performing auxiliary materials etc. Enterprises take part in these events on the bases of invitations received from external partners, from MIEPO or obtained individually. Still, it is necessary to mention that the existence in the past of the „guaranteed” sales markets of the East has finalized in the participation to a wider range of exhibitions in this „territory”, compared to the sporadic participations in the „territories” from the West. But the situation has entered into a changing process after the crises in Russia, and producers more often participate in Western exhibitions, which have a bigger image in the winemakers’ world. For the time being, the results of participations to „western” events are not completely the expected ones in terms of sales. But the winemakers do not lose their optimism, because they see the real possibility to compete successfully with other producers on the low-medium price segment.

Concluding Remarks

64 Annually in Moldova are organized such events like Wine Festival, specialized exhibitions like Food & Drinks etc.

Box 11. After participation to one of the last international exhibitions, a local winemaking company has convinced in the impact of barrels from a special type of oak over the wine quality. So, the company will make efforts to import the oak (the local oak is not the same) and to produce by itself the necessary quantity of

barrels.


80

171. Diversification of export markets, getting closer to consumer needs and improving the competitiveness might lead to sustainable development of the wine sector. Orientation to high value markets and acceptance into large markets chains, producing of wine according to consumers’ sophisticated preferences and its efficient promotion even on traditional markets are immense challenges and in the same time opportunities of local winemakers. Moldovan wines might become more competitive within the tough competition on external markets, if the offered quality would be the best in the target price segment. Additional investments are needed for assuring high quality of grapes and modernization of production and storing processes and equipment, which would decrease production costs and increase the quality of wines. The effect of these strategic actions may be stimulated and multiplied trough liquidation of identified major constraints.

172. The most important constraints within the wine sector are of human capital, financial capital, market infrastructure, innovations and competitiveness, and business climate. The

Government could figure out a major part of constraints identified with different costs and

terms. Thus, the most expensive would be the following activities: (a) strengthening institutional capacities of the NCVQAP or even of some more labs throughout Moldova (short term), (b) adjustment of standards to EU/other states requirements (short/medium term), and (c) modernization/actualization of technological instructions’ system (short/medium term). Other constraints the Government would be dealing with do not need significant resources and should be liquidated trough specific decisions and sector policy reformulations. Diminishing the inflation which would lead to decrease of the borrowed capital, represents a major concern of the Government, NBM and IMF. Other constraints could be figured out by the private business

efforts.

173. Sustainable development of the wine sector can contribute to rural poverty reduction. Enterprises will continue purchasing grapes from companies and population in the next 5-7 years. In the meantime, selection of suppliers will take place depending on supplied quality and demanded price, and which would determine a more efficient co-operation with them. This process will be stimulated by the tendency of planting own vineyards by the wine enterprises. The revenues from sales of grapes are one of the fewest sources of existence for almost 60% of rural population. The most probably is that a part of population could not sell grapes anymore if they do not cooperate in order to increase quality and optimize costs. In the meantime, development of enterprises would lead to new jobs both unqualified (processing of vineyards and qualified (wine factories). The demand could be covered by the ex-grapes suppliers labor force.


81

2.3. TRANSPORTATION

Summary of Findings

174. Transportation sector established itself shortly as an important sector for the Moldova’s economy with an increased competitiveness at the regional level. Based on the „competitive diamond” analysis of the transportation sector, we highlighted its current situation, as well as its evolution according to a set of indicators, and compared it to the similar sectors from neighboring countries. Also, we looked into the main constrains that impede the development of the sector in short and medium term. At the same time, the geographical position of the country together with economic and political factors contributed mainly to the development of such transportation sub-sectors as road and railway modes, the other such as air and water (both by river and sea) having an insignificant contribution to the movement of freight and passengers.

175. Based on the constrains analysis, we established that for the transportation sector the main constrains are those of road and railways’ infrastructure, as well as business climate

and regional economic and political environment. The list of most important constrains are:

a. Lack of a modern road and railways’ infrastructure, which leads to the increased costs of transportation and at the same time, raises the risks for the transit;

b. Weak correlation between the development of the road and railways’ infrastructure with the market demand and strategy for the development of the transportation sector;

c. The problems associated with the political solution of the Transnistrian conflict, which refrain investments in the development of the pan-European corridor IX, which passes via the eastern part of the Republic of Moldova;

d. Slow path of renovation of auto fleet and lack of investments in the railways freight stock, which leads to the aging of the existing fleet and loss of access to the developed markets of EU, where the environmental standards are constantly tightened;

e. Lack of national strategy for the development of the transportation sectors with clear indication of the priorities;

f. Weak harmonization process of the national legislation to the European norms and practices in the area of transportation;

g. Existence of the technical and logistical barriers for rapid border passing, especially for the perishable agricultural products.

176. Identified constrains which refrain the development of the transportation sector, may be divided in two groups: of internal and external nature. The first one includes critical



transportation sector via neighboring countries and their need to transit Moldova’s

territory, which is much smaller. Infrastructure constrains represent issues of national importance, with financial tags well over current means of the state or local budgets. On the other hand, improvement of the business climate needs a more active implication from the part of the government in its endeavors to adjust to the European standards. The role of government seems to the main one in the negotiations with the other countries concerning the parity issue for the transit permits for the road transportation, as well as in the development of the pan-European highways that pass via the territory of the Republic of Moldova.


82

Related and

Supporting

Institutions

Demand

Conditions

Factor

Conditions

Structure,

Strategy and

Rivalry

Auxiliary and supporting services for the road and air transportation but lack of such for the railway stock Emerging development stage of the financial sector, including financial leasing Emerging state of insurance sector Dependence of other sectors of the national economy on the

transportation sector.

Increased competitiveness both on internal and external markets for road transportation. Dominant position of the single state operator in the railways transportation Tariff regulations for the

passengers transportation Lack of fiscal incentives for the development of the transportation sector Non-harmonized legislation with the EU norms in the transportation area. Technical and logistical barriers for the border crossing procedures

Lack of the high speed highways on the national importance;

Weak correlation between the development of the road and railways’ infrastructure with the market demand and strategy for the development of the transportation sector Development of the European transport corridor IX for the transit goods and 4 major European highways passing through Moldova Qualified but insufficient labor force, taking into account the increasing demand for the transport services, especially for the passengers transportation Aging fleet and insufficient level of investments for its renewal Lack of specialized road transportation, such as that of refrigerators for the transportation of agricultural products

Increased volume of trade both on internal market and cross-border one. Increased amount of goods transported in transit New EU environmental and security standards Regional development

programs Demographic factors for the passengers transportation Development of the economic sectors dependent on the transport services Strong non-governmental

sector and associations in the transport sector.


83

FACTOR CONDITIONS

177. Geographical position of the Republic of Moldova may be seen as a positive factor for the development of the transportation sector, especially that of road and railways transport,

due to the transit routes that pass via the territory of Moldova, ensuring a considerable

percentage of the West-East trade flows. To that end contribute also the human and cultural aspects of Moldova, which following the historical background created close cultural and linguistic links with its neighbors – Romania and Ukraine, CIS countries, as well as countries of Central and South-Eastern Europe. Based on these factors, a big portion of the transporters from Western Europe, prefer to contract local companies to transit goods to the CIS countries, relying on their experience and knowledge of the regulations on the CIS market.

