Document of The World Bank FOR OFFICIAL USE ONLY Report No. 80050-MD REPUBLIC OF MOLDOVA JOINT IDA-IMF STAFF ADVISORY NOTE ON THE POVERTY REDUCTION STRATEGY PAPER (NATIONAL DEVELOPMENT STRATEGY: "MOLDOVA 2020") 2012-2020 August 1, 2013 Poverty Reduction and Economic Management Unit Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION REPUBLIC OF MOLDOVA Joint Staff Advisory Note on the Poverty Reduction Strategy Paper (National Development Strategy: "Moldova 2020") 2012-2020 Prepared by the Staffs of the International Monetary Fund (IMF) and the International Development Association (IDA) Approved by Aasim M. Husain and Dhaneshwar Ghura (IMF) and Qimiao Fan (IDA) August 1, 2013 I. OVERVIEW 1. The National Development Strategy (NDS) -known as "Moldova 2020"- was approved by the Parliament of the Republic of Moldova on July 11th, 2012 and officially published on November 30, 2012. The NDS unifies in one document the government's poverty reduction strategy and development vision, although it coexists with other strategic documents such as "Re-think Moldova" or the Government Action Plan for 2011-2014 "European Integration: Freedom, Democracy, Welfare." As with previous strategies, the inclusive and participatory process in elaborating the NDS will contribute to implementation. Public consultations were held and the text of the NDS has been accessible on the government's website for participation. 2. The NDS presents a selective medium-term strategy that focuses on seven national development priorities: (1) Aligning the education system to labor market needs in order to enhance labor productivity and increase employment in the economy; (2) Increasing public investment in national and local road infrastructure, in order to reduce transportation costs and increase speed of access; (3) Reducing financing costs by increasing competition in the financial sector and developing risk management tools; (4) Improving the business climate, promoting competition policies, streamlining the regulatory framework and applying information technologies in public services for businesses and citizens; (5) Reducing energy consumption by increasing energy efficiency and using renewable energy sources; (6) Ensuring financial sustainability of the pension system in order to secure an appropriate rate of wage replacement; and (7) Increasing quality and efficiency of justice and fighting corruption in order to ensure equitable access to public goods for all citizens. 3 3. Despite a sharp decline in poverty in the 2000s, Moldova remains one of the poorest countries in Europe. National poverty estimates indicate positive trends in poverty reduction. Published reports indicate that the national poverty rate fell from 30.2 percent in 2006 to 17.5 percent in 2011. Based on the Europe and Central Asia (ECA) regional poverty line of USD5/day (PPP) 94 percent of the population was poor in 2002 but this had declined to 55 percent by 2011. The incidence of extreme poverty (based on a USD 2.5 PPP poverty line) declined dramatically over the same period from 57 to 10 percent. Both rural and urban areas benefited from sharp poverty reduction, but poverty reduction occurred faster in urban areas. Recent economic performance has also promoted shared prosperity with growth in consumption of the bottom 40 percent of the population outpacing average growth (estimates for the period 2006-2011 suggest average annual consumption growth of 3 percent, as compared to an average 6 percent for the bottom 40 percent). However, based on the ECA regional poverty line, Moldova's poverty rate is more than double the 25 percent ECA average, with extreme poverty also significantly higher than the regional average of 6 percent. 4. The previous National Development Strategy (2008-2011) was presented to the Boards of IDA and the IMF in 2008. The NDS proved to be an effective mechanism to mobilize support from development partners. One evaluation report on the implementation of the National Development Strategy during the period 2009- 2010 was prepared, but no final report over the strategy period was produced. The 2010 report noted that the new Government that took office in 2009 implemented some of the reforms envisaged in the strategy and initiated new ones required by the financial and economic crisis of 2008-2009 and the floods of 2010. The report notes that an increased focus was placed on improving social assistance, reinforcing democratic institutions, strengthening the European integration process, as well as relations with trade and development partners. II. PRIORITIES AND CRITICAL AREAS FOR SUCCESS A. Roadmap for Pro-poor Economic Growth 5. The NDS correctly argues that Moldova needs to add productivity- enhancing investment and exports as growth drivers to its traditional consumption-based growth model. As the NDS acknowledges, the strong pace of growth observed in the mid-2000s was driven by domestic consumption fuelled by remittances, which are expected to taper off in the medium term. The NDS appropriately calls for a shift from the current consumption-based growth model towards one based on raising investments, increasing productivity and competitiveness, developing export industries, and promoting a knowledge-based society. 6. The rate of GDP growth projected under the NDS will require maintaining sound macroeconomic policies and strict implementation of the reforms envisaged in the NDS. GDP growth (rising gradually to almost 7 percent by 2020) targeted under this strategy is appropriately ambitious in view of Moldova's 4 conditions and other countries' experience but it will require macroeconomic stability and timely implementation of all envisaged structural reforms to enhance productivity, investment, and exports. Similar to other transition economies, convergence with the European Union provides opportunities for growth but infrastructure upgrades and improving the business climate are essential. At the same time, there are risks. A protracted slowdown in Europe and/or Russia with substantial impact on remittances, exports, and FDI, could threaten this growth outlook in the near term. It would be useful to provide further detail about the assumptions, for instance regarding future remittances and labor migrations, underlining the growth projections to enable critical evaluations over time. 7. It would be useful to incorporate a comprehensive macroeconomic framework in the NDS to underpin the growth strategy and emphasize the need to maintain macroeconomic stability. A strong reform program and corrective policies following the sharp 2009 recession have largely restored macroeconomic stability and considerably improved macroeconomic performance in Moldova. The adoption of an inflation targeting regime has helped anchor inflation around the 5 percent target, thus mitigating its effects on the poor, although it continues to be buffeted by volatile food and energy prices. Tax policy and administration reforms, combined with expenditure rationalization, have brought the fiscal deficit close to a sustainable level, promoting private enterprise, while enhancing priority social and capital spending. Trade liberalization and investment have also promoted exports helping to gradually lower the current account deficit. Continued efforts, including further fiscal consolidation, will be needed to secure these gains. 8. Moldova's public debt outlook is favorable, with low risk of debt distress, but the high private debt is a concern. Public and publicly-guaranteed (PPG) debt has been steadily declining, supported by prudent fiscal policy-as of end-2012 PPG debt stood below 30 percent of GDP. There appears therefore to be some room for modest borrowing to finance priority projects, provided such borrowing remains prudent and prioritized. In this regard, the NDS could identify measures that will be taken to improve the allocation of capital expenditure, taking into account implementation capacity. The assessment of public debt sustainability should also take into account the country's overall debt position, given Moldova's limited debt- servicing capacity. While public debt is relatively low, private external debt in Moldova is about 60 percent of GDP, and is likely to increase over the medium term, with a rising share of short-term debt, thus raising vulnerability to external shocks. 9. Staffs generally concur with the focus on increased financial intermediation. Staffs agree that further consolidation of the deposit base by promoting the flow of a larger proportion of remittances through the banking sector and greater competition should be encouraged. Staffs acknowledge progress in creating a legal framework for the development of the non-banking financial sector, but further strengthening of the regulatory and supervisory functions is needed. Staffs also note the recent progress achieved in the area of credit reporting. The strategy correctly identifies that reforms aimed at improving the collateral framework are needed, and staffs encourage the Government and National Bank of Moldova (NBM) 5 to ensure their proper implementation. At the same time, such issues as financial consumer protection, financial literacy and inclusion have been largely absent in the strategy, but are important elements for achieving the strategy's goal. 10. The strategy could provide a substantive discussion on the topic of shareholder transparency and corporate governance in the banking and broader financial sector. Staffs draw special attention to the need to develop and fully enforce the applicable legal framework for enhanced shareholder transparency including Ultimate Beneficial Ownership, as well as to adhere to international corporate governance standards. As well, additional legal reforms need to be considered to strengthen NBM's independence and reduce the ability of the courts to interfere. In addition, corporate financial reporting reforms are not specifically mentioned in the Moldova 2020 strategy, though they are important for access to finance, financial stability, compliance costs faced by companies, tax assessments, and governance of state-owned enterprises, as well as EU integration and legislative harmonization. While the Government has undertaken significant reforms in this area, further reform steps are needed, including building a strong audit oversight system and strengthening the public registry of financial statements in the National Bureau of Statistics. 11. Staffs welcome the strategy's focus on establishing and ensuring implementation of clearer rules of the game for business. Staffs agree that this would enhance investor confidence in the business environment in Moldova and, as a result, increase investment flows, including FDI. Further regulatory reforms and strengthening of the rule of law are necessary. Staffs encourage focus on specific improvements in trading across borders, in particular customs administration, as well as tax administration. Competition and the court system are addressed in the strategy, and indeed both present substantial barriers. Further emphasis on making it easier to close a business, which impacts competitive behavior and access to finance, would bring greater gains than improvements in starting a business. The emphasis needs to be on food safety and phytosanitary requirements, to facilitate entry of agriculture and food products into the EU and other export markets. 12. To translate improvements in the business environment into increased revenue and jobs, greater attention must also be placed on company- and industry-level competitiveness. Management training, better access to market information, improved access to finance, and identification and removal of industry- specific constraints can help boost competitiveness and exports. Additionally, vocational and tertiary education should be improved to meet the needs of the labor market, consistent with the first pillar of Moldova 2020. 13. The NDS recognizes the importance of adequate road rehabilitation and maintenance for economic and social development in Moldova. In particular, the NDS rightly recognizes the need to improve not only national roads, which are important for broader economic development, but also local roads in order to achieve targets in the education and health sectors. Staffs also support the Government's focus on efficiency improvement in road maintenance. 6 14. At the same time, staffs call for caution with respect to the affordability of the road sector targets envisioned in the NDS. Restoring eighty percent of roads by 2020 would mean that Moldova would fully recover from the very large backlog in road rehabilitation and maintenance and reach road condition indicators similar to the most developed countries within the period of this NDS. Making this a reality would require a level of investment and maintenance expenditures which will be hard to mobilize, given the numerous other needs of the country. Such an approach would also run the risk of displacing other needed investment and non-investment priority expenditure, if fiscal sustainability is to be preserved. Carrying out adequate cost- benefit analysis would help the authorities better identify good projects and prioritize them. The NDS refers to potential investment in roads by the private sector through PPP arrangements but this will require the establishment of adequate PPP legislation and very significant capacity building in the public sector. The opportunities for PPPs in the road sector may also be limited by the relatively low traffic levels on most of Moldova's roads. Lastly, the report should further emphasize the importance of greater transparency and effective competition in order to prevent waste, fraud and abuse in this sector. 15. Staffs broadly concur with the proposed strategic vision for the development of the energy sector, but reforms (along with capacity building) should be implemented with strong attention to governance and regulatory framework, affordability and financial sustainability. The strategy rightly focuses on ensuring energy security and increasing energy efficiency. However, Staffs would welcome a comprehensive reform program for this sector which incorporates capacity building as well. Comprehensive reforms of the sector should focus on improved governance, a transparent regulatory framework, and financial sustainability balanced with energy affordability. When these conditions are met, the energy sector should be able to attract crucially-needed investment capital. 16. Although agriculture is not among the seven priority areas in the NDS, it remains a mainstay of the economy and it will be necessary to address output volatility, low market competitiveness and vulnerability to climate change. With 12 percent of GDP, agriculture employed 28 percent of the labor force in 2010 and, when combined with the agro-food sector, it represented about 50 percent of total exports. Climate hazards result in high volatility of agricultural output. Competitiveness is hampered by a complex set of factors, including distortions and imperfections in agriculture input and output markets, poor quality public services in areas like agricultural education, delays in farm restructuring, underdeveloped land markets, lack of access to finance, and unsustainable soil management. Most agricultural produce grown in Moldova, especially high value products, do not meet market rigor for safety, quality, quantity, variety, or packaging. The private sector requires support in their efforts to embark on the sophisticated and costly process of adopting and implementing EU food safety and quality standards. 7 B. Promoting Human Development 17. In promoting Human Development, the NDS focuses on education and pensions. Although the sector is not among the seven priority areas in the NDS, it will be important to continue reforms to improve efficiency, accessibility and quality of health care (including by optimizing and upgrading the hospital network and reforming health financing). 18. The NDS correctly emphasizes the need to upgrade education and skills to meet the requirements of the labor market, enhance labor productivity, and increase employment. The strategy emphasizes modernizing the vocational education system and continuous labor force training, enhancing partnerships between education institutions and labor markets, improving the quality of education, and reforming the research and innovation system. In order to adequately design labor policies, the authorities would benefit from strengthening labor market analysis by making stronger efforts to distinguish between cyclical and structural determinants of unemployment. As it seeks to catalyze new sources of growth in the economy, the Government may wish to consider developing mechanisms to coordinate and promote innovation activities, such as through the development of ICT-enabled services, and with a significant focus on skills development. The proposed measures to develop partnership between education and labor market representatives and eliminate corruption factors in the education system could lead to improvements in labor market outcomes. The NDS and subsequent action plans would benefit from the clear identification of the costs of proposed measures and more specific monitoring indicators. Participation in international skills assessments such as the OECD Program for the International Assessment of Adult Competencies (PIAAC) could facilitate monitoring and help design appropriate skills and labor market policies. Also, Governance in the sector could be improved, including through social accountability mechanisms and greater emphasis on beneficiary engagement in monitoring sector performance and voicing demand for improved service delivery. Simultaneously, efforts should continue to increase efficiency of public spending in education by continuing the optimization of the secondary school network, enhancing quality in optimized schools, and raising access to quality preschool education. 19. The NDS rightly identifies the two main issues facing the pension system: equity and sustainability. The indexation formula and particularly the non- valorization of past earnings are the main factors explaining the low and declining replacement rate. At the same time, the small number of contributors compared to pensioners is expected to worsen further due to demographic trends, which threatens fiscal sustainability of the pension scheme. The strategy outlines reform measures to enhance social and fiscal sustainability of the Pay-As-You-Go pension pillar by introducing parametric changes. 20. But ensuring social and fiscal sustainability of the Pay-As-You-Go pension pillar will require more decisive policy reforms. Recent policy developments were modest and insufficient to move forward the longstanding reform agenda. They included steps to increase the contribution period required to qualify for full-size old- 8 age pension and to make special pension benefits converge to regular benefits, but the adopted increase of the contribution period for women has been revoked by the Constitutional Court. Important reforms could include equalizing retirement ages for both men and women at 62 and making further increases to reflect higher life expectancy; better linking benefits and contributions for all groups, including farmers and emigrants; and valorizing past earnings with inflation to halt the sharp drop in the replacement rate. In any event, reforms should be implemented in a package so as not to undermine the fiscal sustainability of the pension scheme. Finally, alleviation of poverty in the old age should be considered in a broader context of available social security policies and programs. Regarding fully-funded pension schemes (the so- called "second pillar"), staffs agree that a thorough evaluation of the prerequisites and time-line is in order (particularly with respect to the strength of the financial system). It should be noted that in addition to social and fiscal sustainability, pension reform would also have a beneficial impact on savings mobilization and development of financial markets. C. Addressing Governance Challenges 21. To achieve the goals of the NDS, the Government of Moldova will need to strengthen public finances and public investment management. Staffs welcome the synchronization of sectoral expenditure plans and program-based budget planning. Staffs also support the links proposed between the NDS, sectoral strategies and MTBF. At the same time, unpredictability of resources for multi-year investment projects has reduced credibility of the budget and could limit the ability of Moldova to achieve NDS goals. In this regard, budget reform, public investment management, internal audit, management control, and expenditure management (including cash planning) should be strengthened. 22. The NDS could benefit from an increased focus on improving efficiency and effectiveness of public service delivery, and building capacity in central and local public administration. The NDS can prioritize and sequence service delivery by identifying key areas of improvement such as re-engineering and streamlining of procedures; integration of services; smart regulation; data warehouse and data centers services to streamline access to data; centralized registries with quality data, open data and remote access; and uniform procedures for services delivered by municipalities. Increasing the capacity of the public administration at the central and local level to evaluate, set, implement and manage policy priorities that would support the strategic goals will also be essential. 