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Results Briefs October 1, 2020

Changing the Development Paradigm in Moldova

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Technology education lesson in a school in Chisinau 

World Bank Moldova



Towards better productivity, private sector-led growth and improved services for citizens and firms.

Challenges

Among the poorest countries in Europe, Moldova has made significant progress in reducing poverty and promoting inclusive growth since the early 2000s. Policy reforms have deepened the path toward European integration, but many reforms that look good on paper have yet to be effectively implemented. A vulnerable political system, a polarized society, an adverse external environment, a skills mismatch in the labor market, and climate-related shocks are some of Moldova’s biggest economic challenges. Business confidence is low due to issues around transparency, accountability, and corruption, and the macroeconomic framework remains vulnerable. Large-scale out-migration, combined with decreasing fertility rates, has led to an alarming decline in the population and an increased share of elderly people, putting pressure on the pension system and limiting long-term competitiveness.

Approach

The partnership between Moldova and the World Bank Group (WBG) laid out in the Country Partnership Framework for 2018–21 supports Moldova’s transition to a new, more sustainable and inclusive development and growth model. The key goals are to improve the governance and quality of public services, enhance the business environment for private sector development and firm productivity, support the transformation of the energy and agriculture sectors, build the country’s crisis preparedness and early response system, and support human capital development and inclusive education.

Results

Jobs and Economic Transformation

The WBG is working to enhance the business environment, foster private sector development, increase the productivity of firms, and create decent jobs in Moldova.

Improving the business environment by reducing red tape and decreasing regulatory burdens is critical if private sector firms are to grow and create jobs. Between 2015 and 2019, key achievements included a reduction in the number of permitting documents from over 420 to 150 and inspection bodies from 58 to 18, and the creation of an online one-stop shop to secure permits. Today, businesses can obtain the 80 most burdensome business permits online, which has been particularly important during the COVID-19 restrictions. The 2019 Cost of Doing Business survey shows the significant impact of these reforms: the number of days to register a company has decreased from 14 in 2010 to four in 2019, and unofficial payments for licenses and permits have declined as have the costs of obtaining permits. These reforms have created massive savings for businesses, estimated at over US$17 million annually, through reduced compliance time, less interaction with government, and an improved business environment. 

To boost the micro, small, and medium enterprise (MSME) sector, which represents 97 percent of all businesses in Moldova, Bank-supported initiatives have focused on opening up new markets, promoting market links, and helping MSMEs access infrastructure, inputs, and business advice. This has included credit lines to exporters to create jobs and access new markets and matching grants for international quality certification, production upgrades, and business development. On the institutional side, critical steps have been made in preparing Moldova to be accepted by the European Union (EU) as an exporter country for specific products and in liberalizing the import of EU-registered fertilizers and seeds. One example of the impact of these initiatives is that each US$1 granted to beneficiaries for business advice has generated on average US$9 in new export sales. Since 2016, more than 1,200 jobs have been created in the export sector. In agriculture, over 1,000 business start-ups have been launched since 2003, helping create more than 5,600 new jobs, anchored in the Bank’s long-standing engagement in the sector. Between 2013 and 2020, farmers receiving grants and just-in-time business advice established more than 45,000 tons of post-harvesting capacity, and 32 productive alliances are now selling and exporting fresh produce at premium prices.

Service Governance and Digitization

Limited access, inefficiency, and the poor quality of public services in Moldova have contributed to social exclusion, persistent poverty, and vulnerability to shocks, especially in rural areas. The Bank has supported several interventions aimed at enhancing the efficiency of, and access to, key public services, including through the digitization of service provision. 