As important geographic factor is the passage via the territory of Moldova of the pan-European corridor IX, which starts in Scandinavia countries (Finland) and ends in South-Eastern Europe (Bulgaria and Greece) ensuring the circulation of goods between the Northern and Southern Europe. In addition, four highways of international importance – E58 (Austria – Russia), E577 (Poland – Romania), E581 (Romania – Ukraine), and E583 (Roman – Jitomir) are passing though the territory of Moldova. Recent study conducted by the Goldman Sachs, forecasts a substantial growth of the demand in Russia65 thus creating strategic opportunities for the development of the transportation sector in Moldova as a potential center for logistics for the trade flows between West and East. Also, taking advantage of the EU neighboring country, Republic of Moldova may attract substantial investments in the transportation sector and logistics, offering a qualified and relatively cheap labor force, combined with the sustainable and good infrastructure.

178. One of the factors of major constrain toward the goal of Moldova to become a transit point is the unsolved Transnistrian conflict, which creates uncertainties and logistical

difficulties for the transport services on the pan-European corridor IX. This has led to the diminishing investments from both sides Moldova and Ukraine in the road infrastructure on this route. The same problem created enormous difficulties and increased costs and uncertainties in the development of the railway transportation, especially after recent separation of the railway administration from the left bank of the Nistru from the Moldovan Railways Authority. Finding a solution in this case would boost significantly the ground transportation in Moldova.

179. The importance of the ground transportation comes from the geographical situation of Moldova, which favored the development of the road and railway transportation on one

side and created limits for the development of the transportation by sea and river. The constrains analysis highlighted the lack of necessary density of the roads and railways in Moldova, which restrains the development of these sectors. The Republic of Moldova is under the regional average on both of these indicators (Figure 2 and 3). The road network still meets the demand because of the relatively low level of economic activity and current demand, taking into account, also, the reduced density of cars per thousands inhabitants, comparing to the other countries of the region. As for the density of the railways per 1000 sq. km of the territory, Republic of Moldova is at the level of new members of the EU and South-Eastern Counties, but well under the level of Central European countries and those from Western Europe.

65 Global Economics Paper No: 99, “Dreaming with BRICs: The path to 2050


84

180. Lack of necessary funds for the investments in the infrastructure for ground transportation and its maintenance had led to the considerable deterioration of its quality,

as it is indicated in the World Bank report, presented in the Constrains Analysis. Also, this situation conducted to the slow down of the rates of construction of new roads (Figure 4). This fact considerably reduces from the competitiveness of the national economy in general and that of ground transportation sector in particular. In this context, we may exhibit the priorities established by the EU in respect to the investments in the transportation sector and its necessary infrastructure oriented mainly towards improvements of the roads and railways networks (Figure 5). An increased attention is given to the development of the transportation and distribution logistics value chain at the European level, especially to that one in proximity to the urban centers with a well developed communications infrastructure, combined with the relatively cheaper labor force and improved utilities’ services.

181. Lack of own financial resources oriented towards the development of the ground transportation, led during the last 15 years to the situation when 90% of the roads network

is considered to be in a very poor condition66 comparing to Romania, where 2/3 of the roads

network needs renovation. In this context we may mention the great disparity in which Republic of Moldova finds itself concerning the access to the necessary funds to overcome this situation.

66 Constraints Analysis, p.34, Figure 30

Figure 3: Density of the railways (km per 1000 sq. km of territory)

0

20

40

60

80

100

120

140

CZ H SK PL SLO BG MD LT EST

Source: IRU and NBS

Figure 2: Road density (km per 1000 sq. km of territory)

Moldova Romania Cehia Polonia Ungaria

Source: www. pmrpublications.com

Figure 5: EU-12 structural funds (2007-2013)

Sea, 2%

Airports, 1% Other , 4%

Urban transport, 10%

Railways, 30%

Roads, 53%

Sourse: ERF Road Statistics 2007

Figure 4: Lengh of the new road build during a year (km)

0

5

10

15

20

1998 1999 2000 2001 2002 2003 2004 2005

Source: NBS


85

With its own resources, it can only partially maintain its road network, which is the situation during the last several years (Figure 6), but these funds do not cover the annual needs even for the maintenance, leading thus to a further degradation of its road infrastructure. The evolution of expenditures for the maintenance and reconstruction of roads shows a significant reduction in financial capacity to finance from the special funds such works (Figure 7).

The annual amounts spent for the maintenance of road network in the Republic of Moldova reaches maximum several tens of millions of US dollars, (based on the budgets for 2004-2007 – the total amount is 30 million US dollars). Thus only some of the roads of national importance are maintained, local ones remaining outside the scope. The hope is for the preferential grants or loans from such donors as World Bank, EBRD, EU, USA, and others). For example only from EU structural funds, Romania will benefit during 2007-2013 of the amount of 4 billion euro for the rehabilitation of its road network, which will allow her to build about 1300 km of new highways till 201367. In comparison, Republic of Moldova during the last 8 years (1998-2005) succeeded to build less then 85 km of new roads. On average, in the region, investments in the infrastructure reach 8-10% of GDP, while in Moldova this indicator is less then 3%.

182. The quality of existing road fleet is very low – a large number of transport units of 10 years and older - and can lead to the access limitations of local transportation companies to

the EU markets, as well as diminishing competitiveness of transportation services on

internal market, taking into account the increased preoccupation of EU for the environmental norms and tighter standards in this area such as Euro 3 and 4, and upcoming Euro 5 for the emissions of residuals. In Moldova, over a half of the fleet of the trucks is 10 years old or older and together with the trucks with the age in between 5 and 10 years old, accounts for 96% of the entire fleet of this type (figure 9).

The newer is the auto fleet the less maintenance cost will be attached to transport services and a lower gas emissions to the atmosphere will be. Currently only 60% of the fleet meets the Euro 2 and Euro 3 standards and, subsequently may be used to render transport services for trans-border

67 www.pmrpublications.com

Figure 6: Distribution of the road funds (2004-2007)

Reconstruction of roads

31%

Road maintenance

69%

Source: Ministry of Transportation and Roads

Figure 7: Evolution of expenditures on roads and road maintenance during 2004-2007 (mil. lei)

0

20

40

60

80

100

120

2004 2005 2006 2007

Reconstructionof roads

Roadmaintenance

Figure 8: Distribution of road transport per age groups

5-10 years40%

< 5 years4%

>10 years56%

Source: NBS


86

trade. Taking into account that starting with the year 2007 the permits will be given to the fleet meeting the Euro 3 standards for environmental purposes, this may become a further bottle-neck in promotion of foreign trade for Moldova.

The number of lorries and especially those in personal ownership has increase substantially over the last decade (figure 9). Also, noticeable change is coming along the structure of the lorries according to the type of fuel consumption. As a result of a sharp increase in the fuel prices in the last couple of years, transport companies are oriented towards cheaper types of fuels such as diesel and gas. Thus the share of lorries on bensin has decreased from 85.7% in 1995 to 72.6% in 2005, while the share of those on diesel and gas increased to 26% and 1.3% accordingly.

183. The number of lorries has increased considerably during the last nine years and especially those for freight. In comparison with the railway transportation sub-sector, where there is only one – state operator – „Moldova’s Railways” (Table 2), in the road transportation sub-sector there is a large number of private companies operating, which ensured a more dynamic development of this mode of transportation.