23. Staffs share the concerns about dysfunction in the justice system as identified by the NDS and fully agree that improvement of the judiciary should be a priority. Staffs believe that strong political will and forceful actions, along with the specific objectives outlined in the Strategy will be critical for turning the situation around in the coming years. The report could also emphasize the importance of judicial awareness in the population and involvement of the young representatives of the judicial profession for the effective implementation of the justice sector reform strategy. At the same time, caution should be exercised not to commit unaffordable 9 amounts of scarce budgetary resources to the sector, e.g. by raising the wages of judges and prosecutors several times, as currently proposed. Also, the monitoring indicators and targets set could be improved (for example, by using experiential surveys with people who had recently an actual experience with the courts [court user surveys] instead of relying only on perception surveys as is currently proposed). III. TARGETS, INDICATORS, MONITORING AND EVALUATION 24. The NDS establishes an integrated framework for implementation, monitoring and evaluation. The framework ensures coherence between various national and strategic planning documents and coordinates implementation and monitoring of the strategy between ministerial subdivisions. It also establishes an efficient process for reviewing the strategy periodically. 25. Staffs welcome the authorities' plan to integrate the implementation of NDS in the fiscal process and ensure consistency of NDS financing needs with budget planning. In this regard, an annual Action Plan to cost and operationalize the goals set forth in the NDS could help better integrate policy objectives into the medium- term expenditure framework. 26. Staffs welcome the authorities' plans to maintain extensive consultations with civil society and other stakeholders throughout the implementation of the NDS. We commend the Government for retaining in particular the role of the National Participation Council, which includes representatives of various NGOs, private sector, and trade union stakeholders. IV. CONCLUSION 27. Bank and Fund staffs believe the NDS provides a good basis for inclusive growth in Moldova, but that implementation will be key. The focus on pro-poor economic growth (through private sector development and improved infrastructure), human development and governance is appropriate given Moldova's current situation. The consolidation into one document of the priorities should enable efficient monitoring and coordination among development partners offering assistance. At the same time, particular attention should be given to the relation between this new National Development Strategy with existing national and sectoral strategies, and how they will inform the preparation of the Medium-Term Budgetary Framework as well as the annual Budget Laws. Implementation risks, particularly those emerging from external terms of trade shocks, weakness in implementation capacity, and the political cycle need to be actively managed. 28. Staffs recommend that special attention be given to the following areas for implementing and strengthening the NDS: * Monitoring and evaluation. The successful implementation of the NDS will critically depend on continued efforts to strengthen the monitoring framework and capacity of key line ministries to develop and implement annual action plans, and integrate these actions into the medium-term expenditure framework. 10 * Public Administration Reform. The NDS could place greater emphasis on civil service management reforms, which is key to the success of other reforms. * Business environment. Priority should be given to improving corporate governance in the financial sector and the broader economy, particularly in light of recent ownership disputes in the banking sector. In this regard, reforms in the justice sector are essential to protect investors and foster investment. * Physical infrastructure development. Moldova's aging infrastructure is a significant bottleneck to inclusive growth. Priority should be given to investment in energy, telecommunications, transportation, water, and sanitation infrastructure, possibly with private sector partnerships. * Human resource development. A competitive labor force is key to Moldova's future development. The NDS should ensure that the educational system is aligned with European standards and is responsive to labor market needs. Improving incentives to health care providers to both improve efficiency and deliver quality health services will be critical in Moldova's efforts to meet the MDGs. Moldova 2020 NATIONAL DEVELOPMENT STRATEGY: 7 SOLUTIONS FOR ECONOMIC GROWTH AND POVERTY REDUCTION TABLE OF CONTENT Introduction ........................................................................5 Strategic vision for the development of the Republic of Moldova ...................................5 Features of current economic growth.....................................................5 Changing the development paradigm .....................................................6 Development priorities ...............................................................7 Impact on economic development .....................................................9 Impact on income and poverty........................................................9 Sustainability of economic growth .....................................................10 Tables and figures ..................................................................12 Education: relevant for a career..........................................................14 Situation analysis ..................................................................14 Strategic vision ....................................................................16 Expected impact ...................................................................17 Specific objectives ..................................................................18 Tables and figures ..................................................................19 Roads: in good condition, anywhere .......................................................20 Situation analysis ..................................................................20 Strategic vision ....................................................................22 Expected impact ...................................................................22 Specific objectives ..................................................................24 Tables and figures ..................................................................25 Finance: affordable and cheap .... .......................................................28 Situation analysis ..................................................................28 Strategic vision ....................................................................29 Expected impact ...................................................................30 Specific objectives ..................................................................31 Tables and figures ..................................................................32 Business: with clear rules of the game .....................................................33 Situation analysis ..................................................................33 Strategic vision ....................................................................36 2 Expected impact ...................................................................38 Specific objectives ..................................................................39 Tables and figures ..................................................................40 Energy: delivered safely, used efficiently ....................................................43 Situation analysis ..................................................................43 Strategic vision ....................................................................45 Expected impact ...................................................................46 Specific objectives ..................................................................47 Tables and figures ..................................................................48 Pension system: equitable and sustainable..................................................52 Situation analysis ..................................................................52 Strategic vision ....................................................................56 Expected impact ...................................................................57 Specific objectives ..................................................................58 Justice: responsible and incorruptible ......................................................59 Situation analysis ..................................................................59 Strategic vision ....................................................................62 Expected impact ...................................................................63 Specific objectives ..................................................................63 Tables and figures ..................................................................64 Coordination of implementation, monitoring and evaluation ............................ ..........66 Integrated cycle of planning, monitoring and evaluation .......................................66 Operationalization process...........................................................67 Interrelated aspects... .............................................................68 Implementation reports .. ...........................................................69 Institutional framework ..............................................................70 3 LIST OF TABLES AND FIGURES Table 1. IMF estimates of GDP per capita at purchasing power parity in 2010 and 2016, USD..................12 Table 2. Logistics Performance Index (LPI) for some countries in the region ..................... ......26 Table 3. Estimates of means required to repair and maintain public roads.............. ..............27 Table 4. Republic of Moldova versus Georgia in the general Doing Business 2012 ranking ......... ...........41 Table 5. Indicators on energy resource consumption and energy intensity .......................50 Table 6. Dynamics of Termocom JSC debts ..................................................50 Table 7. Dynamics of natural gas volume procured and delivered to consumers in Republic of Moldova.............51 Table 8. Available technical potential of the main types of renewable energy sources (RES) ....................51 Table 9. Estimated economic impact of delays and postponements in courts............ .................64 Figure 1. GDP annual growth forecast......................................................12 Figure 2. GDP growth with and without implementation of development priorities, MDL million at 2000 prices ....13 Figure 3. Reduction of poverty rate, %.....................................................13 Figure 4. Share of students enrolled in higher education versus secondary vocational education and general specialized education .................................................................19 Figure 5. Evolution of the condition of national roads during 1992-2010 ..................... .........25 Figure 6. Funding in the road sector during 1990-2011, MDL million ...................... ...........25 Figure 7. Statistics of road accidents for 1990-2010 ................................. ............26 Figure 8. Forecast of evolution of the condition of national roads during 2011-2020...... .. ................26 Figure 9. Risk premiums in countries in the region, percentage points.................................32 Figure 10. Volume of stock transactions to GDP,% .............................................32 Figure 11. Foreign direct investment flow, USD million ................................................40 Figure 12. Number of enterprises in Republic of Moldova .............................................40 Figure 13. Republic of Moldova versus Georgia in the Doing Business 2012 ranking ..........................42 Figure 14. Dynamics of electricity generation and procurement in Republic of Moldova (right bank of Nistru), KW million ........ ............................................................................ 48 Figure 15. Dynamics of losses recorded by electricity distributors in Republic of Moldova ................................... 48 Figure 16. Dynamics of heating production in Republic of Moldova, GCal thousand ............................................ 49 Figure 17. Dynam ics of heating losses in Republic of M oldova............................................................................... 49 Figure 18. Victims of corruption, % population in bribe situations, 2008 ...............................................................64 Figure 19. Share of cases solved in court of the total number of persons under accusation .................................65 4 INTRODUCTION STRATEGIC VISION FOR THE DEVELOPMENT OF THE REPUBLIC OF MOLDOVA FEATURES OF CURRENT ECONOMIC GROWTH Economic growth and the poverty reduction trend is closely correlated in Republic of Moldova with the flow of remittances and consumption generated by the latter. Revenues from Moldovans' work abroad have fuelled the disposable income of households, thus leading to an increased aggregate demand for consumption. Constrained by the limited capacity of domestic production, this demand was largely met by imports of goods and services. The national public budget has benefited from this, but the trade balance has turned into an alarming trade deficit. Economic growth based on consumption and on remittances exposes the economy to a number of vulnerabilities, but there is a greater danger associated with this model of economic growth, i.e. that remittances, at one point in time, will start to decline. Currently, migration breaks families of Moldovan citizens. This in itself is bad enough, but following the evolution of migration in countries faced with this phenomenon, we anticipate that Moldovan families will reunite. Unfortunately, if it will not be acted firmly to create adequate working and living conditions in Moldova, migrant family reunification will occur outside the country, which will trigger a decline in remittances. Two conclusions emerge from the aforementioned: * first conclusion is that it will be difficult to maintain the pace of economic growth, which, in the absence of a structural change of national economy, proves to be unacceptable from the perspective of Republic of Moldova's development agenda; * second conclusion refers to the actual change of the growth model, namely: the need to replace the inertial growth model based on consumption fueled by remittances in favor of a dynamic model based on investment and on development of goods- and services-exporting industries. In this context, the National Development Strategy "Moldova 2020" comes to present a vision of cohesive long-term sustainable economic development based on a diagnostic study of constraints to economic development. In this sense, it will consolidate and will guide the sectoral approach characteristic for the governance program, the objectives of which are outlined for the entire mandate period. Also, before changing the development paradigm of Republic of Moldova's economy, we will continue to count on development partners' support. Areas such as health, culture, social protection, and environmental protection are crucial for the country's 5 sustainable development. The focus of the National Development Strategy is to increase the budget coverage of adequate policies in these sectors as a result of accelerated economic development. Such a focus also requires the sustainability of foreign assistance currently provided to the country. CHANGING THE DEVELOPMENT PARADIGM Economic development, wherever it occurs, is based on 3 factors, namely accumulation of capital, labor force and its productivity level, which includes and other parameters, such as: technologies, efficient governance, skills, etc. The Government has made an attempt to shape the historic and future development of Republic of Moldova in the context of the National Development Strategy,,Moldova 2020". An analysis of economic development factors in Republic of Moldova reveals a very alarming conclusion - without a concerted effort to change the development paradigm, the potential of growth over the next ten years is limited to a maximum of 4.5% to 5% annually. Even this relatively moderate growth scenario is based on rigid assumptions, that labor outflow will be stopped and remittances will remain at current levels at the least, fact which is not guaranteed at all. Certainly, this increase is insufficient to ensure a convergence trend with comparable countries, and even less with European standards. According to the IMF estimates (Table 1), the Republic of Moldova is the penultimate country, ranked in comparison with countries in the region, ahead only of Kirgizstan in terms of GDP per capita at purchasing power parity. With an annual growth rate of 5%, this position in the regional rankings will continue until 2016. As per results of the analysis, growth in Republic of Moldova during 2000-2010 can be firstly attributed to an increase in capital - productive stock of fixed capital. It had increased on average by 8.2% annually, which is a pretty high rate, but still insufficient. Secondly, GDP growth was also conditioned by an increase in productivity of labor and capital (4.7% annually). Therefore, the nature of growth was more extensive rather than intensive. Switching economic activity in the area of agricultural production, characterized by low productivity, to the area of industry and services, where productivity is higher, explains this relative performance. By contrast, labor dynamics has adversely affected economic development. Migration trends that emerged during this period have determined a lower rate of activity in the national economy, from 60% down to 44%. Actual labor as a factor of production decreased during the last decade, from 1.514 million to only 1.143 million in 2010 or, on average, by 2.8% annually. This reduction undermines the positive influence of capital and productivity growth and, as a result, erodes the recorded GDP growth. Therefore, given labor "erosion", the quite positive statistics of the last decade in terms of capital and productivity growth were not high enough to ensure a convergent growth path with the European average. Overall, it took place a jobless economic growth, without a massive re-equipment of production. In other words, the capital has increased, accompanied by a slightly enhanced efficiency of production factor utilization, but at absolutely insufficient rates to ensure sustainable economic development. But even modest growth rates of capital 6 and efficiency of factors of production recorded during 2000-2010 should not be perceived as a guarantee for the next ten years. These have actually been achieved under circumstances when the Government and entrepreneurs had a wide range of so- called "easy targets" or reform and technological opportunities as a result of transition. Any investment in fixed capital under any type of reforms narrows this field of maneuvers. Once the "easy" reforms and structural adjustments have worn out their beneficial effects, the development potential based on multi-factor productivity is minimal. The physical volume of labor is in turn a very rigid economic variable that will never meet elastically medium-term rational efforts of the Government to enhance it, especially under circumstances of mobility offered by European integration. A change in the development paradigm can only occur through a concerted effort by both Government and society. This effort is meant to identify, as quickly as possible, and address those gaps that still impede an economic development model focused on raising investments in fixed capital and its increased utilization, including by increasing labor force productivity. As a way to increase the productive stock of capital and the knowledge regarding its use, the economic development paradigm would imply attracting investment, developing export industries, promoting a knowledge-based society, including strengthening research and development activities, innovations and technological transfer geared towards efficiency and competitiveness. Changing the development paradigm of the Republic of Moldova will be achieved by ensuring equitable distribution of economic development benefits for all strata of society. On the other hand, the speed, scale and consistent approach to the broad spectrum of proposed reforms are also important. A shift in paradigm cannot be achieved through a set of instant reforms only. Promoted reforms will serve only as a first step in establishing a new working method and approach towards issues by the Government and entire society. If we learn to work together at this pace, Moldova will become a competitive country in Europe in terms of its ability to reform and innovate, but economic development will accelerate to a rate that will reduce, in the near future, the gap between our country and developed European economies. DEVELOPMENT PRIORITIES A diagnostic analysis of the constraints to economic development highlights the critical issues, i.e. domains in terms of which Republic of Moldova is largely surpassed by comparable countries. This approach' has been applied successfully in several countries, such as Brazil, Egypt, Bolivia, and Mongolia. Essentially, as long as the critical issues remain unresolved, the investment potential of the national economy cannot be fully realized. It is necessary to remove these investment-suppressing barriers as a matter of priority in order to change the country's development paradigm. On these lines, four critical issues were identified: education, roads, access to finance, and business environment. Following a consultative process, the Government '"Growth Diagnostics" (2005), Ricardo Hausmann, Dani Rodrik, Andr6s Velasco. 