The country’s digital transformation started in 2010 with a comprehensive program of public administration technological modernization supported by the Bank. This partnership established the e-Governance Agency as an institution driving digitization, introduced the legal and regulatory framework for the digitization of public services, and created a robust, world-class ICT infrastructure for enhanced service delivery built on open governance principles. Several platforms, including MCloud, MConnect, MPay, MSign, and MPass, are now operational, and key public services are being re-engineered and digitized, resulting in increased citizen confidence in online services—the adoption index for electronic services developed with Bank support was over 75 percent in 2019. Digital services have been even more critical since the outbreak of the COVID pandemic, enabling uninterrupted access to key services for businesses and citizens.

Today, MConnect, which was launched in 2014 and is the government’s interoperability platform and the backbone of further public service modernization, allows multiple data exchange scenarios among the 53 connected public entities. In the first half of 2020 alone, more than 15 million data exchange transactions successfully took place using MConnect, averaging 500 transactions per day. Without MConnect, data exchanges would still have to rely on paper-based documents that require much more time and expense. Further, 76 public and private sector information systems have been integrated with the digital signature platform MSign, which was launched in 2013 with upgrades in 2019, enabling more than 1 million signatures per month. Citizens, businesses, and public sector employees can now use a digital signature to apply online for services, submit reports, and sign contracts and financial documents. Over 18 million transparent financial transactions took place through the government’s payment platform MPay between its launch in 2013 and the first half of 2020, totaling more than MDL 10 billion and averaging 7,000 transactions per day for more than 500 services. People and businesses no longer have to wait in line as they can pay their bills and public services from their homes and offices. In June 2020, MPay registered the highest number of transactions since its launching: more than 700,000. Some state institutions have completely eliminated paper in their service provision. Most digital public services can be paid today with any payment means available in the country, such as bank cards, online banking, electronic money, and cash. Costs for the collection of fees for public services decreased by almost six times, from about MDL 23 million in 2013 to about MDL 4 million in 2019.

Energy Sector Transformation

Moldova’s dependence on energy imports exposes it to energy security risks. Since the early 2000s, with the Bank’s support, Moldova has significantly reformed its energy sector to allow for cost-reflective pricing, independent regulation, and the promotion of efficient operations and investments. The Bank has supported rules-based and competitive electricity trading by introducing Romania as a new supply source and supporting private sector participation in electricity distribution.  

The Bank has also worked closely with the capital city Chisinau to modernize its District Heating (DH), thus improving the reliability and quality of DH services for end consumers and contributing to the improved operational efficiency and financial viability of Chisinau’s DH company, Termoelectrica. Between 2015 and 2020, through the installation of individual heat substations (306 in residential buildings and 181 in public, administrative, and social buildings), more than 45,000 residents and almost 80,000 public employees benefited from an improved heating and hot water supply at affordable prices. In the same period, 32 public institutions were reconnected to the DH system and began to use DH services, increasing Termoelectrica’s heat sales by 24,766 GCal/season and generating an additional US$1.7 million in revenues per heating season. The transformation of Termoelectrica into a viable company sets a good example for reforming other state-owned enterprises in Moldova. 

Crisis Response and the Resilience of the Health and Social Sectors

The Bank has maintained long-term engagement to support transformation, modernization, and efficiency gains in Moldova’s health and social sectors. The quality and efficiency of the hospital sector has been enhanced since 2015 through a reduction in the number of acute care beds in public hospitals to fewer than 10,000 from more than 12,000 originally and a shorter average length of stay for these beds from 7.6 to 6.6 days. A Hospital Performance Report Card was developed for 55 public hospitals and performance results were made available to the public online, promoting transparency and creating an environment conducive to effective public participation in health. The Bank has also supported enhancements to Moldova’s main means-tested social assistance program Ajutor Social. This included the integration of support previously provided on a categorical basis and the expansion of the program through a combination of policy changes and investments in capacity, while strengthening error and fraud detection systems.