The dependence from the budgetary resources has led to the limited capacity of the railway transportation sub-sector to quickly adapt to the market demand and as a result, during the last several years we observe a reduction in the total number of the freight stock. Even this situation is within the overall trend observed across Europe, in terms of diminishing share of the railway sector in the total transportation services, a great deal in reduction of the volume of goods transported by this mode is the political one – difficulties of regulating the railways which pass via the eastern part of Moldova, as well as logistical problems which appear from time to time with the Ukraine railway authorities concerning the transit of goods on some routes or with Russian Federation concerning the parity on the passengers’ transportation.

184. Although the share of the employees in the transport sector increased from 4.7%

in 1998 to 5.4% in 2005, this indicator

remains lower then in the South-Eastern

Figure 11: Evolution of productivity in transportation

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1999 2000 2001 2002 2003 2004 2005

0

0.1

0.2

0.3

0.4

0.5

0.6

Productia Bruta (mil.lei) Rata de crestere a productivitatii (%)

Source: NBS

Figure 9: Fleet of lorries and freight stock

0

5000

10000

15000

20000

25000

30000

1998 1999 2000 2001 2002 2003 2004 2005

Lorries Buses Freight Stock

Source: NBS

Figure 10: Fleet of locomotives and passengers stock

0

100

200

300

400

500

1998 1999 2000 2001 2002 2003 2004 2005

Disel locomotives Passengers stock

Source: NBS


87

Europe, average being 6%, and lower then in the Central European countries. Compared to the national labor market, this indicator exhibited a very positive dynamic during the last 4 years, with a great potential for growth. Currently, transport sector employs the largest number of workforce among the services sectors, being comparable even to the number of employees from the industry in general. An important factor is the increase in labor productivity in the transport sector, which exhibited diminishing returns till 2004, the trend starting to reverse in 2005. However, this indicator is far from reaching the level of 1989, which is characteristic not only for Moldova but to most countries of the region.

The difference among them is the fact that Macedonia reached in 2001 a 79% of the 1989 level for the rail transport, while Moldova for this indicator stood at only 23% in the same year. However, such comparison with 1989 level may not be entirely correct, taking into account the completely different economic conditions then, and the transportation sector of Moldova served a closed market of much larger scale, that exceeded multiple times current demand.

185. Infrastructure for the air transportation is very limited and entirely depends on the Government’s investments capabilities. Currently regular flights and international ones are served by only one airport – International Chisinau Airport. There are four more airports – in Balti, Cahul, Tiraspol and Marculesti. That in Tiraspol is outside of governmental control of Moldovan authorities due to the unresolved conflict. Airports in Cahul and Marculesti are in the process of certification and only that from Balti is operational but is used only for charter flights.

STRUCTURE, STRATEGY AND RIVALRY

186. Major share in the transportation sector have the road and railway sub-sectors, the first with the dominant position in the passenger transportation and the second in the

freight transportation (Figure 12 and 13). The share of the maritime/fluvial transports and that of air transport is insignificant one both in passenger and freight transportation. Following the geographical position of the Republic of Moldova, the maritime transportation does not play an important role for the national economy and there is almost no official statistics on this mode of transportation. This may change with the launching of the Giurgiulesti oil terminal, where Moldova has a narrow strip along the Danube river. The port is designed for both freight and passengers transportation. However, taking into account that it became operational at the end of last year only as oil terminal and for the passenger transportation there are no facilities as of now, the share of the maritime mode of transportation will continue to be almost insignificant in the short-run in terms of volume of transported freight and passengers, as well as in the total volume of trade in transportation services.

“The quality of labour force is below expectations,

expecially in the passengers transportation. For example,

the taxi operators from the Chisinau municipality cannot

find taxi drivers even with lower qualifications and are

forced to hire teenagers without experience”.

„Economic realities have changed, currently being much

more complex, thus raising the standards for the

transport companies, taking into account more

sophisticated logistics of border-passing procedures. In

the situation when vocational schools do not meet the

current requirements, these skills take effort and time

from the companies to train their employees”.


88

If there is some similarity in the distribution of passenger transportations by various modes of transportation in Moldova with 95.4% and EU with 92% (Figure 14), then for the freight transportation in terms of weight, in Moldova the largest share has the railway mode of transportation, while in EU it has only 10%, and most of the goods are transported by road transport (47%) and maritime transport (40%), (Figure 15). In this respect, the distribution of freight transportation by various modes in Moldova resembles that of Bulgaria and Romania, where the railway sub-sector is the dominant one as well. As for the countries of South-Eastern Europe, we observe the diminishing role of the railway sector and increased share of the road transport.

In general, we can speak of a disadvantage for the Republic of Moldova concerning the lack of the maritime mode of transportation in the structure of the transport sector, which is one of the cheapest mode of transportation and respectively could reduce the costs for freight movement.

187. The development of the transportation sector is based mainly on private sector, which holds the majority share in the overall volume of transported goods. This fact creates the premises for a competitive environment in the transportation sector and diminishing of the administrative intervention. However, we notice a major differentiation in the structure of the ownership in various transportation modes. Most of the services rendered by the road sector come from the private operators, which are in great numbers without someone holding the significant market share (Figure 16 and 17).

Figure 12: Total transported goods, tons (2006)

75%

24%

1%

Rail Road Water and Air

Source: NBS

Figure 13: Passenger transportation, thou. pers (2006)

95.4%

0.4% 4.2%

Rail Road Water and Air

Source: NBS

Figure 15: Freight transportation, EU 25 (2005)

Road47%

Maritime40%

Railway10%

Fluvial3%

Source: ERF Road Statistics 2007

Figure14: Passenger transportation in EU-25, (2004)

Road92%

Railway7%

Maritime1%

Source: ERF Road Statistics 2007


89

In the area of railway transportation the situation is reverse – single operator on the market – Moldova’s Railways, which is a state enterprise. With all the disturbances in its operations due to political and tense international relations, the state enterprise „Moldova’s Railways” registered in the first half of the 2007 a 14% growth in the volume of transported goods comparing to the similar period of the last year, and registered a profit of USD 82 million. The head of the enterprise, Mr. Miron Gagauz declared that the increase in the wages of the employees of the company was 31.1% comparing to the same period of last year and surpassed the 2200 MLD threshold, which is about USD 185 per month.

As a strategic priority for the development of the transportation sector was the securing of the „transportation independence” for the country in the railway sector and its integration into the European system. In this context the construction of the railway Revaca-Cainari was accomplished, as well as a new one Giurgiulesti – Cahul was started.

In the road freight transportation few foreign investments were attracted, some of which being an established joint-ventures or foreign companies. However, the share of the foreign investments in the transportation sector remains a very low one, comparing to the countries of the region, where a liberalization of the sector took place several years ago. As a comparison, in the Republic of Moldova the volume of foreign direct investments (FDIs) in the sector is about 5.5%, while in Macedonia – 46%.

188. In the area of passengers transportation, the current level of the services is below any standards both in urban, inter-city and international transportation. This is caused by the multiple causes, among which the most important are:

a. many small operators with the few number of minibuses and as a result not capable to ensure their own financial capacity for fleet renewal;

b. high level of pollution due to the old fleet of buses c. non-compliance of many transport units to the standards for passengers transportation d. bad road infrastructure in most of the towns and villages which increases the risks of

accidents e. high level of unauthorized passengers’ transportation

Among the most important problems of the passengers transportation the operators mentioned the following:

a. very slow renovation and deployment of new fixed assets (fleet of buses);

Figure 16: Road freight transportation (2005)

Mixt public and

private19%

Public17%

Private56%

Mixt w ith foreing capital8%

Source: IRU

Figure 17: Road passenger transportation (2005)

Mixt public and

private0%

Private82%

Public7%

Mixt w ith foreign capital11%

Source: IRU


90

b. long period for administrative resolutions concerning the deployment of the new buses based on leasing contracts;

c. discrepancies in the tariff policies for the national and international transportation of passengers

d. weak governmental measures to prevent unauthorized passengers transportation

e. lack of incentives that should be granted to the operators for procurement of transport units in conformity with new environmental standards – Euro 1, 2 and 3.