7 established major problems that, once solved, will contribute greatly to ensuring economic growth and poverty reduction. Hence, the experience of an inefficient judicial system endangers the development of all areas, affecting seriously both the business environment in the country and the investment process. Other two priorities, solutions to which can be found during the implementation timeframe of present Strategy and which have direct impact on the poor, are: consumption of energy resources and pension system. Health was identified as one of critical problems which leads to reduction of labor force and to a decrease in labor productivity, but its solving is possible by including health aspects in all long-term development priorities. As long- term strategic objectives, the National Development Strategy "Moldova 2020" is focused on the following development priorities: 1. Aligning the education system to labor market needs in order to enhance labor productivity and increase employment in the economy; 2. Increasing public investment in the national and local road infrastructure, in order to reduce transportation costs and increase the speed of access; 3. Reducing financing costs by increasing competition in the financial sector and developing risk management tools; 4. Improving the business climate, promoting competition policies, streamlining the regulatory framework and applying information technologies in public services for businesses and citizens; 5. Reducing energy consumption by increasing energy efficiency and using renewable energy sources; 6. Ensuring financial sustainability of the pension system in order to secure an appropriate rate of wage replacement; 7. Increasing the quality and efficiency of justice and fighting corruption in order to ensure an equitable access to public goods for all citizens. The focus of this Strategy is to produce a social and economic impact on each of the above-mentioned dimensions. The cumulative effect of solving the addressed problems lies in removing the critical barriers that prevent the optimal use of resources. This approach makes it possible to prioritize areas of state intervention and subject them to a clearly defined objective of the Strategy: ensuring qualitative economic development and, implicitly, poverty reduction. The Republic of Moldova will undertake all the necessary efforts to ensure the transition to a green economic development, which promotes sustainable development principles and contributes to poverty reduction, including by ensuring a better governance in the sustainable development domain, by integrating and strengthening environmental protection aspects in all social-economic development domains of the country. 8 A determining factor in the successful accomplishment of identified priorities and achievement of the main objective is the existence of efficient and modern state institutions. Acceleration of institutional reforms and strengthening of capacity of public authorities will address each identified priority. Increased quality of public services through modernization and greater transparency and accessibility are inherent during Strategy implementation process. IMPACT ON ECONOMIC DEVELOPMENT GDP grew on average by 5.1% annually during 2000-2010. Certainly, some successful years generated better growth rates (7.1% during 2000-2004, 5.2% during 2005-2008), but there are crisis phenomena and the phenomenon of long economic waves, the frequency of which can be estimated at around ten years. Indeed, regional and global economic crises occurred in 1998 and 2008. High growth rates in the most favorable years are, in fact, correction, recovery from the crisis, or crisis-preceding boom effects. This Strategy's economic growth forecast for 2012-2020 uses average rates of economic growth. Certainly, higher annual rates will be registered by case, specifically over short term, and lower annual rates will be registered during correction periods or eventual crises. The base case scenario, which regards a continuation of trends of the last decade, implies that we develop as we did so far, with the same economic, social, political phenomena, with rising remittances and the same pace of reforms. The base case scenario estimates an average annual GDP growth of 4.7% during 2012-2020. But what happens if we succeed in changing the paradigm of economic development? The implementation of the present Strategy's priorities, considering the direct and quantifiable effects of each priority, supplements this annual growth rate by more than 1.2% annually, forming thus an alternative scenario. The annual supplement to the additional GDP growth will emerge gradually, but will accelerate rapidly and sustainably, from 1.1% (2015) to 2.1% (by 2020), continuing after the expiry of the used planning schedule (Figure 1). The difference is small at a first glance, but in developed economies an annual GDP growth difference of 2% is sometimes the difference between stagnation and growth, or the difference between normal growth and economic boom. Hence, the alternative scenario assumes that, due to effects only, in 2020 the GDP will be 12% higher compared to the base case scenario and, with each year beyond 2020, this difference will grow significantly (Figure 2). IMPACT ON INCOME AND POVERTY Along with the implementation of these priorities, the annual income per capita by 2020 will be on average 12% higher compared to the base case scenario and 79% higher compared to 2011. Assuming at least a proportional distribution of welfare, we can estimate the reduction effect from an average income increase. There is an intrinsic relation between the poverty rate (share of population living below the poverty line) and the economic growth rate, which can be expressed through the 9 elasticity coefficient. Thus, the coefficient was minus 0.7 during 2000-2010, which means that each annual supplementary percentage of GDP growth reduces the poverty rate that year by 0.7%. An estimation of the benefits of implementing these priorities can be made by using the elasticity coefficient and the average GDP growth rates in the base case scenario - 4.7% and in the scenario which assume the implementation of seven priorities - 6.7% by 2020. In addition, the direct effect on poverty of pension reform implementation is estimated at about 2%. It should be mentioned that these two effects will cumulate. In 2010, the poverty rate was 21.9%. If we use the poverty level (or line) of 2010, the poverty rate will also be reduced in the base case scenario to approximately 16% by 2020. But, along with the implementation of priorities, it will be reduced significantly, to 12.7%, or by 3.3 percentage points over the base case scenario, which accounts for 149,000 people out of poverty (Figure 3). SUSTAINABILITY OF ECONOMIC GROWTH By contrast, it is worth noting that ensuring a qualitative economic growth through elimination of critical constraints and poverty reduction has a short-term effect. Over medium- and long-term, the main concern of authorities is to promote welfare - a concept that incorporates various development aspects, among which public health, personal security, access to culture, and, last but not least, clean environment. It is known that, without a sustained effort, economic growth has a negative impact on the environment as a result of greater industrial pollution and increased consumption. Regulations that are designed to counter this effect are treated by businesses as an excessive burden. However, at national policy level, the sustainable nature of economic growth is equally important. In this context, the Government's strategic vision over medium and long term is the reconciliation between the need for accelerated economic development and environmental protection in conformity with European standards. This will materialize through: (i) achievement of a rate of economic development that would allow an increasing financing of environmental protection measures, and (ii) balanced regulation of the business environment, both in terms of economic impact and environmental impact. Health also is an integral part of social welfare of the population, but good health conditions facilitate economic development, competitiveness and productivity. Improvement in the health of the population will have a decisive impact on economic development and social prosperity only by achieving equity in health, by real progresses in ensuring the right to health for all people and by making the entire society accountable for health care measures that can contribute to human development, to social and economic welfare. Awareness-raising activities on health determinants and promotion of provisions on health issues in all policies will maximize results in health domain. 10 Thus, health will presume that economic and social security, harmonious social and interpersonal relationships, a safe and healthy working and living environment, adequate quality of drinking water, air and soil, an adequate and reasonable nutrition are necessary conditions, all of which being complemented with healthy lifestyle and access to quality health services. Increasing health system efficiency will also contribute to increased productivity, social inclusion and will reduce poverty, due to the positive impact on reducing morbidity, premature mortality and increase healthy life expectancy. 11 TABLES AND FIGURES TABLE 1. IMF ESTIMATES OF GDP PER CAPITA AT PURCHASING POWER PARITY IN 2010 AND 2016, USD 2010 2016 Albania 7454 10067 Armenia 5110 6712 Georgia 5114 7386 Kirgizstan 2 249 3 181 Macedonia 9 728 13 136 Moldova 3083 4424 Bulgaria 12 851 18 010 Romania 11860 16335 Ukraine 6712 9739 Estonia 18 519 25 145 Latvia 14460 20213 Lithuania 17 185 24 262 FIGURE 1. GDP ANNUAL GROWTH FORECAST 7% 6% 5% 4% m Base case scenario 3% "Moldova 2020" 2% 1% 0% 12 FIGURE 2. GDP GROWTH WITH AND WITHOUT IMPLEMENTATION OF DEVELOPMENT PRIORITIES, MDL MILLION AT 2000 PRICES 50 45 40 35 - Base case scenario 30 - "Moldova 2020" 25 20 15 FIGURE 3. REDUCTION OF POVERTY RATE, % 22 21 - 20 19 18 17 - Base case scenario 16 - "Moldova 2020" 15 14 13 12 13 EDUCATION: RELEVANT FOR A CAREER Human capital is one of the few resources that can offer to the Republic of Moldova a comparative advantage. However, if labor is not specialized in fields required by potential investors -job providers - human capital remains an untapped resource. SITUATION ANALYSIS In recent years, an increasingly characteristic phenomenon for the education system in Republic of Moldova is preference for higher education. The last two decades have been marked by a doubled number of students enrolled in higher education to the detriment of secondary vocational education and general specialized education (Figure 4). Overall, university education is becoming increasingly accessible and age limitations were excluded. Similarly, the high number of students in higher education compared to the much smaller number of people in secondary vocational and general specialized (vocational/technical) education shows that university education is a priority for Moldovan citizens. The popularity of higher education is increasing, although 71.3% of students are enrolled on a contractual basis and pay a tuition fee. Spending on education in Republic of Moldova reached a record 9.2% of GDP (the European average being 5.5% of GDP), without producing a significant economic and social impact. In 2009, financial allocations per pupil in secondary vocational education accounted for MDL 10,224, which is higher by 15% than in general specialized education (MDL 8,709/student/year) and by 33.5% than in higher education (MDL 6,802/student/year) 2. Although secondary vocational education is the most expensive, the biggest problems appear on this particular segment. In 2010, according to International Labor Organization methodology, the number of unemployed with secondary vocational education was 22,800 people, or 24.8% of the total number of 92 thousand unemployed, being higher than the number of unemployed with higher education (18.3 thousand), general specialized education (12 thousand), lyceum, general secondary education (22 thousand) and secondary education (16.8 thousand), recording the highest drop-out level (24.5%). In terms of labor market in Republic of Moldova, 970 thousand people of 15-29 years old or 27.2% of the total population were registered in 2010. The unemployment rate among this age group is 13.9%, being 1.9 times higher than the nationwide unemployment rate (7.4%). According to the National Bureau of Statistics data, only 22% of young people found a job immediately after graduation in 2010. A quarter left their first jobs because of low wages, and 17.7% went to work abroad. Young people in cities succeed in higher proportions to find a permanent job than those in rural areas (75% versus 54%). 2 Vocational Education at a Crossroads: An analysis of policy decisions in the secondary and specialized education system, Sergiu Lipceanu, IDIS Viitorul, 2010. 14 Consequences are felt directly on the economic front. They show a relatively small proportion of graduates employed as per qualification obtained in education institutions, and the absence of monitoring mechanisms for their careers makes the issue less visible. About 30% of graduates do not work according to professional qualifications obtained in vocational schools, colleges and universities, which show the necessity to diversify the educational routes by promoting the lifelong learning concept. This phenomenon is deepened by the informational asymmetry between labor force demand of potential employers and the wrong perception of students regarding employing opportunities, which tends to perpetuate this phenomenon. The business environment in Moldova, especially exporters, complains about low quality of job candidates education and about lack of qualifications. 85% of companies mention lack of qualified labor force , with companies requiring a higher level of professionalism and specific skills from workers. Most often, economic agents mention that they are faced with a significant gap between their needs and professional skill mix of vocational/technical education institutions' graduates. The quality of curricula also determines the reduced adaptability of young workers to company conditions. This most often leads to an increased turnover of staff. On the one hand, the worker is unsatisfied because he/she cannot meet the requirements and, on the other hand, the employer does not receive the expected performance from the employed human resources. It is also alarming that young workers do not show devotion to work, as .4 confirmed by 52.2% of respondent companies. The low productivity of young employees and poor quality of products/services form a vicious circle, which in turn determines modest salaries. Non-competitive salaries are another reason for lack of business attractiveness. For graduates of secondary vocational education unemployment is more acute than for those who graduated from general specialized or higher education facilities. Their share in the structure of unemployment reached 28% in 2009. In this context, labor migration is an increasingly pressing problem, which imposes a more efficient correlation between education policies and migration and employment policies. If the Government will not intervene, unwanted effects of the problem will deepen. This situation, combined with unfavorable demographic forecasts and with the precarious state of health, challenges the myth that Republic of Moldova has plenty of labor force, which is skilled and cheap. Consequently, the labor market will face a deepening substantial imbalance between supply and demand and shortage of skilled labor. Attracting investment, given the lack of required human capital, will become increasingly difficult, and the lines of emigrants will be further fuelled by fresh graduates of the education system, with the purpose of both searching for a well-paid job and materializing quality education without tapping the potential to create domestic jobs. S,,Work relations in Republic of Moldova from companies' perspective", UNDP and Government of Belgium. 4 Idem. 15 Aligning the education system to the requirements of the labor market is imperative. A perpetuation of this situation is a major risk for the education system because, with extending opportunities to access education in Europe, potential students will prefer other educational destinations. STRATEGIC VISION The correlation between labor market demand and education supply will have a significant impact on economic development. Modernization of the vocational education system and improvement of continuous labor force training will allow citizens to adapt to new labor market conditions. Partnerships between education and labor market will lead to a generation of educational offerings that will meet the quantitative, qualitative and structural labor force needs. This in turn will help reduce unemployment and the flow of citizens who leave the country and the rate of population at risk of poverty or social exclusion. To the effect of achieving the strategic vision, education policy will be targeted to ensure the quality of studies. Enacting new legislation on education, adjusted to the European experience, will facilitate structural and institutional reform in the field, taking into account the principle of efficiency and quality. Reform of research and innovation system, by de-monopolization of its financing, by applying consistent and relevant rules supporting excellence in education and in science, will boost the quality of career education. Establishment of the National Agency for Higher Education and Research Quality Assurance is crucial for evaluation and accreditation of institutional and professional training/development programs for labor market specialists. The National Framework for employment qualifications and standards will guide the educational process towards development of competencies required on the labor market. Meanwhile, labor forecasting capacity will be strengthened, with a focus on creating lifetime professional training opportunities. Curricula will be geared towards professionalization of research and innovation capacities, as well as towards their development in universities. The quality of academic processes will be ensured inclusively by redefining the assessing principles and criteria of higher education institutions intellectual potential, by restructuring teaching and research tasks, by refocusing institutional services, which will be made available to students, in the benefit of accurate and more adapted choice of educational routes by them. As a quality requirement toward the intellectual staff of an institution will be the share of 75% of professors with teaching and research titles. A precondition for increasing the quality of education is to eliminate corruption factors in the education system. The optimal solution in this regard is to rely on market mechanisms. In order to stimulate a real competition among higher education institutions, the financing formula for universities will be modified, taking their performance as a fundamental criterion, offering to them in return broader financial autonomy. 