Past and ongoing lending and advisory engagements allowed the Bank to mobilize a robust emergency COVID-19 response in 2020 and provide medical relief and social support to the most vulnerable, while enhancing the health system’s response to the coronavirus outbreak, all in record time. As part of the Bank-supported emergency response, the Ajutor Social program provided much-needed cash transfers to about 72,000 poor households. During the emergency period, program coverage has increased from 4 percent at the beginning of the year to almost 5 percent today. At the same time, the benefit size for families with a significant depth of poverty (i.e., families with many children) was permanently strengthened, thus increasing it by 85 percent on average. The pandemic emergency project has also provided immediate support to strengthening the technical capacity of health facilities to detect and handle COVID-19 cases while minimizing the risk of infection for health care staff. The Bank has facilitated the purchase of various personal protective equipment, lab reagents for COVID diagnosis, vehicles for sample transportation, and testing kits, lab supplies, and medical devices for COVID diagnosis, as well as equipment for intensive care unit beds and pulse oximetry units or sensors.

Human Capital and Inclusive Education

In Moldova, a child born today can expect to achieve only 58 percent of the productivity of a fully educated adult in optimal health. This is a slight improvement from 56 percent a decade ago, driven, to a large extent, by advancements in the education sector. Bank-supported interventions aim to provide solutions for challenges in education quality, relevance, and efficiency and to prioritize access to quality education for disadvantaged groups, namely children with disabilities.

Between 2015 and 2018, 20 hub-schools across Moldova were renovated and supplied with furniture, learning aids, and software to accommodate the diverse needs of children with disabilities and to facilitate their learning, which enabled the integration of over 200 students with disabilities and/or special needs into mainstream schools. These efforts were complemented by the development of three on-the-job training modules in inclusive, child-centered education for teachers. One hundred schools were supplied with equipment and learning materials for students with disabilities and/or special needs. In addition, during 2015–20, 12 mainstream hub-schools were renovated in line with new quality standards and are now offering better quality and learning conditions to more than 6,000 students. The training of more than 2,700 staff of the National Agency for Quality Assurance in Education and 600 primary teachers in the same period has consolidated the quality gains.

Tools to enhance social accountability interventions are being applied in 100 beneficiary schools, creating opportunities for students and parents to contribute to improved decision making for their schools. An online interactive platform launched in 2014 includes the profiles of 1,275 education institutions across the country, with detailed information on individual school performance and interactive maps that allow a comparison with the average performance by district/municipality and at the national level to inform decision making.

Climate Adaptation and Resilience

The Bank supported important climate adaptation measures between 2015 and 2019, for example, by expanding the use of sustainable landscape management practices on close to 57,000 hectares. The renovation of selected schools in the same period led to a 40 percent reduction in school energy consumption. Construction of a new DH pumping station in the capital city, accompanied by the modernization of three other large pumping stations and rehabilitation of 14.4 km of pipelines between 2015 and 2010, is estimated to have reduced CO2 emissions by 8,200 tons/year.

During 2018–19, Bank-funded advisory work supported the development of the National Climate Services Framework and internationally compatible urban rescue standards and methodology, which are ready to be operationalized and adopted by the authorities. The work of the International Finance Corporation (IFC) also had a climate dimension: by developing sustainable agribusiness value chains, IFC increased downstream value-added and reduced commercial vulnerability to climate events. The Bank continues to support climate services through advisory projects that assist hydro meteorological services in the improved production, delivery, and effective use of hydro meteorological and climate-related information.

Bank Group Contribution

Between 2018 and 2020, the Bank delivered lending projects totaling US$332.3 million (of which, US$227.3 million were from the International Development Association or IDA), including the Emergency COVID-19 Response Project. The Bank’s policy engagements during this period helped reduce fiscal risks by reforming the pension system, mobilized more revenue by raising tax rates on tobacco, pre-empted potential conflicts of interest of high-level public officials, made the financial information of state-owned enterprises and municipal enterprises more reliable, and supported the adoption of a new bank governance framework. A solid advisory services and analytics program of 33 activities was also delivered, including a flagship Country Economic Memorandum on Growth Drivers Policy Note for the incoming government, a series of energy sector reviews, a water sector diagnostic, financial sector advice, and skills and social assistance/social protection work.