189. In air transport currently operate 14 companies, one of which is a state company –

„Air Moldova” – whose share in the passengers’ transportation in 2006 was 52.1%68. Three

out of these 14 companies (Air Moldova, Moldavian Airlines and Tandem Aero) hare regular flights from Chisinau Airport; another four have flights based on parity agreements – Turkish Airlines, Austrian Airlines, Taron, and Club Air. The other two companies – State company „International Marculesti Airport” and Joint Stock Company „Nobil Air” have charter flights.

The number of transported passengers has shown in the last several years a stable growth. Thus in 2006, the growth rate was 13.8% and in absolute number reached 548.3 thousand passengers – double from the level o 10 years ago. However, the volume of transported freight remained at the level of 2005 – 1700 tons. A seasonal increase in the number of passengers is observed during the summer period, which is the trend during the last three years. Despite this, the air transportation does not represent a significant share either in passengers or freight transportation.

To several operators (8 companies) that were specialized in the cargo transportation and registered in the Republic of Moldova their licenses were withdrawn in 2007 due to the irregularities in their activity. In the air roster of the Republic of Moldova there are 19269 registered airplanes, of which 47.4% have the certificate of flight. 80% of the fleet consists of the airplanes produced in the USSR, most of which do not correspond to the EU and International Civil Aviation Organization (ICAO) standards. This fact considerably limits the competitiveness of the national operators on the air services market both regionally and internationally. The limited character of the air transportation in Moldova, does not allow the development of the own flight schools for training of new crews, which currently have aging personnel. With the aim to overcome this issue, the State Administration of Civil Aviation recognizes the training centers from abroad that meet the criteria and JAR-FCL1 and JAR-147 standards on a non-discriminatory basis.

Based on bilateral agreements, the sharing of the passengers’ transportation between the national and foreign companies, which have regular flight schedule to and from the Republic of Moldova, is done on a 75% and 25% basis accordingly.

Further development of the air transportation will depend on the general increase in the standards of living of the population, as well as its capacity to pay for more expensive mode of transportation but at the same time a more fast one.

68 State Administration for Civil Aviation: Report on activities for 2006 69 Strategy for the development of civil aviation for the period 2007-2016

Figure 18: Air passenger tranportation (2006)

Air Moldova51%

Moldavian Airlines17%

Tandem 4%

Tarom2%

Turkish Airlines14%

Austrian Airlines 5%

Club Air 5%

Other2%

Source: State Civil Aviation Administration


91

190. In the last 8 years, the transportation sector (mainly the road transportation) became a bridge between West and East, ensuring the transport logistics for the freight movement

from the countries of European Union (27), Turkey and countries of South-Eastern Europe

to CIS countries (Figure 19 and 20). Starting with 2007, following the accession to EU of Romania and Bulgaria and change in the border-crossing procedures, transport units from the Moldovan companies started to encounter difficulties in operating on European market that may lead to the reverse of the positive trend in the trade in services registered in Moldova during the last decade.

The new, more restricted procedures to obtain a visa to the EU countries, especially in the newly acceded one, including Romania, added to this problem. Taking into account the way in which transportation sector of Moldova has developed during the last years, it is important to determine the priorities for this sector in general and its strategy for the development in the regional context.

191. A special role of the governmental bodies is the insurance of the non-discriminatory access of the operators in the transportation sector of Moldova to foreign markets, as well

as a favorable business climate within the Moldovan market. Currently, due to the disparity in the transit needs based on the parity agreements, there is a great demand and lack of such permits for local operators based on such agreements. In particular this is the case for the transportation to Hungary, Ukraine, Poland and Russia. With such conditions of market access Moldovan companies risk to loose their competitiveness gained on the regional market in the last several years.

Concerning the technological innovations in the transport services, OECD survey, reveling some of those innovations being implemented in the countries of South-Eastern Europe, such as new trucks with electronic combustion systems, new information technology and trucking systems, but almost none of them being reported for Moldova. From the interviews and discussions with the operators in both cargo and passengers’ transportation sectors in Moldova, it has been mentioned that often changes and ambiguous government policy, refrains private investments and discourages innovations in the sector.

Figure 19: origine of the feight (auto)

0% 20% 40% 60% 80% 100%

2004

2005

CIS EU 27 Turkey and SEE

Source: IRU

Figure 20: destination of the freight (auto)

0% 20% 40% 60% 80% 100%

2004

2005

CIS EU 27 Turkey and SEE

Source: IRU

„Already a large portion of the auto fleet

registered in Moldova, about three

thousand, moved together with their

companies to Romania, Portugalia,

Russia and other countries to avoid

restrictive system of permits and have

market access to EU and CIS countries”.


92

Another constrain that may explain the low FDI and innovation in the sector is the lack of institutionally independent regulator in the sector, with the exception of Albania and Bulgaria, where such agencies have been established as independent legal entity. In Moldova, the Ministry of Transport acts as a regulator. Opposite to the most of the countries in the region, Moldova and Albania regulate the transport tariffs.

One positive aspect of the regulatory framework of the Moldovan transport sector is the lack of discrimination between the national and foreign companies, where Moldova is an exception to the countries of the region that apply such discrimination. Mostly this became possible upon Moldova’s accession to the World Trade Organization in 2001. As a result, Moldova eliminated restrictions on market access both for commercial presence and cross-border supply of transport services (Annex 4, Table 1).

DEMAND CODITIONS

192. The increase in the living standards and purchasing power of the population substantially boosted external trade, especially imports of goods (Figure 23), which

subsequently increased the demand for the volume and quality of transport services.

International trade plays a critical role in the development of the transport services in Moldova. Thus, based on the total turnover of goods (Figure 21) we notice that most of it is due to the cross-border supply. On the internal market most of the goods are transported by local transport companies (Figure 22), based on the total volume of transported goods (mil. tones).

In the last 10 years the export of the transport services increased by 2.7 times (in line with the overall export of services – by almost 2.9 times), while the import of transport services increased by 1.8 times, significantly lower then the overall import of services – by 2.5 times. This permitted to keep the share of transport services in the overall export of services at a stable level of about 48% average during the last ten years, while the level of imports of the transport services in the overall imports of services decreased from the level of 48% in 1997 to about 35% in 2006. The trade balance in transport services after the financial crisis of 1997-1998 turned into the positive one and remained positive during the last 7 years (Figure 24), increasing both in relative terms (7 times – from 2% of the trade in transport services to 14%), and absolute terms from $3 to $53 millions during the same period.