16 EXPECTED IMPACT The process of enhancing education quality will allow creating a good investment climate due to skilled, responsible, flexible labor, thus contributing to greater labor productivity. This will result in an increased quality of products/services in the national economy. Promoting the transfer of knowledge must be conducted in a way that would translate innovative ideas into new products and services, which generate growth, quality jobs and contribute to solving society problems with a view to consolidating economic and social cohesion. Training of qualified labor force will be ensured through promoting career guidance, starting with general education, and offering lifetime continuous training possibilities. In accordance with the inter-generational model (Mayer, 2004), current investments in nutrition, health and education have a significant positive impact on employment, on professional skills and on knowledge, and these in turn contribute to increased economic development. A work force that is better educated and connected to the needs of the economy affects the gross national production through multiple paths, called channels of influence. First, the volume of physical labor as a direct factor of production increases. Second, the efficiency of using a unit of labor (production factor productivity) increases. These two parameters can be quantified and estimated until 2020. Additionally, there are other ways in which better education will serve the national economy, such as: encouraging domestic investments at the national level and new jobs creation due to manifested managerial skills and personal initiative of the graduates; greater attractiveness to foreign investors; reduced employers' costs to re-shape and enhance the current workforce skills by developing new skills and competencies generated by an economy based on knowledge; innovation and modern technologies. Estimating the effects of achieving the proposed objectives on annual GDP growth was based on several additional conditions, the main being: (i) migration of young graduates will be reduced by at least 50%, and (ii) in the medium and long run, graduates who were able to fully benefit from the reform will be at an aggregate level by 20% more productive. Under such circumstances, the annual growth rate of GDP over the medium term may be 0.6-0.9% higher compared to the scenario "without reforms". Even if the labor force is an inert economic variable, and by 2020 due to lower replacement rates the new graduates will form only a small share of the total employed population, the improvement of the career education quality will have a greater effect in the long run. 17 SPECIFIC OBJECTIVES Monitoring indicator 2010 2015 2020 Unemployment rate, % 7.4 6 5 Outflow of young labor force, % 17.7 15 10 Share of employers satisfied with labor force 15 40 60 quality, % (2011) Share of employed graduates that claim to need 40 20 10 additional training after graduation, % 18 TABLES AND FIGURES FIGURE 4. SHARE OF STUDENTS ENROLLED IN HIGHER EDUCATION VERSUS SECONDARY VOCATIONAL EDUCATION AND GENERAL SPECIALIZED EDUCATION 100% 90% 80% 6 0%y - General specialized 60% -education a Secondary vocational 4W. education 306 ' 11 Higher education 20% 10% 0% 1990-1991 2010-2011 19 ROADS: IN GOOD CONDITION, ANYWHERE Transport costs of economic agents and road traffic safety are closely related to road infrastructure quality. The poor condition of roads is seen as a major constraint hindering economic development and requiring substantial public investment. Moreover, an adequate road infrastructure is a precondition for a harmonious regional development and access of population to public services. The prospect of establishing a Deep and Comprehensive Free Trade Zone between Republic of Moldova and European Union makes road infrastructure indispensable for the utilization of local producers' export potential. SITUATION ANALYSIS Republic of Moldova is affected by an intensive process of road degradation. About two thirds of the length of national roads was in good condition in 1992, then less than half of them were in good condition in 1998, and only 7% in 2006 (Figure 5). Although the condition of local roads was less examined, a study of 1,500 km (out of 6,000 km) of local roads conducted in 2006 found a bad and very bad condition of about 96% of their length. Intensive degradation of public roads in Republic of Moldova occurred because of insufficient funding for maintenance and repairs (Figure 6). During 1998-2006, road funding covered less than 10% of needs. Allocated funds allowed only the execution of routine maintenance (winter maintenance, filling potholes, profiling, etc.). Because of failure to conduct average and capital repairs, over 80% of road length exceeded the established operating framework. A relative improvement in the condition of roads has occurred in the years 2010-2011, conditioned by increased contributions to the road fund (from MDL 241 million in 2009 up to MDL 788 million in 2011). However, these contributions are not sufficient to restore the entire road network to an appropriate state. The effects conditioned by insufficient funding of road maintenance and repair works were exacerbated by systemic issues. Technical norms and standards used in roads are outdated and do not match current requirements, and the institutional structure of the road maintenance system is inefficient. In Republic of Moldova (except the left-side region of Nistru) there are 39 road maintenance companies, of which one is private, 35 are joint stock companies with state participation, and three are state companies. The study conducted during the development of the Land Transport Infrastructure Strategy for 2008-2017 demonstrated the need to reform the road maintenance system in order to enhance the efficiency of this transport. Administration costs exceed 25-30% of total spending, with a law- prescribed ceiling of 14.5%. To the effect of making the road maintenance system more efficient it is necessary to ensure a healthy competition and encourage new investment 20 in the field through transparent public procurement friendly to bids involving advanced technologies, ensure transparency in the operation of specialized companies, their privatization and merger, optimize the maintained road network length, and implement a maintenance method through multi-annual contracts (3-5 years) and road differentiation by level of required maintenance. The adverse effects generated by the poor condition of roads in Republic of Moldova have a significant negative impact on the country's social-economic activity. One of the factors offering the possibility to achieve sustainable economic development, examined in the Global Competitiveness Report 2010-2011, published by the World Economic Forum, i.e. ,,quality of infrastructure", ranks Republic of Moldova 94th out of 139 countries, the lowest being road quality infrastructure (139), followed by port infrastructure (124), air infrastructure (109), and only railway infrastructure is ranked higher (67). The quality of transport infrastructure is largely perceived as an important component of competitiveness and business environment in general and, as a consequence, is an important factor in attracting investment and ensuring export competitiveness. Compared to countries in the region, Republic of Moldova got the lowest positions in the World Bank's ranking on 2010 Logistics Performance, being ranked 104th out of 155 countries, 132nd for logistics competency, 124th for customs procedures, and 123rd for infrastructure aspects (Table 2). However, Moldova cannot fully capitalize on the economic and investment potential because of poor roads that limit accessibility to objects of production, to markets and to cultural and tourist centers. Moldova is often avoided because of these reasons as a transit country for cargo and passengers. Because of poor road network, households, especially those in rural areas, incur significant additional costs to access social and administrative services and markets. According to estimates, the unsatisfactory state of roads implies additional costs for users of approximately MDL 2.5 billion annually. The poor quality of roads also has a negative effect on road safety. The total number of reported deaths per million vehicles is about 1,120 (6-9 times higher compared to European Union countries) and the number of deaths per one million population is about 120 (Figure 7). The poor condition of roads has a negative environmental impact. Fuel consumption on roads in bad shape condition increases by 20%, generating additional emissions of harmful substances into the atmosphere. Besides, bad roads are an additional source of noise and of vibration. Gravel roads cause formation of dust clouds, which negatively influence the development of agricultural crops in the roads influence area. 21 STRATEGIC VISION The implementation of the new qualitative economic development model based on exports, on investment and innovation will be accelerated by the development of both road infrastructure and logistics sectors related to transport services. Essentially, road infrastructure durability is contingent upon ensuring the necessary minimum of financial resources for national and local road infrastructure maintenance, but also upon substantial public investments in construction and rehabilitation of national public roads, so as to have 80% of roads in good and very good condition by the end of this Strategy due date (Figure 8). Estimates show that approximately MDL 4.2 billion is required annually for national and local road maintenance and current repairs (Table 3). At the same time, a capital reconstruction of over 400 km of roads was planned for 2011-2014 with funding from external sources, reaching an amount of EUR 334 million. Thus, to the effect of attaining the established objective by the end of this Strategy due date, it is necessary to mobilize additional domestic and foreign funding of EUR 1.1 billion. Measures beyond the mere allocation of public funding are required in order to accomplish this vision. It is necessary to explore the public-private partnership potential in the area of road infrastructure and logistics services related to transport and road infrastructure services. The road network management is also followed closely by the Government. A reduction of administrative costs to a standard prescribed by legislation is a source of savings that can contribute to more adequate maintenance works. Hence, a greater efficiency of the maintenance system will be achieved through an effective competition based on: (i) transparent public procurement friendly to bids involving advanced technologies; (ii) ensuring a more efficient control of work quality; (iii) reorganization and modernization of road maintenance companies by the year 2013; and (iv) implementation of the road maintenance method through multi-annual contracts by the year 2015. EXPECTED IMPACT Adequate road rehabilitation and maintenance in Republic of Moldova will have a number of beneficial effects, contributing to the country's economic development. With a strategic location, Moldova plays an increasingly important role as a border country between the European Union and Eastern Europe and could become a commercial hub of transportation in the region, where roads will be rehabilitated and logistics costs will be lower than in neighboring countries. Transport services can be developed but their costs are very high in the absence of a quality road infrastructure. It is important that in the future the design and development of road infrastructure be done in line with social and economic needs of citizens. Given that Republic of Moldova aims at increasing the dynamics of industrial and agricultural sector's development, a solid road infrastructure, functioning road transport and some multi-modal logistics 22 centers will facilitate significantly the access of farmers to local and foreign markets. Rehabilitation of roads in the country by using advanced technologies will have an impact on the labor market through both creating new jobs and involving more adequate professional training. Last but not least, a modern road infrastructure will contribute to the development of some sectors providing non-traditional services such as tourism and logistics services. The imperative to implement environmental protection measures will be taken into account while designing, constructing and operating the roads, including by applying environmental impact assessment procedures, by promoting construction and operational standards under climate change conditions, by maintaining, restoring and expanding road plantations areas (green protective strips along roads etc.). Also, road infrastructure development has a beneficial social impact. The current state of roads is a major impediment in rural population's access to quality social services. For example, school network optimization through establishment of hub schools is directly posing the problem of access to these institutions. Auto transport services can be developed, but their maintenance costs are very high in the absence of a well- developed road infrastructure. Hence, road rehabilitation will increase the population's access to health services, especially to emergency and hospital services. In the context of hospital reform and public hospital network restructuring based on the National Master Plan for Hospitals, the distance between hospitals will increase and the state of roads is crucial for the rapid access of patients to health facilities. Simultaneously, transition to universal coverage and access to an efficient primary care, as the closest nursing provider to the individuals and of good quality is a priority for the Republic of Moldova. Thus, further road construction, urban and rural planning will be coordinated closely with medical institutions planning (hospitals, primary care and emergency institutions). Also, it is a fact that the inclusion of effective road safety measures in the road construction helps to prevent personal injury and loss of human capital and productivity as a result of road accidents. Building new, safer roads is also an opportunity to promote a healthier lifestyle by creating conditions for physical activities such as walking and cycling in public spaces. Another important aspect is environmental protection. First, better roads reduce significantly fuel consumption per each kilometer, thus reducing harmful gas emissions, noise and other pollutants. Vehicles will require less consumable, such as oil and tires, which are also a great pollutant. Last but not least, the road rehabilitation and reconstruction process must be conducted in strict compliance with the requirements of national legislation in the areas of environment and good international practices (environmental impact assessment, action plans for environmental protection during reconstruction, etc.). Apart from these beneficial implications, better roads affect directly economic growth and development through more channels. Both in the international practice and in the Moldovan context, mathematical models are well-calibrated to appreciate exactly the effect of one kilometer of road rehabilitated on expenditures, population and business 23 incomes, time saved, and accidents. The main benefits, displayed in descending order, are: * reduced vehicle operating costs, including saved fuel and avoided repairs; * less time spent on roads, which can be further used for productive or recreational purposes; * reduced number of accidents; * intensify additionally attracted traffic of goods and of passengers, including international transit; * increased investments, regional development, extended tourism as a result of enhancing country attractiveness, these representing tertiary, less distinguishable effects. The first of these is the most tangible benefit. Estimates suggest that MDL 2.5 billion is wasted annually on additional repairs and on fuel on road segments planned for rehabilitation. Starting with the assumption that at least a moderate part of saved money can be invested for productive purposes, increasing thus the stock of fixed capital, calculations suggest that over short and medium term regular annual GDP growth will be additionally increased by 0.3% due to fuel savings and repairs avoiding only. But the overall effect will be probably even greater. SPECIFIC OBJECTIVES Monitoring indicator 2010 2015 2020 Rehabilitation of national public roads, km 900 (2014) 1900 Repairs of local public roads, km 700 (2014) 4900 Share of national public roads in: * very good condition, % * good condition, % 38 42 Reduction in the number of deaths caused by road 120 60 accidents per million population Logistics Performance Index) 2.57 2.67 2.87 * infrastructure 2.05 2.35 2.65 * logistics competency 2.17 2.37 2.77 24 TABLES AND FIGURES FIGURE 5. EVOLUTION OF THE CONDITION OF NATIONAL ROADS DURING 1992-2010 100% 90% 80% 70% 60% 50% * Good conditions 40% 30% m Poor conditions 20% 10% 0% FIGURE 6. FUNDING IN THE ROAD SECTOR DURING 1990-2011, MDL MILLION 1200 1000 Rehabilitation and 800 new construction 600 * Road maintenance 400 200 0 25 TABLE 2. LOGISTICS PERFORMANCE INDEX (LPI) FOR SOME COUNTRIES IN THE REGION Country LPI Customs Infrastructure Transportation Logistics Tracking of Costs across borders competency shipments Ukraine 2.57 2.02 2.44 2.79 2.59 2.49 3.06 Croatia 2.77 2.62 2.36 2.97 2.53 2.82 3.22 Bulgaria 2.83 2.50 2.30 3.07 2.85 2.96 3.18 Romania 2.84 2.36 2.25 3.24 2.68 2.90 3.45 Albania 2.46 2.07 2.14 2.64 2.39 2.39 3.01 Moldova 2.57 2.11 2.05 2.83 2.17 3.00 3.17 FIGURE 7. STATISTICS OF ROAD ACCIDENTS FOR 1990-2010 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 1990 1995 2000 2002 2004 2006 2008 2010 VAth U Accidents 0 Totalvi ctirns traumas Deceased FIGURE 8. FORECAST OF EVOLUTION OF THE CONDITION OF NATIONAL ROADS DURING 2011-2020 100% -__ 80% - 70% - 60%- 50%- 40%- 30% - 20%- 10%-a 0% 2011 2012 2014 2016 2018 2020 m Poor * Mediocre * Good Very good 26 TABLE 3. ESTIMATES OF MEANS REQUIRED TO REPAIR AND MAINTAIN PUBLIC ROADS Name of Works Total Volume Periodicity Annual Estimated Cost, Volume MDLthousand km years km la 1 km total a. National Roads Capital repairs (rehabilitation) * cement concrete coverage 287 30 10 4800 45920 * asphalt concrete coverage 2797 16 175 7500 1311094 * gravel coverage 252 9 28 450 12600 Total 3336 1369614 Medium repairs (periodic maintenance) * asphalt concrete layer 1150 6 192 2450 469583 * bituminous treatment 1592 4 398 450 179100 * profiling with added material 252 3 84 220 18480 Total 2994 667163 b. Local Roads Capital repairs (rehabilitation) * cement concrete coverage 42 25 2 3600 6048 * asphalt concrete coverage 2717 13 209 3500 731500 * gravel coverage 3016 9 335 450 150800 Total 5775 888348 Medium repairs (periodic maintenance) * asphalt concrete layer 1350 6 225 1450 326250 * bituminous treatment 1367 5 273 350 95690 * profiling with added material 3016 3 1005 220 221173 Total 5733 643113 c. Capital repairs of bridges 1131 units 16 1554 34 52830 /24681 m d. Routine maintenance of national and 9344 continuously 9344 64,2 598016 local roads IN TOTAL 4219084 27 FINANCE: AFFORDABLE AND CHEAP The financial system in Republic of Moldova is largely dominated by the banking sector. This in turn proved to be sufficiently stable and held on relatively with no losses in the global financial crisis of 2008-2009. Economic recession has affected the credibility of economic agents, announcing the deterioration of the loan portfolio. Still, these were short-term effects, the situation getting back to normal with the economic recovery. Despite the stability of the banking sector, economic agents signal limited access to finance, and the level of financial intermediation is among the lowest in the region. SITUATION ANALYSIS The fundamental feature of the banking sector in Republic of Moldova is weak financial intermediation. The average GDP share of banking loans during 2004-2010 accounted for 31.5%, Republic of Moldova being surpasses by countries in Central and Eastern Europe, except only Albania and Georgia. Leaders in the region - Latvia, Slovenia and Estonia provide credits, the average GDP share of which varies between 80% and 115%5 . Although the situation is slightly better in terms of bank deposits as a share of GDP - the main source of lending, however the Republic of Moldova, characterized by an average GDP share of bank deposits of 32.9%, is ranked lower on this than countries such as Lithuania, Serbia, Romania, Belarus, and Georgia, remaining below the region's average. Lack of confidence in banks by population and companies is the main obstacle determining the relatively low rate of deposits as a share of GDP. Hence, the main function of the banking system, namely concentration of citizens' savings and their channeling towards those who need additional liquidity, is performed deficiently. Growth reserves for the lending volume to the real sector of economy, accompanied by a higher savings rate, are gains from Moldovans' work abroad. Empirical studies show that about half of the work gains are transferred to Republic of Moldova as remittances. Preference to place savings in foreign banks, also conditioned by the fact that the amount of guaranteed deposits in EU countries is considerably higher, does not lead to a full tapping of this potential. On the other hand, state policies targeting the channeling of remittance funds towards small businesses (PARE 1 +1) were not supported by sufficient financial means. Another aspect relevant to the situation analysis in the banking/financial sector relates to the use of available resources and risk management efficiency. On the one hand, banks in Republic of Moldova have liquidity in excess of prudential norms prescribed by international good practices. Hence, the average share of liquid reserves in total banking assets was 27.3% during 2004-2009. In case of an efficient intermediation the liquidity "Diagnostic of the Moldovan banking system in the context of signing the Deep and Comprehensive Free Trade Agreement with the EU", Expert-Grup, 2011. 28 excess would determine banks to intensify lending efforts, which would imply a reduction of the risk premium. In reality, economic agents in Republic of Moldova invoke limited access to finance, indicating high interest rates as one of the biggest problems encountered in their operation (14.2% of respondents to the questionnaire that laid the foundation for the 2010-11 Global Competitiveness Report indicated access to finance as the biggest obstacle to doing business6). The same is confirmed by the risk premiums applied in Republic of Moldova, which are the highest in the region7. The fact that risk premiums in Republic of Moldova represented 8.6% during 2004-10 shows lack of confidence by commercial banks in potential debtors and determines their preference for liquid assets. The confidence crisis could be partially overcome by improving the information on debtor credibility. A recent reform in this area aims at establishing in Republic of Moldova credit history bureaus that collect information on timely loan payments, which would allow commercial banks to adjust interest rates based on debtors' profiles. As a result of this reform's implementation, Republic of Moldova jumped considerably in the World Bank's Doing Business 2012 ranking, from 96 to 40 . At the same time, some problems remain unsolved, i.e. rights over security if the debtor becomes insolvent. The inefficient use of resources and inadequate risk management are conditioned by lack of a true competition in the banking segment of the financial market and, generally, lack of viable financing alternatives through the non-banking financial sector. At the end of 2011, the assets of the largest five banks in Republic of Moldova as a share of total banking sector assets accounted for 70.12%9. In 2011, although approximately 3/4 of banks' capital was represented by foreign investments, only four banks out of those 15 active banks in the Republic of Moldova were branches of Western banks. Another factor reducing the efficiency of recourses utilization is the state's share in the banking capital of one of the largest five banks in Republic of Moldova. Referring to the capital market, it is worth noting that the volume of securities traded during 2004-2010 as a share of GDP is among the lowest in the region - 1.28%, recording in the last years a downward trend. For purposes of comparison, the regional average during this period was 5.32%, while the European Union average was 92.4%. STRATEGIC VISION The strategic vision for increasing access to finance is based on the following pillars: (i) developing financial intermediation; (ii) streamlining the costs of financial resources; and (iii) streamlining the guarantee terms for credits and loans. 