Figure 21: Turnover of goods, mil tons-km (2005)

National transport31%

International transport69%

Source : NBS

Figure 22: Volume of transported goods, mil tons, (2005)

National transport94%

International transport

6%

Source: NBS


93

193. Another demand factor is the quality of the transportation services, which will be adjusting to the structure of the transported goods, based on import-export flows, as well as

the issues of security and comfort in the case of passengers’ transportation. The new requirements to the transportation logistics (packing, loading, and movement of goods) are put forward by the final consumers of transportation services. In the Republic of Moldova, where major share pertains to the production and export of agro-industrial goods, their transportation and especially of fresh fruits and vegetables, requires a specialized fleet of lorries with refrigerators. Currently, those 1950 refrigerators that are operating on the internal market, account for only 2.5% from the total number of lorries, which is way under the actual demand. Although, at present, there is no such narrow specialization among transportation companies, depending on the types of goods, with an increased demand this may well happen in the near future and represent a development strategy for some companies.

Taking into account the share of the agro-industrial sector in the national economy, the role of transportation sector becomes more relevant one to ensure a minimum access of multiple small producers to the local and international markets, as well as to the storages and processing plants for agricultural products. Similarly, the importance of the transportation for the agricultural sector will be in ensuring its supply with various factors of production such as fuel, fertilizers, as well as necessary machinery.

To the same extent, the services of the railway transportation companies may be specialized by the types of goods they are transporting (Figure 25), by using various types of specialized freight stock.

Increased competition among the passengers’ transportation companies and tighter standards for the quality of their fleet and services rendered, will lead to the replacement of existing fleet of

Figure 23: Evolution of foreign trade in goods

0500

1,0001,5002,0002,5003,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

export import

Source: NBS

Figure 24: Evolution of the trade in transport services

0

50

100

150

200

250

1997199819992000200120022003200420052006

0%

10%20%30%40%50%60%

export import % of total trade in services

Source: NBM

Figure 25: Main types of goods transported by railway

oil products14%

mineral solid fuels

43%

iron ores20%

metalic products

1%

cement and lime12%

foodstuff and fodder

10%

Source: NBS


94

relatively old buses and trolleybuses, with orientation to a more large buses, which will replace the current fleet of vans which are used in the urban transportation routes.

Introduction of new environmental standards by European Union (Euro 4 and Euro 5) for the road transportation sector, as well as standards implemented by the Joint European Aerospace Agency (JAA) and those of ICAO in the field of certification and maintenance of airplanes will require major investments both from private and governmental operators, in order to meet the new requirements of European market.

Currently, in the air transportation sector there are positive changes followed by the participation of the Republic of Moldova in the EU program – Single European Sky, concerning the air traffic management systems, reduction of operational costs and harmonization of safety standards. A big portion of these objectives Republic of Moldova has already met by its participation in the program ATM 2000+.

194. Increase in the trade flows between the EU and emerging CIS markets and Asia will guarantee a higher circulation of goods which will pass as transit via the territory of the

Republic of Moldova. The transportation sector may take advantage of this situation and adopt a strategy to become a logistic node in between West and East, at least in the road transportation, following the latest trend in transportation services rendered by Moldovan operators, whose successful strategy in this respect placed them competitively on the regional market. However, the promotion of such strategy assumes a high degree of cooperation between various ‚stakeholders’, both private and governmental in order to overcome increased competitiveness between countries in this respect.

During the 90s the transit via Moldova decreased considerably (Figure 26) due to the difficulties in border-crossing procedure, caused by lack of their harmonization among CIS countries on one side and with those of Central and Eastern European countries on the other side. In addition, lack of coordination between various governmental institutions such as veterinary and phyto-sanitary services, customs and tax authorities added to the problem. On top of them were the political considerations following the Transnistrian conflict, which adds uncertainty of transit via the territory not controlled by the official authorities of Moldova.

However, following several measures undertaken within the regional CIS Coordination Committee and Governmental decisions, starting with 2001 the number of transit units increased, although in relative terms remains under the level of 1996 of 4.6 percent of the total border crossing transport (Figure 27).

Figure 26: Total number of lorries in transit

0

500

1000

1500

2000

2500

3000

3500

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: NBS

Figure 27: % of transit from the total number of road transport which enters Moldova

020000

4000060000

80000100000120000140000

1996

1997

19981999

20002001

2002

20032004

2005

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Source: NBS


95

The improvement in the legal framework and border-crossing logistics (based on Moldova’s participation in the trade and border-crossing facilitation project in the South-Eastern Europe), as well as in the customs procedures, together with the improvements in the road and railways infrastructure will lead to the increased role of the transport sector in the transit of goods via Moldovan territory.

If currently, the existing infrastructure is capable to ensure the necessary minimum for the transit and logistics of goods on the European highways which are passing through Moldova, then in the near future, this may not be sufficient taking into account the forecasted increase of about 2.5 times in the volume of traded goods.

RELATED AND SUPPORTING INSTITUTIONS

195. The non-governmental sector plays an important role in the development of the transportation sector, promoting its interests. Starting with 1994, an Association of Transporters has been established in order to promote the interests of the transport operators on the Moldovan market. It has been very active over this period and participated at the elaboration of the reform strategy for the sector, which included the following:

a. National Strategy for the development of the freight and passengers transportation

b. Review of the licensing requirement for the new entrants on the transportation market according to the EU standards;

c. Elaboration of the methodology for establishing the tariffs for the passengers transportation

d. Harmonization of the national legislation regulating the transport sector with EU norms;

e. Elaboration of the technical regulations and standards for the passengers transportation and safety norms;

f. Elaboration of the requirements to the personnel employed in the transportation services.

At the meeting with the meeting with the representatives and leadership of the Association of Transporters, several issues have been raised, which are of most interest for transport companies from Moldova. Thus, it was mentioned the very poor conditions of the road infrastructure and lack of financial resources for that purpose, which leads to further deterioration of its quality. According to their opinion, the minimal amount necessary for the maintenance of the road network will need about 18-20 mil US dollars. Currently these expenditures do not meet even half of this amount on annual basis. To reach the acceptable standards, according to the experts of the Association about 50 mil US dollars are needed annually for the maintenance of roads plus another 150 million USD per year for their rehabilitation.

In the air transport sub-sector, as well, an Association of Companies has been created, which promoted their interests in the Republic of Moldova. In 2006, the companies, members of this Association, had a turnover of about 1.2 billion MDL, (about 100 million USD). According to the

The leadership of the Association sees the priority

number one - rehabilitation of the road network

and building of the new highways, based on the

fact that majority of regional development

programs depend on the access to this critical

infrastructure.

According to some estimations carried by the

experts of the Association, about 2 billion lei

(about 165 mil. US dollars) are the additional

expenditures of transporters for the reparations of

their fleet due to the bad road infrastructure.


96

data of this Association, the situation in the air transport sub-sector is difficult. In 2007, after the restrictions have been imposed on 8 companies, 160 airplanes remained registered in Moldova, and 260 pilots have been exposed to the uncertainty for their future jobs. Most of these airplanes rendered their cargo services in Africa and Asia. The costs to prepare a single pilot are about 50 thousand USD, and it may reach 14 million USD in the case of highly qualified pilot with experience of flying on many types of airplanes. At the same time, the interruption in the flight period should not exceed 6 months.

196. The service industry for the transportation sector developed with increased rates in the last several years. Many companies, small and large, appeared on the market, some of them

specializing in a narrower niche. Increased competitiveness exists for general services and less one for more specialized services for the heavier and bigger transport units (such as lorries and buses), where larger investments are necessary in order to establish a diagnostic center. Such centers are mostly located in the large urban areas, namely Chisinau and Balti, with few exceptions in some district centers, which increases the costs for services for the transportation companies located outside these areas. Increased level of living along with better infrastructure (roads, sewage, water, and other utilities) will create favorable conditions for the extension of such services in other towns of the Republic of Moldova.