6 "The Global Competitiveness Report 2010-2011", World Economic Forum, 2010 7 Risk premiums are expressed as the difference (in percentage points) between the interest rate on loans provided by banks and interest rate on state bonds. World Development Indicators, http://data.worldbank.org/indicator/FR.INR.RISK Doing Business 2012, http://doingbusiness.org/data/exploreeconomies/moldova Financial indicators for the banking system of Republic of Moldova, http: //www.bnm.md 29 The objective of authorities for the year 2020 is to have a financial system channeling efficiently financial resources to households which produce savings to businesses that are looking for ways to finance their business ideas, creating a true competition in the banking market to attract funds from depositors. Selling of the state's share in the banking capital and entrance of new strategic investors in the market will boost the competition spirit and will optimize financing costs. It is also imperative to develop as many options as possible to place the savings of the population outside the banking system, which leads to the development of financial intermediation. The reforms promoted in support of the business environment will be targeted towards the optimal utilization of remittances to stimulate economic development, which will maximize development advantages offered by migration. The confidence in the financial system of households, including migrant workers, will be subject to increased guaranteed amounts of deposits and effective monitoring of financial services. The issuance of long-term securities accessible to migrant workers (such as Diaspora Bonds) can be an efficient tool to use the remittance potential. Also, an important objective is to improve the financial tools that are already applied, together with their diversification, to the effect of supporting the re-equipment of industry and innovation (business angels). Mobilization of new funding through existing models and new innovative investment schemes will generate changes in the consumption and production manner and will increase export product competitiveness. Adapting to good European practices of the financial market regulation and supervision mechanism will increase its level of efficiency, will create favorable conditions to access capital on the local financial market, which will generate an increased entrepreneurial activity in the field and will boost the level of protection of consumer services offered on the financial market. Current weaknesses in collateral management will be removed, and hedging instruments will be developed so that excessive liquidity in the financial system be targeted in an effective way to crediting the real sector of national economy. Developing risk management capabilities, including expanding information coverage through credit history bureaus, will lead to lower risk premiums. EXPECTED IMPACT Facilitating access to finance will lead to a significant increase in financing volumes through the banking and non-banking sectors as a percentage of GDP (up to 50% by 2020). Achieving the planned level of growth of economy financing is in itself an ambitious task, sensible to global economic and financial risks, as well as to local ones. But, being reached, such an increase will have a direct impact on gross domestic production and income by converting loans into new investment. Assessing the impact that would have easier access to finance was based on the assumption that, out of each modest additional MDL provided to the real sector as a 30 loan, at least 30 bani will be invested in productive capital. The supposed average maturity of loans is three years. Under such circumstances, additional investment will be reflected in an annual GDP growth of up to 0.5-0.7% higher compared to the scenario without the implementation of this priority. This beneficial effect appears gradually, but tends to accelerate rapidly, and will continue after the expiry of the forecasted term of this Strategy. SPECIFIC OBJECTIVES Monitoring indicator 2010 2015 2020 Increasing the GDP share of deposits, % 35.8 40 45 Increasing the GDP share of loans, % 37.2 45 50 Reducing the risk premium, percentage points 10.1 9 7 Increasing the volume of exchange transactions 0.4 2 5 with securities as a share of GDP, % 31 TABLES AND FIGURES FIGURE 9. RISK PREMIUMS IN COUNTRIES IN THE REGION, PERCENTAGE POINTS Poland Hungary Lithuania Serbia Czech Republic . Slovenia 2004-2010 Latvia _2001-2010 Bulgaria - Albania Montenegro - Moldova 0,0 5,0 10,0 15,0 20,0 FIGURE 10. VOLUME OF STOCK TRANSACTIONS To GDP, % 0,00 5,00 10,00 15,00 20,00 25,00 Hungary Czech Republic Poland Estonia Montenegro U 2010 Bulgaria 2004-2010 Croatia Serbia Slovenia Lithuania Romania 32 BUSINESS: WITH CLEAR RULES OF THE GAME An efficient market economy is characterized by the capacity to promote innovation based on fair competition for resources and clients. Ultimately, the winners are consumers that benefit from goods and services purchased for a fair price and a quality commensurate with the price. A favorable business environment is attractive to foreign investment and creation of new enterprises. SITUATION ANALYSIS Foreign direct investment is mobilized by economic development prospects, as well as by a series of external and domestic factors. Externally, the global economic expansion favors investment from emerging countries, while domestically the implementation of privatization programs is able to generate a targeted interest of potential investors. In Republic of Moldova direct foreign investment has reached a maximum level of USD 713 million in 2008, having declined dramatically as a result of the world economic crisis. In 2010, the growth rates of foreign direct investment were recovered but not entirely (Figure 6). Creation of new enterprises is also influenced by the country's economic prospects, albeit clear rules of the game have a determining role in taking a business start-up decision. The number of enterprises increases annually in Republic of Moldova by over 2,000 (figure 12). This growth could be intensified provided there are regulations favorable to doing business. The perception of investors and enterprises regarding business environment attractiveness in Republic of Moldova is guided by international rankings. * Republic of Moldova's ranking in the Doing Business 2012'0 survey of the World Bank was 81st out of 183 countries, being surpassed significantly by the majority of countries in the region and in the CIS. * In the Global Competitiveness Index 2011-20121 Republic of Moldova ranked 93d out of 142 countries, also being surpassed by the majority of countries in the region and in the CIS. According to the aggregate indicator "Institutions", which reflects the regulation framework under the Global Competitiveness Index, the Republic of Moldova ranks 106 h. According to the same ranking, entrepreneurs highlighted the following factors as being key problems to businesses, in order of priority: (i) political instability; (ii) corruption; (iii) limited access to finance; (iv) inefficient public administration; and (v) Government instability. * Index of Economic Freedom 201112 is an important reference indicator internationally, which evaluates the degree of state interference in economic activity based on 10 sub-indicators: business freedom, trade freedom, fiscal 10 ,Doing Business Survey 2012", World Bank, http://doingbusiness.org/ ,,,Global Competitiveness Index 2011-2012", World Economic Forum, http://www.weforum.org/reports 12,Index of Economic Freedom 2011", Heritage Foundation, http://www.heritage.org/ 33 freedom, Government spending, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labor freedom. Republic of Moldova is ranked only 120th on this indicator out of 179 countries. * Another indicator is the Logistics Performance Index, which shows the capacity of countries to ensure the goods movement and to interconnect producers with consumers and with international markets. Moldova ranked 104th Out Of 155 countries in 2010. On the same indicator, the Republic of Moldova is situated among the last in the rank: the 124th in customs administration and the 132nd in the area of logistics competency and performance. As a conclusion to the aforementioned, the business environment in Republic of Moldova is characterized by unjustified financial costs and time, which exceed essentially the levels in developed countries. Consequently, the country's rate of economic development is affected negatively and the investment and export potential for added-value production is not fully utilized. The excessive administrative burden creates barriers for starting, doing and closing businesses, being a de-motivating factor in promoting fair competition geared towards productivity and innovation. Indicated problems are encountered at all stages of the business cycle: (i) starting a business; (ii) doing business, and (iii) closing a business. STARTING A BUSINESS Moldova ranks 88th out of 183 countries in the international ranking ,,Doing Business" 2012 on ,,Starting a business". The main problems at this stage of a company's business cycle are the large number of procedures and high costs associated with these. However, the ,,Starting a business" indicator described above covers only the procedures related to business registration. For many types of activities, before starting a business, companies must get a number of permits (trade operating permits, sanitary permits, veterinary permits, licenses, authorizations for anti-fire protection etc.), the issuance procedures often being burdensome, non- transparent and unclear, including time-consuming, costly and involving human resources. DOING BUSINESS At the stage of doing business, entrepreneurs encounter a number of mandatory conditions imposed for different types of activity and administrative barriers and costs related to: * big number of state inspections; * frequency and manner of submission of compulsory reports and information; * tax payment manner and, respectively, time consumption; 34 * getting a huge number of permits for constructions, installations, equipment, raw materials, products and services, including for imported and exported ones; * burdensome and non-transparent formalities, procedures and rules in customs administration and in ensuring customs declaration for import and for export of goods and services; * non-familiarization by importing countries with conformity evaluation results, conducted by national entities for exported goods. An inventory of the list of permits, except those related to financial markets (banking and non-banking), licenses and documents issued by local authorities, conducted in 2011, revealed the existence of over 400 papers. Of these, only 272 papers were considered justified, which were included in the Nomenclature of permits issued by authorities to individuals and businesses for entrepreneurial practice . Permits other than the ones included in the Nomenclature do not represent a legal norm. Also, it is important to mention that several public authorities are mandated with control functions, performing numerous inspection visits that bring significant costs and risks to the business environment. A combination of these with the requirements and procedures related to import-export operations, associated with high costs for goods' border crossing, affects primarily investments in export-oriented businesses, which are intense from technology and innovation perspectives, or which have the highest potential for growth. Aside from conformity requirements and administrative barriers, a critical constraint to doing business is the low level of quality infrastructure development, specifically of conformity assessment capacity, which affects significantly the country's export potential. Ensuring a sustainable export-based economic growth requires a reduction in the high costs associated with goods' border crossing, service delivery and mobility of persons related to these businesses. A better business infrastructure, an efficient customs administration, targeted to facilitate trade with goods and services represent priorities to ensure an economic development based on business cost optimization and export promotion. CLOSING A BUSINESS Moldova ranks 91st out of 183 countries in the international ranking ,,Doing Business" 2012 on "Closing a business". Problems at this chapter are associated with the cost and with the length of insolvency procedures, as well as low asset recovery rate by creditors. 13 Approved by Law regarding regulation through authorization of entrepreneurial activity No.160 of July 22, 2011 35 Generally, financial and time costs incurred by companies at different stages of the business cycle are comparatively higher than average costs in the reforming countries from the region, such as Georgia (Figure 13). The sequential implementation of the regulatory reform, the unequivocal interpretation of regulatory acts corroborated in conjunction with biased attitude towards entrepreneurs by public authorities and institutions mandated with state control functions have diminished to some extent the expected effects of reforms meant to improve the business environment. Regulations that lead to an excessive increase in the administrative burden fall by their nature under the following two categories: * Unjustified regulations, which generate administrative costs often exceeding public benefits. Such regulations are the result of low competencies of public bodies or institutional and personal interests. Interests relate to the preservation and expansion of institutional functions that allow greater influence and importance, and creation of favorable conditions for corruption and encouragement of economic groups, generating thus unfair competition in the economy and inhibiting innovational activities; * Ambiguous and contradictory regulations, which can be interpreted and applied in a discretionary manner and, thus can lead consequently to the discretionary enforcement of regulatory provisions, to a reduced regulation predictability and transparency, to corruption and unfair competition. Although a large number of regulations and of permits were reviewed and amended during the reform, it has not answered fully the expectations in this regard. Thus, compared to Georgia, which inherited from the Soviet period a similar regulatory framework, Republic of Moldova failed to utilize sufficiently the potential for reduction of administrative barriers (Table 4). This situation reveals another major problem that lies in poor compliance by public authorities to the principles of good regulation prescribed by previous reforms, such as predictability and transparency in business activity regulation; material and procedural regulation through legislative acts; regulatory impact assessment; equity in relationships between state and businesses; tacit approval of starting and/or doing business; one- stop shop, etc. This situation creates favorable grounds for corruption and regulatory discrimination. STRATEGIC VISION Republic of Moldova aims at improving the business environment so that by 2020 the risks and costs associated with each stage of the business life cycle are lower compared to countries in the region, this being governed by the principle of free competition. The impact of improved business environment will be expressed through increased investment and exports, higher number of reliable companies motivated to implement innovations, capable of creating quality jobs, ensure high productivity and competitive export-oriented production, which is supported by Republic of Moldova's advancement 36 in the international rankings Doing Business, Global Competitiveness, Economic Freedom and Logistics Performance, exceeding the average in the region. Optimization of procedures and timeframe required for an economic agent to start, do and close a business, by applying innovational approaches in business regulation, such as digitization of public service delivery, and changing the focus from inspections to counseling, with inspections being conducted based on the perceived risk principle, will improve significantly the business environment and will also reduce useless administrative costs and will ensure implicitly economic development. Aside from direct stimulation of businesses, investment and foreign trade, optimization by means of innovational approaches in public service delivery will create a foundation and substantial boost for innovations and for new jobs, including in the private sector. The reform solutions for the regulatory system will be efficient and sustainable if supported by enforcement and implementation mechanisms. In this regard, work will be done on involving more actively the private sector in initiating, developing and revising regulations. Other important players in this process are the courts, which will have to answer promptly and correctly to citizens' and entrepreneurs' signals of violations of their rights by public institutions, particularly in relation to the timely issuance of permits, ensure a transparent system for the submission of complaints regarding all institutions involved in business regulation and foreign trade, non-involvement by public institutions in business activity, if there are no obvious reasons, and recovery of damage caused by these within a short period of time. Competition is an essential factor in boosting the national economy, in improving the business environment and raising its attractiveness for both launching new businesses and their development. To ensure effective and fair competition, the Republic of Moldova intends to develop and implement a national program in the field of competition and state aid by undertaking the best European practices to prevent, suppress and limit the anticompetitive activities of economic agents and of public administration authorities. Creation of new enterprises will be also encouraged through sharing of business success stories, through support to entrepreneurial spirit, among women in particular, whose share is currently only 27.5% among entrepreneurs. The existing mechanisms through which small and medium enterprises benefit from trainings, as well as financial and logistics support, will be expanded and diversified. In addition, efforts will be concentrated to develop the quality infrastructure capacity meant to facilitate exports and encourage implementation of advanced technologies in local companies, including in agriculture, so that to ensure the consumption security. Also, the implementation of reforms in the health regulation and administration domain can optimally improve the productivity and efficiency in the Republic of Moldova. The economic activity of companies has a direct environmental impact. At the same time, rigid regulations addressing environmental protection impose certain compliance costs for doing business. Although from the perspective of sustainable development 37 such costs are justified, there is a risk that the business environment perceives them as excessive. In this regard, new regulations will address environmental impact assessment so as to distribute evenly the administrative burden on economic entities without distorting market mechanisms and without creating grounds for unfair competition. Broadly, the quality of the business environment affects investment activity and economic development through administrative and compliance costs and through risks associated with the opacity of regulations and discretionary enforcement of sanctions. Promoting intelligent regulation and a horizontal approach and establishing interoperable standards in the field will create conditions to use all business development opportunities. EXPECTED IMPACT Eliminating regulatory constraints and unjustified costs would create grounds for a more dynamic, intelligent and sustainable economic development, encouraging investment in the productive sector of national economy, creating new products and broader access to foreign markets. Direct effects from regulatory framework improvement will be a reinvestment of savings from the reduction in doing business and job creation costs. Savings from reduction of administrative costs can be estimated relatively easily and are smaller than the costs of compliance with regulatory provisions. Compared to these, savings from reduction of compliance costs cannot be estimated with sufficient precision but can be reckoned by increased trade volumes, including exports as a share of GDP, which have an impact directly proportional with economic development and poverty reduction. Indirect effects would be enhanced investor confidence in the business environment in Republic of Moldova and, as a result, increased investment flows, including foreign. Since local investors' resources are limited, foreign investment could be a major factor in changing the country's development paradigm. Moreover, an improvement in the business environment, aside from the quantitative impact on investment, will also enhance their quality, with a particular bias towards businesses that are technology- and innovation-intensive. Since this effect depends on several factors, including the quality of business environment in Republic of Moldova compared to business environment from other countries, it is not possible its quantification. 38 SPECIFIC OBJECTIVES Monitoring indicator 2015 2020 Starting a business Time required to start a business, hours 24 1 Reducing the cost of starting a business by 50% by 80% Dealing with construction permits Time required to obtain construction permits, days 180 100 Reducing the costs of dealing with construction permits by 20% by 40% Paying taxes Reducing the number of payments in paying taxes, fees and contributions down to 35 down to 25 Time dedicated to paying taxes, hours 215 190 Trading across borders Reducing the number of documents required for export/import operations down to 5 down to la 4 Reducing the time required to obtain documents relevant for down to 25 down to 10 export/import operations, days Reducing the costs of export/import operations (per container) by 5% by 10% Logistics Performance Index (LPI) (customs operation) 2.33 2.55 Logistics Performance Index (LPI) (logistics competency) 2.30 2.50 Closing a business Increasing the investment recovery rate by 50% by 100% Time required for business closing, years 2 1.5 Reducing the number of state inspections by 20% by 40% Reducing the number of mandatory reports by 10% by 20% Reducing the number of permits by 20% by 40% Reducing the cost of dealing with permits by 20% by 40% Digitalizing public services for the business environment (no. of services) 20 All 39 TABLES AND FIGURES FIGURE 11. FOREIGN DIRECT INVESTMENT FLOW, USD MILLION 800 700 600 500 400 Foreign Direct 300 -Investment, net 200 100 FIGURE 12. NUMBER OF ENTERPRISES IN REPUBLIC OF MOLDOVA 50000 45000 40000 - 35000 - 30000 - Micro 25000 - Small 20000 - Medium 15000 -- - m Large 10000 5000 0 2005 2006 2007 2008 2009 2010 40 TABLE 4. REPUBLIC OF MOLDOVA VERSUS GEORGIA IN THE GENERAL DOING BUSINEss 2012 RANKING Moldova Georgia Doing Business 2012 ranking 81 16 Starting a business 88 7 Procedures, number 7 2 Time, days 9 2 Cost, % of GDP per capita 9,1 4,3 Minimum capital, % of GDP per capita 9.9 0 Dealing with construction permits 164 4 Procedures, number 27 9 Time, days 291 74 Cost, % of GDP per capita 79.2 20.2 Getting electricity 160 89 Procedures, number 7 5 Time, days 140 97 Cost, % of GDP per capita 660.6 751.3 Registering property 18 1 Procedures, number 5 1 Time, days 5 2 Cost, % of property value 0.9 0.1 Getting credit 40 8 Strength of legal rights, 0-10 8 8 Depth of credit information, 0-6 4 6 Public credit registry coverage, % of adult population 0 0 Private credit bureau coverage, % of adult population 0.3 29.6 Protecting investors 111 17 Extent of disclosure, 0-10 7 9 Extent of director liability, 0-10 1 6 Ease of shareholder suits, 0-10 6 6 Strength of investor protection, 0-10 4.7 7 Paying taxes 83 42 Payments, number per annum 48 4 Time, hours per annum 228 387 Total tax rate, % of profit before all taxes 31.3 16.5 Cross borders trading 134 54 Documents required to export, number 6 4 Time required to export, days 32 10 Cost required to export, USD per container 1545 1595 Documents required to import, number 7 4 Time required to import, days 35 13 Cost required to import, USD per container 1740 1715 Enforcing contracts 26 41 41 Procedures, number 30 36 Time, days 352 285 Cost, % of contract value 28.6 29.9 Resolving insolvency 91 109 Time, years 2.8 3.3 Cost, % of property value 9 4 Recovery rate, cents per dollar 31.3 25.5 FIGURE 13. REPUBLIC OF MOLDOVA VERSUS GEORGIA IN THE DOING BUSINEss 2012 RANKING Starting a business Resolving 200 _ Dealing with insolvency 150 construction permits Enforcing Registering contracts - property - oldova - Georgia Trading across borders Getting credit Paying Protecting taxes investors 42 ENERGY: DELIVERED SAFELY, USED EFFICIENTLY Energy efficiency and security have a direct impact on economic development and poverty reduction. At the moment, however, the energy system in Republic of Moldova faces a number of problems. Energy infrastructure is in a state of advanced usage, and prices of energy resources, which are 95% imported, are increasing. Power generation capacities are insufficient on the right bank of Nistru. Similarly, there are insufficient physical network interconnections with neighboring countries in the sectors of natural gas and of electricity. Losses in the electricity and heating sectors are high, as well as the debt to the natural gas supplier accumulated in the heating sector. Energy consumption is inefficient and the use of renewable energy resources is limited (table 5). SITUATION ANALYSIS Although a series of trends are common for all sectors, further are reflected the particularities of the situation in electricity, heating, natural gas and renewable energy resources sectors. ELECTRICITY The level of electricity production decreased by 15% in 2010 compared to 2001, the largest share of electricity production belonging to the Central Heating-and-Power Plant nr.2 (CHP-2) - 70-80%. Procurement of imported and of produced by the Moldovan Thermo-Electrical Power Plant electricity is declining. Thus, in 2010, this indicator fell by about 21% compared to 2009 and, respectively, by about 6% compared to 2001 (see Figure 14). This shows the dependence on energy imports and procurement from one supplier - the Moldovan Thermo-Electrical Power Plant, which affects our country's energy security. Also, albeit losses recorded by electricity distribution grids in Republic of Moldova are declining, their level is higher level compared to developed countries (up to 10%), which affects negatively the energy efficiency of Republic of Moldova (figure 14). HEATING Production of heating is fluctuating (Figure 16). Thus, in 2010, production increased by about 9% compared to 2009, but fell by 12.8% compared to 2001. The largest share of heating is produced by the central heating-and-power plants - 60-65%. The reduction of thermal load is conditioned, inter alia, by massive consumer disconnections from the district heating system. A serious problem of the heating sector in Republic of Moldova is the large historic debt accumulated by the JSC "Termocom" to the central heating-and-power plants (table 6). Following an analysis of the JSC "Termocom" debts, one can see that the greatest debts are registered to the JSC "CHP-2". The reviewed period recorded 2-fold increase of 43 debts, and their average payment rate was 40-60%. It should be noted that the debts of the JSC "Termocom" to the JSC "CHP-1" are 3 times lower compared to the JSC "CHP-2", which is due to the different capacities of the plants. This is caused by increasing population and economic agents' arrears for heating and by non-adjustment of tariffs on time. Another deficiency of the heating sector is the high level of heat losses, which accounted for 22% in 2010. This indicator registered in the period 2001-2010 a general growth trend of about 7.2 percentage points (Figure 17). Buildings consume most of the energy (40%) and contribute most to greenhouse gas emissions. Buildings in the residential sector show the highest energy consumption (65% of all buildings). Reduced energy performance of existing buildings also has a strong social impact, affecting in particular the socially vulnerable population. The average share of spending for heating ranges from 15% up to 50% of the total spending of a household. The experience of European countries and the local one gained as a result of implementing projects meant to increase the energy efficiency of existing buildings (building envelope renovation, upgrading heating systems, etc.) demonstrate that the potential for reducing energy consumption in existing buildings is about 30-50% and may even reach 70% in some cases. NATURAL GAS Republic of Moldova is dependent on natural gas imported from a single source. This dependence enhances the vulnerability of national economy to natural gas price increases. Procurement of natural gas to Republic of Moldova is declining (table 7). Thus, in 2010, natural gas procurements decreased by approximately 16.3% compared to 2005. However, gas procurements in terms of value increased by approximately 2.7 times in the reviewed period due to higher average import prices for natural gas. Similarly, the volume of natural gas supplies fell as a natural expression, and in monetary terms these registered an upward trend because of increased average prices of gas delivered. Higher natural gas import prices have a negative impact on the economy and vulnerable categories of the population. RENEWABLE ENERGY RESOURCES AND ENERGY EFFICIENCY It is clear that ensuring energy efficiency and using of renewable energy sources in Republic of Moldova is a strategic priority in the absence of energy resources and growing dependence on imported energy resources. Energy efficiency in Republic of Moldova is very low, about 3 times lower compared to European countries, which leads to a substantial increase in the costs of energy resources. The main constraints for energy efficiency growth in Republic of Moldova are: i) high energy consumption leading to increased energy intensity; ii) increasing 44 energy prices, morally and physically outdated technology and equipment; and iii) lack of knowledge and skills in the area of energy efficiency and use of renewable energy resources (Table 8). STRATEGIC VISION The Government aims to create by 2020 a competitive and efficient energy sector that will provide consumers with quality energy resources, on affordable and reliable terms, will respond to the challenges of energy price increases, dependency on imports of energy resources, and energy sector impact on climate change. The strategic vision will be accomplished based on the principle of competitiveness and liberalized energy market. The specific situation in the energy sector, with continuously growing consumer requirements for quality and energy security, meeting the mutual obligations ,,energy services provider - consumer", have an overall significant impact on Republic of Moldova's sustainable development, on viable supply of energy and fuel to the country and population, in adequate quantities and at reasonable prices. Hence, an active energy policy and a well-developed and efficient legislative-regulatory framework will contribute to changing the paradigm of economic development. The strategic vision for the development of the energy sector is based on the following pillars: (i) ensuring the country's energy security, and (ii) increasing energy efficiency. Strengthening the country's energy security will be achieved through energy market liberalization in compliance with provisions of the Energy Community Treaty, through integration of the Republic of Moldova with the European energy market and development of energy resources' transport interconnections. Also, special emphasis will be placed on optimizing the energy mix, on diversifying energy resources and on creating new energy generation capacity. Ensuring energy efficiency will materialize through: reduction of energy intensity in residential, industrial, transport and agriculture sectors; modernization of the energy system; implementation of efficient energy technologies; involvement of own energy resources, including renewable ones, in the consumption balance. Major importance will be given to raising public awareness regarding the need to save energy, including by encouraging the population to buy utility services, construction materials, housing, home appliances, and products with an impact on energy. Energy savings thus obtained will also have a favorable environmental impact. Also, innovations in all aspects of hospital sector modernization regarding energetic assurance and raising energetic efficiency will be supported. The role and value of building low-cost technologies for medical facilities operation will be most appreciated. An emerging need will be to ensure low-cost biosafety and biorisk management, closely connected with the introduction of environmental friendly technologies within medical institutions, in accordance with modern European standards or with other modern standards. 45 Attracted investments are essential in order to develop and modernize the energy sector in line with the strategic vision. This implies: (i) creating and strengthening mechanisms to attract and use efficiently funding for energy projects; (ii) use rationally state investment and private investment in energy development projects; (iii) developing an information base and a database for energy project funding. To the effect of accomplishing the proposed strategic directions, the Government will channel its efforts to: (i) strengthen sector reform, including by adopting new energy legislation harmonized with EU requirements; (ii) implement measures promoting energy efficiency; (iii) attract investment in the sector; (iv) strengthen institutional capacity in this area. EXPECTED IMPACT Development of the energy sector in line with the strategic vision will contribute to materializing the concept of sustainable development of national economy. Envisaged actions will boost the implementation of a new economic paradigm based on ,,investment-exports" relying on the country's industrial development process, will result in a reduced poverty level as a consequence of increasing population access to energy resources, as well as a reduction of dependency on imports of energy resources and strengthened energy security. Increasing energy efficiency will have a direct influence on many sectors of national economy, especially those directly related to utilization of energy in production, as well as to consumption in households and public institutions. Currently, the intermediate production in the energy and transport sectors amounts over MDL 17 billion. The planned gradual increase of energy efficiency by up to 10% would mean that more goods could be produced with the same amount of energy, or that the same domestic product could be obtained with less energy, which equals fewer costs. Annual savings by 2020 will account for approximately MDL 830 million in current prices. These savings can be channeled towards new investment in different proportions, depending on the sector. A modest estimate suggests that, as a result of new investment, the annual GDP growth rate over medium and long term will be higher by at least 0.2% compared to the base case scenario, only on account of savings achieved. 46 SPECIFIC OBJECTIVES Monitoring indicator 2015 2020 Energy Security Energy interconnections * electricity lines, km 139 * natural gas pipelines, km 40 Stimulating the use of energy produced from renewable energy 10 20 sources in the total domestic consumption, % Ensuring the share of bio-fuels in the total of fuels used, % 4 10 Increasing the domestic production capacity for electricity, MW 800 Ensuring the share of annual electricity production from renewable 10 energy sources, % Energy Efficiency Reducing energy intensity, % 10 Reducing electricity losses in transport and distribution networks, % 13 11 Reducing natural gas losses in transport and distribution networks, % 20 39 Reducing heating losses in transport and distribution networks, % 2 5 Reducing greenhouse gas emissions (compared to 1990), % 25 Reducing energy consumption in buildings, % 10 Share of renovated public buildings, % 10 47 TABLES AND FIGURES FIGURE 14. DYNAMICS OF ELECTRICITY GENERATION AND PROCUREMENT IN REPUBLIC OF MOLDOVA (RIGHT BANK OF NISTRU), KW MILLION 5000 4500 - 4000 - 3500- - 3000- - 2500 -- --Procurement 2000- - --Production 1500- 1000 - - - - - 500 - - 50 - --- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 FIGURE 15. DYNAMICS OF LOSSES RECORDED BY ELECTRICITY DISTRIBUTORS IN REPUBLIC OF MOLDOVA 25 20 15 ________ -RED Nord --- RED Nord-Vest 10 RED Union Fenosa 5 0 - - - - - --- 2005 2006 2007 2008 2009 2010 48 FIGURE 16. DYNAMICS OF HEATING PRODUCTION IN REPUBLIC OF MOLDOVA, GCAL THOUSAND 4000 3500 3000 -- -- - - 2500 2000 -- Heating plants 1500 *CHPs 1000 0 - - FIGURE 17. DYNAMICS OF HEATING LOSSES IN REPUBLIC OF MOLDOVA 25 20 21 18,3 1 15 A t16,1 16,31 16 14,8 14,6 14,1 10 -4.Lo sse s, % 0 49 TABLE 5. INDICATORS ON ENERGY RESOURCE CONSUMPTION AND ENERGY INTENSITY 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Domestic consumption of 2479 2701 2826 3065 3257 3242 3090 3128 2960 3157 energy resources, thousand tons coal equivalent (c.e.) Electricity consumption - 2206 2449 2527 2634 2921 3215 3364 3428 3378 3488 total, million kWh Energy intensity of industrial 0.238 0.214 0.177 0.174 0.157 0.145 0.118 0.104 0.131 0.112 production, tons e.c./MDL 1000 Electricity intensity of 0.325 0.300 0.290 0.249 0.202 0.182 0.154 0.135 0.175 0.146 industrial production, kWh/MDL 1 Average annual energy 0.683 0.746 0.782 0.851 0.905 0.904 0.864 0.876 0.831 0.886 consumption per capita, tons e.c./person Average annual electricity 934 1044 1282 1216 1166 1136 1127 1137 1115 1152 consumption per capita, kWh/person GDP per 1 kg e.c. domestic 7.69 8.35 9.77 10.45 11.56 13.80 17.29 20.12 20.42 22.76 consumption, MDL GDP per 1 kWh electricity 8.64 9.21 10.93 12.16 12.89 13.92 15.88 18.36 17.89 20.60 consumption, MDL GDP energy intensity, tons - 0.12 0.10 0.10 0.09 0.07 0.06 0.05 0.05 0.04 e.c./1000 lei PIB TABLE 6. DYNAMICS OF TERMOCOM JSC DEBTS Company Debt frozen as Current debt, MDL million /% payments per Plan 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Procedure, MDL million S.A. CET-1 MDL mil. 158.1 0 0 0 0 0 60.0 132.3 145.1 37.3 374.7 % 100 100 100 100 100 59.9 0 0 72.5 S.A. CET-2 MDL mil. 458.7 125.7 106.1 89.2 97.4 81.9 79.2 156.1 250.2 267.5 1253.3 % 17.0 29.2 29.8 31.9 42.7 69.5 60.9 48.6 47.1 50 TABLE 7. DYNAMICS OF NATURAL GAS VOLUME PROCURED AND DELIVERED TO CONSUMERS IN REPUBLIC OF MOLDOVA Indicator 2005 2006 2007 2008 2009 2010 Volume of natural gas procured, 1418.6 1418.2 1305.4 1226.9 1126.3 1187.8 million m3/MDL million 1364.9 2473.3 2727.3 3007.6 3288.4 3674.0 Average price of natural gas, 76.1 133.4 172.9 232.3 263.9 250.1 USD/1000 M3/ MDL/1000 m' 962 1744 2089 2451 2920 3093 Volume of delivered gas - total, 1315.0 1322.0 1208.8 1130.8 1030.0 1089.8 million m3/MDL million 1555.2 2440.5 3148.3 3603.4 3622.3 4362.4 Average price of delivered natural gas, 1183 1846 2604 3187 3517 4003 MDL/1000 m' TABLE 8. AVAILABLE TECHNICAL POTENTIAL OF THE MAIN TYPES OF RENEWABLE ENERGY SOURCES (RES) Type of RES Technical potential PJ Million tons equivalent of petroleum Solar 50.4 1.2 Wind 29.4 0.7 Hydro 12.1 0.3 Biomass Agricultural waste 7.5 Firewood 4.3 Waste from wood 4.7 processing, rape Biogas 2.9 Bio-fuel 2.1 Total biomass 21.5 0.5 Total RES potential 113.4 2.7 Sources of energy with low heating, > 80.0 > 1.9 including geothermal, potential 51 PENSION SYSTEM: EQUITABLE AND SUSTAINABLE Ensuring an equitable pension system based on a wage replacement rate that ensures a decent living for citizens is the main focus of this priority and the reason for having it in the vision of the authorities of Republic of Moldova in 2020. At the same time, the fiscal burden associated with the contributions to the state social insurance budget the gap between pension amounts for different categories of pensioners, influence of demographic trends - population migration and ageing - all of them have a sizeable impact on national economy and on its development rates. SITUATION ANALYSIS The public social insurance system is an integral part of the state social protection system, with the main objective of providing cash benefits to insured persons who are unable to obtain wage revenues due to certain risks (ageing, temporary or permanent lack of working capacity, maternity, unemployment, etc.) and is based on the collection of social insurance contributions from employers and from insured persons and distribution of benefits to beneficiaries. The pension system in Republic of Moldova operates based on the pay-as-you-go scheme, which consumes 8.8% of GDP. In 2010, 69.6% of the working population was contributing to the social security system, and pensions were paid for 84.7% of citizens who have reached the retirement age, i.e. a total of 460,500 people, or 13% of the total population. Thus, the pension system has a significant role in ensuring a decent standard of living for the population. In 2011, expenditures for payment of pensions were 67.8% of the total social security budget. The pension system currently faces the following challenges: SMALL QUANTUM OF BENEFITS AND LOW REPLACEMENT RATE The quantum of the average pension for retirement age was only 70.6% of the subsistence minimum for pensioners in 2010. Over 92% of the total retirement-age pensioners received pension amounts lower than the subsistence minimum for pensioners. The replacement rate or, in other words, the ratio between the average retirement-age pension and average salary recorded in the economy, is only 28.2%, while the European Code of Social Security establishes its recommended value at 40%. Moreover, a modeling of the local pension system over long term shows that, under current conditions of the system, the replacement rate will decline further to 23% in 2020, down to a low level of 14% around late 2040. Under these circumstances, the pressure on state to increase pensions grows dramatically, which will lead to a destabilization of the pension system. A reduction in the replacement rate is caused by two factors: (i) pension indexation method and (ii) non-updating (non-indexation) of income insured in the past to determine the initial pension. 