In the railway transportation of Moldova, there are no specialized companies in technical services for diagnosis and reparation of locomotives and freight stock. Therefore, Moldova uses such services from neighboring countries.

In the air transport sub-sector, all the service companies and auxiliary ones for maintenance and flight guidance are located in Chisinau. There is only one state company for air traffic guidance, which is situated in Chisinau – MoldATSA. Also, there are 3 service companies and 3 technical services and one training center. In the process of integration into the European traffic control, MoldATSA, renders an increasing number of services for over-flight. Their number in the last 6 years has increased six-fold.

Also, with the governmental support another aspect of civil aviation is maintained – agriculture related air service. For that purpose a state enterprise – „Moldaeroservice” – has been created. Unfortunately, these services are not requested within the territory of Moldova because of high costs, and the company renders its services mainly in Romania, and sometimes to other countries (ex: Irak). Taking into account the future of agriculture development in Moldova, this situation may change in the coming years.

197. Insurance sector plays an important part in the development of the transportation sector. Although, currently it has a limited penetration level of the economy but its recent

dynamic evolution shows a changing

trend for the coming years. The transportation sector remains to the be main sector for the insurance companies, which responds to the demand of transportation companies. From the very beginning the portfolio of all the insurance companies of Moldova was composed of transportation related risks either related to the transportation vehicles, cargo or passengers’ movement. Together with the avia risks, the share of the transportation sectors in the general portfolio has increased from 63% in

Figure 28: Insurance premiums (million MDL)

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 (6 luni)

auto (pasangers and cargo) air other

Source: ISSA


97

2003 to 76% in 2006. Thus we notice an increasing impact of the insurance on the development of transportation business. However, the insurance sector remains at an emerging state of development, most of the insurance companies having a very low capitalization to offer the necessary protection and to meet the current demand. Subsequently, due to the very small volumes of premiums, reinsurance of risks is more costly for the local companies, especially that they have the habit of contracting reinsurance on bilateral level without using the local brokerage companies, which could consolidate the risks and obtain lower prices for the reinsurance contracts. In addition, the market is very fragmented, currently being 33 insurance companies on the market of about 45 million USD, most of which have their own capital less then 1 mil. USD. The situation started to change after new legislation has been adopted last year with new prudential norm and increased capitalization requirements. Many companies started to look for a foreign partner or being part of acquisitions and/or merger processes.

As a result, higher costs, due, also, to the lack of large scale effect and inefficient administration, are passed on to the clients, in this case – transportation companies. From the Figure 29 we can observe that the share of costs in the activity of the insurance companies in the Republic of Moldova is much higher then that of the insurance companies in EU, which leads to higher costs to the beneficiaries of such services in Moldova. With the expansion of areas of activities and introduction of new types of insurance, especially in the financial area, boosted the development of leasing, which, in turn, contributed to the more dynamic development of the road transportation, since the companies started to use this easier access to the financial resource to renew their fleet of cars and lorries.

198. Financial leasing boosted the development of the transportation sector. Most of the portfolio of the leasing companies consists of road transportation vehicles. However, most of the portfolio is composed of the cars for personal use (76%), and lorries and tracks used for cargo transportation have a much smaller share of 12%. This is due to the limited financial capacities of transportation companies, which cannot afford to buy new vehicles. At the same time, the leasing operations have doubles the volume of subscribed premiums for financial risks from 2 mil to 4.5 mil lei during the last year. In general, though, the leasing market in Moldova is only at its starting point with a very small capacity in order to have a considerable impact on the development of transportation sector. Partially these limitations come from leasing companies themselves, which do not have enough own capital and use borrowed capital from local banks, which, in turn, are offering at a higher interest rate. This leads to the higher interest payments to the leasing companies and reduces the demand, which, otherwise would be higher. The leasing market is far from having the same

Figure 29: Share of expenditures in insurance sector

0% 20% 40% 60% 80% 100%

EU

Moldova

Costs Profit Insurance payments

Figure 30: distribution of the portfolio of leasing companies

altele

0%

autocamioane

12%

imobile

5%echipament

7%

autovehicule

76%

Source: survey


98

penetration of the economy as in EU or Central European countries.

199. On the efficiency of operation of transportation sector depend not only the activity of various branches of national economy, but a range of social aspects, transport ensuring the

mobility of the work force. The transportation sector is part of the value chain in many sectors of the economy, ensuring the supply of the production factors, movement of the labor force and delivery of the goods to the consumers. The transportation sector ensures the functioning of the most municipal and governmental institutions by serving passengers in the urban areas. At the same time, the transportation sector has a major impact on the environment, especially the road and air transportation, whose emissions contribute to the global warming effect. In this respect, starting with 1990, EU started the implementation of the new standards for environmental protection for the road transportation by introducing once in three years new standards from Euro 0 in 1990, Euro 1 and 2 in 2000, Euro 3 and 4 in 2005, and in 2008 – Euro 5. In this respect, Republic of Moldova tries to stay in line with this trend, however with some delay, implementing Euro 3 only starting with 2007.

CONCLUDING REMARKS

200. Transportation sector plays a very important role for the national economy, however, due to identified constrains, its development is refrained, as a result offering an inferior

logistics and increased transportation costs for the goods moved within and/or out of

Moldova. Currently only road and railway modes of transportation may offer large scale operations in Moldova and be competitive at the regional level. Therefore, clear establishment of the priorities for the revival and development of the transportation sub-sectors is extremely important provided limited financial recourses.

Taking into account the geographical area of the Republic of Moldova, probably there is no

other feasible alternative to the road transportation, fact which has been confirmed by the

evolution of the transportation sector in Moldova in the recent years. In most of the European countries, 85% of the freight (in terms of weight) is moved by road transport and is carried within the 150 km distance. Up to 500 km of distance, 97% of the entire freight weight is transported by the road transport. It is proved that at such distances there is no alternatives in terms of efficiency and costs. 90% (in value terms) and 80% (in terms of weight) of freight is transported on roads worldwide.

Identified constrains, which refrain the development of the transportation sector, may be

divided in two groups: of internal and external nature. The first one includes critical



transportation sector via neighboring countries and their need to transit Moldova’s

territory, which is much smaller. Infrastructure constrains represent issues of national importance, with financial tags well over current means of the state or local budgets. On the other hand, improvement of the business climate needs a more active implication from the part of the government in its endeavors to adjust to the European standards.

Once the critical constrains in the transportation sector are passed over, especially those of the road network, this will lead to the major economic effects with positive long-term results at the general economic level. In favor of this argument, speaks the statistics or average economic rates of return on World Bank projects, where rehabilitation of roads’ infrastructure has a significantly higher rate then the one for the other sectors (Figure 31).