52 The pension indexation coefficient is the average of annual growth of the consumer price index and annual growth of the average wage for the previous year. CPI growth usually records lower growth rates than the average wage, which leads to a reduction of the replacement rate. This method of indexation is in line with international practices, while the non-indexation of income insured in the past is a practice without precedent. The amount of pensions in the local pension system is calculated differently for periods before and after 1999. The pension part for the period of activity until 1999 is calculated so that nominal wages are updated together with wage growth until the year preceding the year of retirement. The pension part after 1999 is calculated based on the average insured income without updates, based on wage/price evolution in this period. Non- indexation of insured income reduces replacement rates, resulting in major differences between pensioners. The unbalanced pension formula in itself creates differences between pensioners whose pension amount was calculated "on old manner" and those whose amount was calculated "on new manner". SMALL NUMBER OF CONTRIBUTORS AND REDUCTION OF THE RATIO BETWEEN THE NUMBER OF CONTRIBUTORS AND PENSIONERS The coverage of the pension system and the number of insured persons is decreasing. The number of active population fell during 2011-2010 from 1.6167 million to 1.2354 million, and the number of employed persons from 1,499,000 thousand to 1,143,400. Thus, the number of taxpayers in the public social insurance system has fallen to about 860,000 in 2010. This is mainly due to population emigration. According to statistics, 311,000 people work outside Republic of Moldova. In this context, we could mention the informal employment phenomenon. According to estimates, in the second quarter of 2011 the number of informally employed people was 406,900 persons. On the other hand, the number of pensioners of all categories has remained relatively stable, falling by about 4.1% compared to 2001, accounting 627,100 persons on January 1, 2011. Thus, the ratio between active population and pensioners of all categories is 2:1, and the ratio between working population and pensioners is 1.8:1. It should be noted in this context that it is necessary to maintain the ratio between number of contributors and number of pensioners at around 4:1 - 5:1 for the stable operation of the pay-as-you-go pension systems. POPULATION AGEING Further development of the public pension system will worsen due to demographic trends. The ratio of population aged over 60 years to the total population was 14.4% in 2010 compared to 13.6% in 2000. Among the persons 60 years of age and beyond women prevail, with a share of 16.8% of the total population, the share of men being 11.8%. The ageing process is more pronounced in rural areas, where the share of the elderly over 60 years is 15.2% of the total population compared to 13.2% in urban areas. According to international practice, a population is considered "ageing" when the ratio of elderly exceeds 12%. 53 According to the pessimistic scenarios of demographic projections, the number of population could shrink by up to one million inhabitants by 2050. Simultaneously with declining birth rates, working-age population (15-59 years) will decrease steadily and population ageing will aggravate. Thus, by 2050, the share of working-age population will decrease, depending on the scenario, by about 11 to 16 percentage points from current indicators, from 69.2% down to 57.9%. However, it is not the decrease in the number of population that is the most worrying development, it's the developments associated with the continuous decline of the age structure, largely due to the process of population ageing. Compared to 2001, the share of young population in 2010 was lower (corresponding to 0-15 years of age), from 24.8% to 17.8% of the total population, and the share of population over 57/62 years of age from 14.4% to 15.5% of the total number of population. The share of people over the current retirement age will increase from 15.2% to 31.5% in 2050. The increase in the share of elderly population will create an increasing pressure on social insurance systems. DIFFERENT RETIREMENT AGE The current pension system sets the retirement age at 57 years for women and 62 years for men. The minimum insurance period, i.e. the mandatory payment of social insurance contributions, is at least 15 years for a partial pension or at least 30 years for women and 30.5 years for men for a full pension. According to current legislation, the total number of work history required for an old-age pension will be extended to 35 years by 2020. Compared to other countries in Central and Eastern Europe, the retirement age in Republic of Moldova is at the lower limit for men and below the minimum limit for women. On the other hand, life expectancy in Republic of Moldova is also lower compared to those countries. However, most countries in Central and Eastern Europe plan to increase the retirement age in the next ten years, specifically by equalizing the retirement age for women and men. Life expectancy is higher for women than men in all countries of Central and Eastern Europe, including Moldova. Because of this reason, as well as fact that the retirement age in the Republic of Moldova for women is lower than for men, we find significant differences in the national retirement system between the number of women and of men benefitting from pensions and between the size of their pensions. Thus, in 2010, the average number of years worked registered for retirement pay was 32.5 years for women and 37.5 for men, and the average old-age pension for women was MDL 797.1 and MDL 937.8 for men because the size of the pension depends directly on the number of years worked and the level of state social insurance contributions. LOW LEVEL OF INSURED INCOME OF CONTRIBUTORS The size of the pension depends directly on the incomes of active and working population through paid social insurance contributions. According to the National Social 54 Insurance House, the average monthly insured salary of people employed through individual contracts was about MDL 2,133 in 2010. Another Moldovan reality is provision of salaries under the table. Thus, reported wages of insured persons being small, low level of pensions is a direct consequence of this fact. At the same time, there are some discrepancies in relation to salaries by gender (in 2010, the average salary of women was 76% of men's salary). In the end, existing salary discrepancies contribute to a conservation of the low level of pension savings, which influences further directly their quantum, which affects the welfare of women and of men. FINANCIAL NON-SUSTAINABILITY OF THE PENSION SYSTEM The social insurance system has been facing a budget deficit since 2005, which has increased gradually from MDL 1.74 million to MDL 87.33 million in 2007. After a period of three years, 2008 the state social insurance budget reports showed a surplus of MDL 47.7 million. However, the situation changed in 2009 and 2010, when the state social insurance budget recorded again a budget deficit of MDL 25.55 million and MDL 213.3 million respectively. The deficit in previous years was covered from the balance of funds on National Social Insurance House bank accounts. In 2009, the budget deficit was covered from means in the reserve fund of the state social insurance budget and partially from state budget means. Starting in 2010, the budget deficit is covered from the state budget. Long-term modeling indicates that, if current conditions remain, the system will register a deficit in the next ten years and a surplus in the long run. The pension fund surplus in the long run is caused only by the considerable reduction of the replacement rate. UNFAIR REDISTRIBUTION OF FUNDS Moldovan legislation stipulates privileged pension terms for certain categories of citizens: judges, prosecutors, civil servants, MPs, members of government, locally elected officials, and customs employees. The difference between these terms and general conditions for old-age pensions consists in lower retirement age and lower required number of years worked. The stated objective of such privileges is for the state to reward the special merits of these categories. But in the transition process to a market economy these principles lose their relevance. The average pension for these categories, in the case of Government members, about 8 times higher than the average old-age pension set under general terms, but in the case of civil servants - 2.3 times higher. In order to respect the basic principles of the public social insurance system, currently first steps are being undertaken to unify the pension system, which seek to ensure that all contributors to the social insurance system benefit from the right to receive an old- age pension based on general conditions. The total number of privileged pension beneficiaries was 7,311 persons in 2010 or approximately 1.1% of the total number of pension beneficiaries. The pension expenditure for these categories reached MDL 116.49 million or 2% of total expenditure for payment of pensions in 2010. 55 However, out of the total number of beneficiaries of social insurance and state pensions, only about 152,400 are employed in the national economy. Current legislation does not provide for a re-calculation of pensions for people who continue to work. So, although they continue to pay social insurance contributions, this does not influence the amount of their pension in any way, the means being used to cover other social risks, such as benefits for temporary loss of working capacity. LOW ATTRACTIVENESS OF THE PENSION SYSTEM The social insurance system faces a credibility problem of population, mainly due to the low level of pensions and insufficient information provided to the population on the retirement system. As a result, people continue to avoid paying contributions based on their real wages, which further jeopardizes the proper operation of the pension system. UNDERDEVELOPED OPTIONAL PRIVATE PENSION FUNDS AND NON-EXISTENCE OF MANDATORY PRIVATE PENSION FUNDS The social insurance system is the only way to protect an individual in case of social insurance risks, including for age limit. In 1999, Moldova adopted the legislative framework on non-state pension funds, which represents the 3rd pillar of a multi-pillar pension system or optional pension systems according to the World Bank's classification. However, the private pension system in Republic of Moldova is virtually non-existent - two private pension funds are registered, but they do not have any significant activity. The factors behind this stagnation are, on the one hand, lack of interest shown by the population (low level of incomes that do not allow to allocate a part of wages to these private funds) and, on the other hand, insufficient incentives for employers and for individuals contributing to these funds. In addition, the legal framework required for the operation of mandatory private pension funds, or second pillar, is non-existent so far. SOCIAL SECURITY GUARANTEES FOR MIGRANT WORKERS Given the increase in labor mobility between countries and the migration of working- age population, the optimization of social insurance systems has become an important component of the social policy promoted by the state. The negative effects of migration are long-term and usually are felt either when migrant workers and their families who worked a period abroad are returning back or are displaced in other states, in both cases these persons having no social insurance entitlements. Under these conditions, migrant workers and their family members are often disadvantaged economically and socially in comparison with the citizens of that country, being deprived of the right to social security, including right to pension. Hence, the migration processes have led to the urgent need to conclude bilateral social insurance agreements with the main host countries for migrant workers. STRATEGIC VISION A fair and sustainable pension system, ensuring a decent living after retirement to all categories of population, men and women alike, is indispensable for social cohesion. 56 The current inadequate level of pensions in Republic of Moldova and its further downward trend generate an alarming growth of pressure for ad hoc pension increases, threatening the viability of the pension system and, implicitly, even the economic development potential in the "without reforms" scenario.. The funding of any pension increases from outside the pension system reduces the chances of success of other reforms, including those of other development priorities. Thus, the pension reform will primarily minimize the risk of these adverse effects. The reform of the current pension system implies: A. Modernization of the existing pay-as-you-go pension system (pillar 1) by: * adjusting the pension system to principles of organization and operation of the public social insurance system and existing international standards; * improving the financial sustainability of the system by increasing and unifying conditions regarding the contribution period and retirement age, and accumulating financial means in the reserve fund of the state social insurance budget; * ensuring a closer link between paid state social insurance contributions and amount of pension set for insured persons; * undertaking complex measures to develop the labor market, increasing labor remuneration and improving the demographic situation. B. Reviewing timeliness for cumulative pension system implementation (pillar 2), within which social insurance contributions are invested instead of being spent immediately for payment of benefits to current pensioners. An opportunity study will be developed by the end of 2015. At the same time, the introduction of a cumulative pension system implies preparation measures, including for the modernization of the existing pay-as-you-go pension system (pillar 1) and development of the financial market. EXPECTED IMPACT The reform of the pension system will contribute to a reduction in poverty rate. Although poverty rate evolution is influenced by a multitude of factors, we can say that a more rapid growth of the pension quantum due to pension system reform will reduce the absolute poverty rate of pensioners in a higher proportion than under current conditions of the pension system. Hence, the net impact of the reform estimates that by 2020 the share of pensioners below the absolute poverty line will decrease by 2 p.p. over the scenario "without reforms". At the same time, a sustainable and attractive pension system will have positive repercussions on the national economy, reducing the extent of unwanted phenomena, such as salaries paid under the table, shadow economy, etc. 57 SPECIFIC OBJECTIVES Monitoring indicator 2010 2015 2020 Minimum level of rate of replacement of salaries with pensions, % 25 Increasing the ratio between average retirement pension and subsistence 70.6 75 85 minimum for pensioners, % Reducing the absolute poverty rate of pensioners, % 28.1 26 23 Reducing the ratio between the number of retired pensioners with pensions 92 89 84 under the subsistence minimum for pensioners and the total number of retired pensioners, % Reducing the state social insurance budget deficit, % (compared to an average 0.5 0 of 1% during 2006-2010) Increasing the number of states that have concluded social security 4 8 12 agreements with Republic of Moldova 58 JUSTICE: RESPONSIBLE AND INCORRUPTIBLE Demand for justice is a priority for the country's economic and social development. An eloquent indicator that qualifies as alarming the situation in this sector is the increasing trend in citizens' lack of trust in justice. According to the Public Opinion Barometer, 2/3 of citizens do not trust the justice system and their number is increasing. This has serious spillovers for the business environment, affecting implicitly economic development prospects and country citizens, whose rights must be ultimately safeguarded by the judiciary. Protection of human rights and fighting against corruption are global commitments that are in the permanent focus of authorities. Also, considering that the accomplishment of these commitments depends on a well- functioning justice system, this Strategy is focused on the reform of the court system. SITUATION ANALYSIS The perception of population regarding the performance of the judiciary is not a favorable one. According to the International Survey of Enterprises, carried out by the International Finance Corporation, only 31.9% of economic agents from Republic of Moldova consider that courts are reasonable, impartial and incorrupt, as compared to 38.9% of economic agents from Eastern Europe.14 The same source specifies that about 70% of economic agents from Republic of Moldova do not believe that courts would protect their property rights, and this affects negatively their intentions to invest. In the same vein, the satisfaction level with court services related to the organization of court trials reveals the following assessment: the courts got 3.91 points, courts of appeal - 3.76, and the Supreme Court of Justice - 3.62 out of maximum 5 pointss. Normally, the superior bodies should be more efficient in order to serve as an example for the lower-level bodies, situation which is not registered at the moment in the Republic of Moldova. From a statistical point of view, things do not look better. The productivity and efficiency of courts is falling: the number of remaining cases by the end of the year is increasing by 20% for criminal cases, by 50% for civil cases and by 150% for economic cases, while the total number of cases entering the system is decreasing (2009 versus 2007). In the same context, the number of judges increased from 380 in 2007 to 420 in 2009, but their monthly load decreased, accordingly, from 66.6 down to 58.6. The case settlement rate - an international efficiency indicator used to measure courts' performance, is also decreasing. The majority of unsolved cases is in economic courts (it actually doubled from 2,000 in 2007 to 5,200 in 2009), thus implying greater attention to changing the economic jurisdiction under the planned reform. This situation has following causes: 14 http://www.enterprisesurveys.orq/documents/EnterpriseSurveys/Reports/Moldova-2009.pdf 1s Decision of the Superior Council of Magistrates regarding the results of the survey on satisfaction level of the court services' beneficiaries, no. 271/12 dated September 17, 2009. Survey funded by USAID. 59 PROCEDURES AND OPERATIONAL EFFICIENCY The delays and postponements of court procedures became a rule in courts, registering an upward trend during 2006-2008. Thus, 61% of monitored court trials were postponed 16 by courts in Chisinau and 85% in the Southern-Eastern region of Republic of Moldova The postponed court trials imply damage for the economic agents and country economy, expressed in lost gross national revenue due to absence from work of about MDL 390 million annually (Table 9). Only 60% of courts use audio-video recording technologies for court trials (although all courts have been equipped with such devices) and about 25% publish court decisions on their web pages. Hence, a study conducted, in June 2011, by the USAID Good Governance Program found that 30 courts (of the total number of 52 courts) do not post entirely court decisions and lists of court trials - which is important information for the public. Different court decisions continue to be issued for similar cases, thus disturbing business environment security and generating unequal opportunities. Economic agents consider the lack of judicial security and predictability, as well as that of public policies, a critical constraint to development. The issue of judicial unpredictability will get exacerbated along the advancement of the EU legislation absorption process - commitment assumed in the context of European integration, as shown by the experiences of other countries that have recently joined the EU. The principles of market economy inspired by the EU law, substance of the free exchange and internal market of the EU are not familiar to the professionals in the area, thus affecting de facto implementation of the EU legislation. The impact of judicial remedies' duration and lack of uniformity for national jurisprudence are reflected in the number of cases with systematic property rights' breach solved by the European Court of Human Rights. Hence, during 1995-2010, 40% of the total number of breaches found by the European Court of Human Rights refers to property rights in Republic of Moldova. INTEGRITY OF THE JUDICIARY SYSTEM Disciplinary procedures in the judicial system are rather formal and with no visible impact on its performance. During 2001-2008, a number of 44 disciplinary sanctions were applied to judges. In 2010, disciplinary sanctions were applied to 10 judges. Although a certain functioning of the disciplinary system may be attested, the number of sanctions is immeasurable in relation to breaches reported by the national and 16 Report on OSCE Program on monitoring judiciary processes in the Republic of Moldova, 2009. 60 international reports in the area.'7 A similar situation is perceived in relation to ethics and discipline among all legal professions. Corruption erodes the rule of law and affects the state's reputation and trust. Over 20 thousand persons confessed that they bribed judges in 2009; every judge has requested or accepted on average about 4 bribes per month . Approximately 40% of population states that it is very likely for a person to solve a problem by bribing the judge. A comparative analysis with other countries in the region, based on the relative number of people that were asked for a bribe, ranked in 2008 the Republic of Moldova among the countries with populations most vulnerable to corruption19 (Figure 1). The corruptible nature of the judicial system is implicitly confirmed by the Justice Independency Indicator determined by Freedom House at 4.5 (1 being the highest independency level, 7- being the lowest one). In the same context, almost 30% of practitioners attest to know situations when decisions were taken based on attempts of direct and deliberate influence20. At the same time, it is also alarming that 69% of judges consider that their legal status does not ensure their independence, and 47% of judges perceive performance indicators to be useful in ensuring the system's independence. One in five persons in Republic of Moldova admits that he/she was asked to offer a bribe. 23% said they offered bribes in social activity areas: health, police, customs, education, local public administration, and private sector. The role of justice in fighting corruption is illustrated by the share of cases solved in court out of the total number of persons under accusation21 (Figure 19). Corruption affects severely the vulnerable segments. Being harshly influenced by the economic crisis, people with small incomes are most dependent on public services and least able to pay additional costs related to bribes and frauds. Affecting property rights, corruption leaves investors without any compensation for assumed risks and increases the uncertainty regarding potential dividends. Thus, their motivation to invest reduces, being reflected in the country's economic development. PROTECTION OF HUMAN RIGHTS IN CRIMINAL COURT AND PROTECTION OF VULNERABLE POPULATION Observance of human rights, especially in criminal justice, remains to be an aspiration. Detention conditions (re-socialization system, subculture, lack of jobs when getting out of penitentiaries) generates an increasing number of relapses (60% in 2010), exposing communities to insecurity and tax payers to triple costs, in cases when the claims regarding detention conditions go to the European Court of Human Rights. At the same 17 E.g., reports of the OSCE Mission in the Republic of Moldova. Trial Monitoring Reports, 2006, 2007 and Final Report 2009. 18 Analytical Report on Victimization. Soros Foundation Moldova, 2010 19 "Human Development Report", PNUD, 2010 20 "Judiciary Integrity and Resistance to Corruption", Transparency International, 2010. 21 Evaluation Report, GRECO, 2010 61 time, according to experts' opinion22, the justice system services for vulnerable persons (children, elderly, minorities, victims) needs systemic interventions. The manner of collecting specific data on vulnerable groups and informing the decision making process, promptness of reaction of authorities, including the judiciary, specialization of interventions for vulnerable persons through specific training, restorative role of justice - all these remain to be just recommendations. The situation attested in the justice sector explains the extremely low reporting rate from women- victims and, as a consequence, the small number of investigated cases, when one in three women is subjected to domestic violence, and Moldovan women are more susceptible than men to become victims of offences. STRATEGIC VISION Justice to serve the citizen - this vision is shared by all actors in the area and represents the qualitative change needed for the reform approach in the justice sector. As a result of reforms to be implemented in the sector, justice seekers will benefit from impartial, qualitative, accountable and timely justice, with zero tolerance to corruption, for the country's sustainable development, and the justice system will offer efficient remedies for an inclusive economic development, for social justice and human security. In the context of these priorities, the vision of authorities for 2020 is in line with the specific objectives reflected in the Justice Sector Reform Strategy for 2011-2016: * strengthening the independence, accountability, impartiality, efficiency, and transparency of the court system; * increasing the efficiency of the pre-judicial investigation process to the effect of guaranteeing the observance of human rights, ensuring the security of each person, and reducing the level of crime; * improving the institutional framework and processes that ensure an effective access to justice: effective legal counseling, examination of cases and execution of judicial decisions within a reasonable timeframe, modernization of the statute of some legal professions related to the justice system; * promoting and implementing the principle of zero tolerance for corruption phenomena in justice; * implementing certain measures, whereby the justice sector would contribute to creating a favorable environment for sustainable economic development; * ensuring the effective observance of human rights in legal practices and policies; * coordinating, establishing and delimitating responsibilities and tasks of main actors in the justice sector, as well as ensuring cross-sectoral dialogue. The plenary implementation of justice sector reform is crucial with a view to implementing the vision of authorities. The broader horizon provided for by present 22 Victimization Study, Soros Foundation, 2010 62 Strategy assumes that the effects of this reform's implementation will be felt by the entire society. EXPECTED IMPACT It is difficult to quantify the manner in which more efficient justice may influence economic development, because it is composed of multiple individual benefits, which complement each other and contribute to a generalized perception about justice, which may favor or may disfavor investment. When referring only to a reduction in corruption, very modest estimates for 2011 assess the volume of bribes paid from the enterprises' revenues to be about MDL 390 million. The lower level of corruption would result in investing a part of this money for productive purposes, thus generating an annual GDP growth by at least 0.1%. Aside from the purely numerical effect on domestic investment, the country's attractiveness will increase for foreign investment and associated new technologies, thus inducing important collateral effects. The reduced number of postponed court trials will have similar effects on the costs incurred by citizens and by business environment, as well as indirectly on the investment climate and country's attractiveness. SPECIFIC OBJECTIVES Monitoring indicators 2010 2015 2020 Share of citizens that show lack of trust in justice, % 67 60 40 Improved justice independence index Freedom House 4.5 4 3 Share of judicial cases examined with delays, % 60 30 10 Share of courts that observe norms and decisional transparency 60 100 100 (publish court decisions and have audio-video records of court sessions), % Share of litigations solved via alternative ways (extra-judicial) 0 10 25 Number of corruption victims, % 20 15 10 Share of economic agents which believe that courts are reasonable, 31.9 40 60 impartial and non-corrupt, % 63 TABLES AND FIGURES TABLE 9. ESTIMATED ECONOMIC IMPACT OF DELAYS AND POSTPONEMENTS IN COURTS Statistical Indicator Economic calculations Number of delays per year in the 23 576,213 system57,1 Average number of people 7 Average monthly salary in the participating in a session economy per working hour, MDL 20 Time spent by a participant during the 4 Total "lost" economic effect by a day when the case was postponed, participant per day, MDL 95 hours Average monthly salary in the 3,500 Total economic effect per delayed economy (2010), lei session, MDL 668 Average transport expenses of a 15 Total losses in the system without participant (2010), MDL intervention, MDL 385,036,338 FIGURE 18. VICTIMS OF CORRUPTION, % POPULATION IN BRIBE SITUATIONS, 2008 Romania 36 Moldova 34 Kirgizstan 24 Ukraine 23 Latvia 22 Lithuania 21 Armenia 17 Estonia Georgia 2 0 10 20 30 40 23 Estimates were made based on the rate of postponed sessions, identified by the OSCE report "Monitoring of court sessions ", 2009, which concluded that 61% of 7037 monitored court sessions in Chiinlu were postponed. Estimates include all courts and appeal courts and the total number of cases examined by these in 2009. 64 FIGURE 19. SHARE OF CASES SOLVED IN COURT OF THE TOTAL NUMBER OF PERSONS UNDER ACCUSATION 1000 897 900 U Persons under 800 _ accusation 700 - 600 _ Persons 0 deferred to 500 386 394 justice 400 274 300 Condemned 200 158 persons 100 0 2007 2008 2009 6 months 2010 65 COORDINATION OF IMPLEMENTATION, MONITORING AND EVALUATION This strategy will lay the foundation for Republic of Moldova's long-term development and will ensure a platform for the management and coordination of reforms in seven priority areas that, alongside the Government's strategic documents and donor initiatives, cover the activity of all ministries and autonomous administrative authorities. Strategy coordination, monitoring and evaluation, as well as stakeholder functions are described below. INTEGRATED CYCLE OF PLANNING, MONITORING AND EVALUATION Republic of Moldova passes through a dynamic development process, during which development priorities are defined, with necessary actions planned for their implementation. Further, after accomplishment of established actions, the evaluation process of established tasks will be undertaken. Although the document envisages a period of nine years, starting in 2012 until 2020, the planning, allocation of resources, monitoring and reporting on accomplished actions will be performed annually. The scheme below describes this cycle: Planning and Prioritization Implementation, Monitoring & Reporting 1-------------------------------------------------- Quarterly and annual reporting on accomplished actions I I I> I.. . . . . . . . . . . . . . . . . . . . . . . . Consolidated Action Plan Consolidated Action (Implementation) Plan CL Actions and sub-actions 10 Technical Assistance (Implementation) MTBF - E Financing Annual Budget Programs A (Implementation) Annual reporting based on indicators 66 Thus, according to the scheme above, the management system of the National Development Strategy,,Moldova 2020" will have the following main features: * The Strategy will be implemented through an update of the existing Consolidated Action Plan, which includes in itself actions from the Government's Activity Program and other national and strategic planning documents. Consolidated Action Plan is a single framework for planning, monitoring and reporting for all central public administration institutions. Similarly, reporting on implementation of actions from the National Development Strategy ,,Moldova 2020" will be conducted based on the Consolidated Action Plan. To this effect, the State Chancellery has already implemented an online monitoring system of the Consolidated Action Plan; * The annual planning and reporting cycle will not only allow a permanent monitoring of Strategy implementation progress, but also the correction, when the case, of planned measures and activities. This is important because the Strategy is a long- term one, when changes can occur in the domestic and foreign environment, thus requiring some adjustments, but also in the context of implementing current and future European integration commitments, which have a direct link to Strategy priorities; * The implementation of many actions in the strategy will be impossible without amending the structure and level of funding. The Medium Term Budgetary Framework (MTBF) will be the framework through which Strategy actions requiring financing will be prioritized and financed. The general establishment of priorities in the Medium Term Budgetary Framework, development of sectoral expenditure plans and program-based budget planning - all these will have to take into account the priorities envisaged by the National Development Strategy ,,Moldova 2020". These documents will be progress assessment tools, since the main Strategy indicators will be reflected in program-based budgets and in sectoral expenditure plans. It will be the responsibility of the Ministry of Finance in collaboration with the State Chancellery to ensure this synchronization; * In order to know the Strategy implementation progress and to determine the necessity to adjust some established actions, the State Chancellery will conduct a mid-term evaluation of Strategy implementation. Depending on circumstances and on progress achieved, such an evaluation could be holistic, to include for example all seven priorities, or thematic - cover certain priorities or aspects. Such an approach is in line with the monitoring and evaluation mechanism of the ,,Europe 2020" Strategy. OPERATIONALIZATION PROCESS The ministerial subdivisions for analysis, monitoring and evaluation of public policies will have an important role in the Strategy's operationalization, ensuring that actions for its implementation are integrated in the annual strategic planning cycle. The results of activities were taken into account during the development, at the beginning of 2012, of the Medium Term Budgetary Framework for 2013-2015. This process will be repeated 67 annually and will offer to all stakeholders the possibility to express their views at any time of the implementation process. This approach is reflected in the diagram below: CONSOLIDATED ACTION PLAN Actions Subactions set in time administrationistituiosrepnilfothrimeetao. MTBF / LAW ON STATE BUDGET Objectives & indicators Programs Indicators As in the case of all actions from Consolidated Action Plan, activities identified for the implementation of this Strategy will be specific, set in time, with an indication of public administration institutions responsible for their implementation. In the context of the Medium Term Budgetary Framework for 2013-2015, both the State Chancellery and the Ministry of Finance will introduce a mechanism for comment analysis and formulation to the effect of ensuring the conformity of ministerial proposals for sectoral expenditure plans and program-based budgets with priorities revised in the Strategy and actions specified in the Consolidated Action Plan. An important aspect is to ensure the harmonization of indicators in the National Development Strategy ,,Moldova 2020", sectoral expenditure plans and program-based budgets. INTERRELATED ASPECTS Special attention will be paid during the operationalization and implementation process to interrelated aspects, namely gender, human rights, social inclusion, environmental dimensions, etc. In this sense, the mechanisms will be applied at three levels: * In the process of action formulation for the implementation of Strategy priorities the ministries will be instructed to use already existing techniques and methodologies with a view to ensuring that interrelated aspects and proposed measures and actions are reflected. If necessary, consultations with different support groups will be encouraged; 68 * The State Chancellery will facilitate the active use of the methodology for ex-ante evaluation of public policy impact in the formulation of actions for Strategy implementation. This methodology includes already the most relevant interrelated aspects. At the same time, public policy proposals developed with ex-ante methodology are useful instruments for the dialogue with the civil society; * Actions included for Strategy implementation will be directed not only at the primary removal of the barriers that suppress investment activity, but also to ensuring that these measures do not adversely affect many areas of public policy - health care, environmental protection, employment, social protection etc., but, on the contrary, to help maximize performance in these areas; * Upon submission of annual reports on implementation and in the intermediate evaluation process in particular, the State Chancellery will ensure the integration of interrelated aspects in reports. IMPLEMENTATION REPORTS Consultations regarding implementation at Government, at Parliament, at donor community, and at civil society levels will cross the entire Strategy implementation process as a red line. Monitoring and evaluation reports developed in the process will not only highlight the successful outcomes but will also identify challenges and obstacles, suggesting corrective actions. Hence, the reporting framework will not be static. The framework of indicators and measurement techniques will evolve depending on how the analysis of each of those seven priorities will evolve. These modifications will be considered regularly and will be integrated in the general monitoring and reporting framework. Strategy implementation will be accompanied by the development of reports specified below: * Quarterly progress reports - based on an online Consolidated Action Plan monitoring system managed by the State Chancellery. The ministries will submit quarterly information regarding progress in implementation of Consolidated Action Plan actions. Performance criteria for action accomplishment will be used to observe progress, such as: initiated, under implementation, completed, completed with delays, etc. Comparisons between ministries and priorities will also be possible. If necessary, the State Chancellery will develop narrative reports with presentations of main accomplishments and obstacles; * Annual implementation report - results of permanent (quarterly) monitoring will be presented in the annual report on Strategy implementation. Compared to quarterly reports that will reflect statistical data, the annual report will have an analytic nature. It will serve as a base in planning the next Consolidated Action Plan cycle and modeling the next Medium Term Budgetary Framework cycle. The reports will also include comments regarding indicators of each of the seven priorities envisaged in the Strategy; 69 * Thematic evaluation reports - developed on a needs basis. Very often unexpected challenges emerge, also caused by a constantly changing operating environment of the Government. Given the above, the State Chancellery will conduct thematic evaluations during implementation. The concrete aspects to be evaluated and time of evaluation will be identified during Strategy implementation; * Intermediate implementation report - upon completion of the first stage of Strategy implementation, after 2015, the State Chancellery will develop an intermediate evaluation report, which will include the results and impact of implementation, as well as an adjustment of final objectives based on progress made; * Final implementation report - upon completion of Strategy implementation, the State Chancellery will develop a final report on implementation results and impact. It will reflect the main accomplishments, as well as issues and future needs. IF necessary, the State Chancellery will use the results of external evaluations in preparing the final report. INSTITUTIONAL FRAMEWORK The following stakeholders will be involved in Strategy implementation: Reporting to Reporting to Parliament Parliament Government National Participation Council State Chancellery in collaboration with the Ministry of Finance Ministry Ministry Ministry Ministry Ministry Ministry Ministry responsible responsible responsible responsible responsible responsible responsible for the for the for the for the for the for the for the Education Roads Finance Business Energy Pension Justice priority priority priority priority priority System priority E Other institutions involved and stakeholders Government will have a supervision role in the Strategy implementation process, will review the progress made on its implementation, will guide the State Chancellery and 70 line ministries, and will approve reports before submitting them to the Parliament and stakeholders. The Government will ensure a maximum reflection of Strategy priorities in the future financing framework. State Chancellery is the main institution responsible for Strategy coordination, monitoring and evaluation. It will ensure the translation of priorities envisaged in the Strategy in the Consolidated Action Plan, regular submission by all line ministries and other institutions of information for the online monitoring system, and timely submission of progress reports to Parliament, Government, Strategic Planning Committee and National Participation Council, as well as to external stakeholders. Ministries responsible for priorities will ensure coordination and reporting in their areas of competency. Ministries will ensure the coordination of actions for accomplishment of priorities envisaged in the Consolidated Action Plan and their comprehensive nature, as well as presentation of financing needs in sectoral expenditure plans and in annual budgets of public authorities. Ministries will ensure that information regarding implementation progress and needs for assistance is presented to donor sector coordination groups. Parliament will review the Strategy implementation evaluation reports. The purpose of this reporting is to inform the legislative power of the progress made and existing issues. A permanent interaction between Government and Parliament is essential, particularly in the budget process. National Participation Council is an important platform in Strategy implementation, formed out of civil society representatives. It will also be consulted at the implementation stage through a review of monitoring and evaluation reports and through formulation of recommendations. Special importance will be attributed to the opinions and contributions of organizations working in interrelated areas, such as gender equality, human rights, environment protection and other. 71