99

Figure 31: Average economic rate of return on WB infrastructure projects (%)

0

5

10

15

20

25

30

35

w ater pipes railw ays average per WB telecom ports roads

Source: World Bank, 2000/ IRU


100

ANNEX A. LIST OF INTERVIEWEES FOR THE IN-DEPTH SECTOR ANALYSIS

Fruit and Vegetable Sector

1. Tudor Ciobanu, General Director “SAURON” (large producer of fruits and table grapes,

joint venture). 2. Sergiu Iuncu, General Manager “VERDE MONDIAL” (greenhouse producer of vegetables,

joint venture). 3. Iurie Flueraru, General Director “URS BERGER”, (producer of apples and table grapes, cold

store owner). 4. Cornel Timus, General Director “RG-AGRO PLUS” (medium-size cannery). 5. Tudor Besleaga, President of the Board of Directors “ORHEI VIT” (large cannery). 6. Anatolii Terzi, Head of R&D Department “NATUR BRAVO” (large cannery). 7. Dumitru Vicol, General Director “MONICOL” (medium-size fruit drying enterprise). 8. Alexei Papusoi, Executive Director “MOLDOVA FRUCT” (Fruit Exporters Association). 9. Multiple discussions and consultations with CNFA staff (USAID Agribusiness Development

Project) including Conrad Fritsch (COP), Dennis Zeedyk (Deputy COP), Viorel Leahu, Victor Rosca, Valentina Plesca, Nicolae Zaharia (Agribusiness advisors).

10. Valeriu Bulgari, Chairman UNIAGROPROTECT (Union of Agricultural Producers). 11. Vladislav Brad, Local Export Promotion Expert, EU “Support to MIEPO” Project. 12. Doina Nistor, Chair Women, Business Advisory Center, NGO. 13. Ciobanu Raisa, Food Industry Division - MAFI.

Wine Sector

14. Mihailuta Valeriu, Chief-economist, „Cricova” S.A., produser of sparkling and high quality

wines; 15. Cojocaru Vasile, General Director, „Vinaria Bostavan” S.A., „Vinăria Purcari” S.A., large

produser of high quality wines; 16. Jitaru Constantin, General Director, „Asconi” SRL, large produser of quality wines; 17. Russu Lilia, Executive Director, MIEPO; 18. Netreba Ludmila, Chief of Wine Technology Policies Division, AAMV; 19. Mudrea Iurie, Chief of Analysis, Forecast and Promotion Division, AAMV; 20. Rusanovschi Maria, main specialist, Wine Technology Policies Division, AAMV; 21. Sturza Rodica, Director, CNVCPA; 22. Rusu Alin, Wine Industry Consultant, USAID Project „Competitiveness Enhancement and

Enterprise Development; 23. Gheorghita Maria, Textile and Apparel Industry Consultant, USAID Project

„Competitiveness Enhancement and Enterprise Development;


101

ANNEX B. SELECTIVE CITATIONS FROM EC FOOD SECURITY PROGRAM REPORT “DEVELOPMENT

OF SMALL SCALE IRRIGATION SYSTEM: ANALYSIS OF THE IMPLEMENTATION PROCESS – 2006”

Background Information on Irrigation Development in Moldova

The development of the irrigation system in the Republic of Moldova has always been and will always be a priority because of the annual amount of rainfall and droughts that often affect the territory of the country. In the Soviet times, over 100 large scale irrigation systems were operating until 1991, ensuring the irrigation of an area of over 310 000 hectares (out of which 110 000 hectares on the left bank of Nistru river). The irrigation systems were conceived and projected for large irrigation area of collective agricultural farms, exceeding the surface of 1000 irrigable hectares on average. As a result of the privatisation process and fragmentation of land plots, most large scale irrigation systems disappeared, as they were not appropriate for operation on small areas.

The irrigation system of the Concern Apele Moldovei was built between 1950 and 1985 and is composed of 106 pumping networks (branches) of different levels that include 334 pumping stations that pump water from Nistru and Prut rivers, as well as from the accumulation basins. According to the data provided by the Concern Apele Moldovei, from the 106 pumping networks, 61 networks did not operate at all within 2000-2005, or in other words, thus from the total number of 334 pumping stations only 85 are operational.

EC FSP Program Objectives

Following the request submitted by the Government of Moldova, the Food Security Program of the European Commission provided a financial support of 2 million Euros within 2005-2006, through the State Budget, for the development of a small-scale irrigation system in Moldova. The support provided through the budget was used for: (a) purchase of new irrigation equipment through the 2KR Japanese Project, and (b) development and repair of the water supply irrigation infrastructure of Apele Moldovei. The objective of FSP program for 2006: Expanding the irrigated area for the high value crops by 7000 hectares, according to the Action Plan for the Development of Small-scale Irrigation System of the Ministry of Agriculture and Food Industry for 2005-2006.

Program Results (intermediary)

(1) Using the funds allocated by the European Commission by means of the State Budget for 2005-2006, IAUPIFP acquired small-scale irrigation systems, meant for sale by instalments to private farmers from the Republic of Moldova. In 2005, 34 sprinkling irrigation systems were purchased from grant funds. Of these, 23 units were sold in 2005, 7 units were sold in 2006 and 4 units are still in stock to be sold in 2007.

In 2006, the unit purchased 60 sprinkling irrigation systems, 30 pumps and 40 drip irrigation systems from the grant funds. Out of 130 units, 65 were sold that account for 50% of the total number. As a result, only 1500 hectares of irrigated land were covered out of 3400 hectares of the irrigated land established as a variable condition for program implementation. According to this parameter, until October 2006, the Unit failed to fulfil the variable FSP conditions for 2006.

Also it was very difficult to raise funds in the Circulating Fund. So far IAUPIFP had to raise in the Circulating Fund 2 instalments of 25% each, from the cost of the equipment purchased in 2005 and 25% from the cost of the equipment purchased in 2006. The payback rate of the financial resources is quite low - 46.8% from the fund to be raised in 2005 and 34% from the fund to be raised for 2006.

(2) According to the data provided by Apele Moldovei, the renovation of 33 stations included in the program in 2006 will allow for the expansion of irrigated lands by approximately 3500 hectares. The


102

sum allocated from the State budget for 2006 (5 million MDL) was used for renovation of the pumping stations equipment, renovation of stations themselves, as well as renovation of the distribution networks. By now, the works had been carried out by over 90%.

As this is a program with variable implementation conditions, the evaluation procedure of the program conditions fulfilment carried out by the EC will be launched in August 2007.

Conclusions of the Report

Within this study the process of program implementation by the “Apele Moldovei” Concern was reviewed, and both the logistical side and the economic efficiency of concern activity were evaluated, in order to get a clear picture on the current situation and program impact on the Concern activity. For a better understanding of concern subdivisions activity, a thorough review of the activity of 4 water pumping stations (which are representative in terms of operations and size) was carried out. The conclusions of this analysis are presented below:

� Access to information is limited because of the outdated data collection and processing system. The information management system is lacking, and it is spread at different levels within AM.

� Pumping stations operate at a very low capacity compared to the projected capacity, ranging at a level of 2-23%. That is why the administrative expenses have a very high share in the cost of provided services – 45.5% on average for 4 stations.

� The equipment in the stations has a high degree of functional and physical depreciation. Big losses are also caused by the lack of automated systems for starting and stopping the operating process of the station.

� Financial expenditures related to the provision of water pumping are not separated from the non-profit activities of AM, such as protection against floods, maintenance of protection dams.

� The costs analysis has also shown that according to the projected levels, the pumping stations should operate at a capacity of about 40-50% in order to overcome the break-even-point and become effective. At the same time, water supply prices of are not differentiated depending on the pumping level or group, being unique for different levels within the same system.

Recommendations of the Report

Measures to be implemented by Concern Apele Moldovei:

� Implement a centralized information management program in short terms;

� Separate the activities that do not generate profit from the irrigation system that is a service;

� Differentiate the price for water pumping per stations or networks and gradually transfer to the “profit centres” system;

� Implement a modern accounting system with the integration of subordinated regional enterprises;

� Finance efficient pumping stations that meet the demand to a large extent, such as the 85 stations that currently operate;

� Give up the pumping stations where a demand for services is not foreseen for the nearest future or those that are disintegrated and need large investments;

� Review the possibility of passing the inefficient stations to local public authorities or Water User Associations with a view to saving financial resources allocated from the State Budget;

� Select 4-5 efficient pumping stations with high service demand and renovate and re-equip them in 2007 with modern equipment.


103

ANNEX C. CONCLUSIONS OF THE USAID/ADP MARKET STUDY “MARKETS FOR FRESH APPLES IN

RUSSIA, LITHUANIA AND GERMANY” (JANUARY 2006)

“…German and Lithuanian importers indicated not to have dealt with Moldovan fresh apples so far. A few Russian respondents reported that they used to purchase fresh apples from Moldova, but stopped when the Russian ban on Moldovan fresh produce was introduced (in May 2005). They reported to have had an overall positive experience with Moldovan apples, and believe that Russian consumers perceive them quite well. Here are some of their specific observations with regard to Moldovan apples:

- apples from Moldova are usually in the low price category;

- the produce is marketed through smaller-size wholesalers and it is sold at the open bazaars, so it does not reach the supermarkets;

- Moldovan apples are often perceived as local Russian produce, and the consumer is usually confident that the utilized level of chemicals is not high;

- the price charged by Moldovan partners is sometimes regarded as too high for the quality offered.

Importers recommendations to Moldovan exporters of fresh apples wishing to enter the respective markets had somehow a different focus, being seen from different perspectives. For example, the Russian importers, representing the only surveyed group actually familiar with Moldovan apples, put a great emphasis on the need to improve the quality and handling processes for fresh apples in Moldova, including produce sorting, grading and packing. The Lithuanian and German respondents, on the other hand, pointed out that price competitiveness would be the major market access key for Moldovan apples, not giving up produce quality, of course.

On the Lithuanian market, this actually means competing with Polish supplies, which have important comparative advantages in terms of market proximity and no-tariff trade regime (since both Lithuania and Poland are EU members). So this appears as a tough task for Moldovan exporters provided that the tariffs to EU are high for third countries (in the range of 6-13% depending on the time period and estimated price), and the distance is much longer (as compared to Poland).

The German importers stressed that the EU market for fresh apples is a very difficult one at the moment, with highly competitive supplies coming from overseas (New Zealand, South America and South Africa), this creating serious problems for local (German) and other EU producers. One or two German importers showed quite pessimistic (or realistic?!), suggesting that the market is full and there is no chance to enter it at the moment. The main message, however, conveyed by most German respondents was the following: “If Moldova can supply fresh apples of similar quality and better (lower!) price than other Northern Hemisphere countries, than it has got a comparative advantage that should be pursued!”

The full list of recommendations collected from the three target groups is provided in the Table below.


104

Table. Recommendations to Moldovan exporters of fresh apples by target market

Germany Lithuania Russia

� Ensure high quality fruit, have all the necessary certifications (including EUREPGAP), dispose of large volumes and deliver constant supplies;

� EU is a very difficult market facing strong competition from overseas (which causes problems to local producers), and now with the accession of new members, such as Poland and Hungary, the competition will get tougher.

� This is a very difficult year, do not recommend to anyone to export to Germany because the market is full!

� There are high costs to get on the German market for fresh apples! Be careful!

� Come to Germany, find out the market requirements for the produce, see the retail shops, and, if you are lucky, get a trial supply.

� Find your comparative advantage! This should be the price – if you can supply similar quality and better price than other Northern Hemisphere countries, than you’ve got it!

� Ensure that your produce satisfies all European standards and phyto-sanitary requirements;

� Improve post-harvest operations: sorting, grading, packaging (use Euro pallets);

� Offer a competitive price for a high quality produce – that’s the main requirement for entering the market.

� In order to compete on the market Moldova should have a comparative advantage over Poland, which is not easy.

� Problem 1: large distance so the transportation costs are high;

� Problem 2: since Lithuania is now member of EU, the custom tariffs on imports from third countries are high, so “your apples become pure gold until they get here”.

� Varieties that you can offer is also an important factor.

� Choose you partners carefully, concentrate on large chains (either wholesale or retail).

� Focus on the produce quality, which should satisfy the European quality standards;

� Resolve the issue of “black spots” (“Moldovan apples get black spots quickly!”, which is a sign of calcium deficiency);

� Improve harvesting operations, so that the produce keeps an attractive appearance for longer periods of time;

� Purchase modern equipment for improving the post-harvest operations, such as sorting, grading, waxing, packing;

� Improve the produce packaging: use European standard packaging;

� Keep the price corresponding to the produce quality;

� Reach the level of Poland, or otherwise Polish apples will soon substitute the Moldovan ones (“within the last 2-3 years Polish apples made a great jump forward and moved from the low price category into the medium to high one.”).

Although it is clear that each market has its own specific requirements and regulations, the main and immediate task of Moldovan apple producers resumes to improving quality and post-harvest handling, so that the produce satisfies the high demands of the high-end target markets. While produce quality is an absolutely necessary element, it is not a sufficient one though. Finding the comparative advantage of Moldovan fresh apples on each of the target markets is the next challenge. As suggested by our respondents, the focus should be put on obtaining a price advantage over the competitors. Various strategies should be employed to achieve this, including exploiting the relatively low labor costs (still prevalent in Moldova), rich soils, as well as plantation of high-yielding apple varieties that perform well in Moldova, under the condition that they are demanded on the target markets.


105

ANNEX 4. CONDITIONS FOR TRADE IN SEE TRANSPORT SECTOR

Table 1: Conditions for trade in the road transport sector in SEE

Table2: Conditions for trade in the rail transport sector in SEE

Albania Bulgaria Croatia Macedonia Moldova

Market access Commercial presence restrictions on any entrant restrictions no restrictions Cross-border supply

restrictions on foreign entrant

bilateral road freight agreements

bilateral road freight agreements

bilateral road freight agreements no restrictions no restrictions

Regulations

Existing regulator Independent Agency

Independent Agency

Independent Agency

Independent Agency

Ministry of Transportation

Transport tariff regulation urban transport no regulation no regulation no regulation public transport

Average time for authorization 10-30 days 21 days 30 days 30 days 3 days Discrimination of foreign firms Prohibition of cabotage prohibition prohibition prohibition prohibition no prohibition Restrictions on passangers and freight n/a restrictions restrictions restrictions no restrictions

Albania Bulgaria Croatia Macedonia Moldova

Market access Commercial presence

restrictions on any entrant State monopoly no restrictions no estrictions

State monopoly

Except passengers and freight

Restrictions on foreign entrant State monopoly no restrictions no restrictions State monopoly

Except passengers and freight

Cross-border supply

restrictions on foreign entrant bilateral freight agreements

bilateral freight agreements

multilateral agreements no restrictions no restrictions

Ownership

Private & foreign ownership State monopoly

For new entrants and existing maint.

State monopoly State monopoly

For pass. & freight transp.

Regulations

Existing regulator Ministry of Transport

Independent Agency n/a State finances

Ministry of Transportation

Passenger tariff regulation Government control

Approval needed

Approval needed

Approval needed

Approval needed

Freight tariff regulation Some price control No regulation

Approval needed

Free agreement No regulation

Infrastructure and transport organization

Single operator Separate firms

2 separate units, 1 firm n/a Single operator

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