These have helped to maintain the policy dialogue, advocated for important structural reforms, and shaped the pipeline. IFC’s committed portfolio is US$5.4 million, and investments have spanned agribusiness, manufacturing, and infrastructure (municipal and telecommunications). IFC has mainly focused on the implementation of the Investment Climate Reform Project, conducted jointly with the Bank, an excellent example of the strong collaboration between IFC and the Bank that has been instrumental in improving the business enabling environment since 2016, as described above. The Multilateral Investment Guarantee Agency has one operation, with an outstanding exposure of US$20 million in support of Moldova’s fragile financial system. 

Partners

The WBG has engaged in joint advocacy with the International Monetary Fund (IMF), EU, United States, and other development partners on critical issues, such as the 2018 tax and capital amnesty package that averted the risk of illicit financial flows from entering the Moldovan financial system and undermining anti-corruption efforts. This collaboration has been equally crucial to the effective mobilization of an emergency response in the wake of the COVID-19 crisis.

The Bank continues to work closely with the IMF on the macro, fiscal, and social dimensions, and with the United Nations and the World Health Organization on the mobilization of emergency health and social support. Swiss-funded technical assistance on health system financing, governance, and service delivery is amplifying health sector modernization efforts.

In the power sector, alongside the EU, the European Bank for Reconstruction and Development (EBRD), and the European Investment Bank, the Bank is financing Moldova’s power system interconnection with that of Romania, while Swedish-funded advice on DH optimization and gas supply options underpins the Bank’s DH engagements.

The EU-funded Eastern Partnership-Forest Program provides advice and technical assistance on environmental protection, sustainable production and trade in forest products, and sustainable financing for the sector. In partnership with the Global Partnership for Social Accountability, the Bank has supported social accountability and participatory decision making in health and education.

Other partnership examples include the United Kingdom’s Good Governance Fund–supported work on the governance of state-owned enterprises and the governance reform scorecard; EU-supported regional initiatives on road safety, the financial sector, and ICT; a Policy and Human Resources Development Grant from the Japanese government for inclusive education; and Swiss support to social protection and skills.

The WBG is building platforms to support country-level outcomes, such as the Economic Council supported by IFC with Swedish financing. The Council, which also benefits from EBRD and UK support, brings under its umbrella Moldova’s main business associations and serves as a bridge between the public and private sectors. The removal of several regulatory barriers supported by the Council has already helped facilitate new investments of at least US$80 million, with more in the pipeline. This platform is currently being used to address the impact of the COVID-19 pandemic on businesses and to help develop policies to support them through the crisis.

Moving Forward      

To assist Moldova in responding to urgent COVID-19-related needs, Moldova was provided with exceptional access to US$63.2 million in concessional IDA lending. IBRD financing will be used to enable post-crisis restructuring, strengthen resilience to future emergencies, and address immediate developmental and social needs.

The Bank is reassessing options for repurposing the ongoing portfolio to respond to COVID-19, including in education and health, the provision/digitization of public services, and support of revenue mobilization efforts. Moreover, depending on the severity of the crisis and the magnitude of its macro, fiscal, and social impacts, the Bank will explore options for the renewal of budget support, depending primarily upon reform commitment, and for pipeline prioritization, which may focus on targeted support to small businesses and farmers, water security and sanitation to improve access to critical services in small towns outside the capital city, and possible engagement on disaster and risk management.

Beneficiaries

Competitiveness Enhancement II Project

“I recommend that all who consider developing their business treat each stage seriously. I know that there are no general rules that would lead you to success, but my recipe consists of innovation, a lot of work, plus partners that offer their shoulders when needed, and one of those partners is the Competitiveness Enhancement II Project!”

Moldova Education Reform Project

“Now the school looks nicer and is warm, so I can focus better on learning.”

“We managed to absorb the financial resources allocated by the Ministry of Education under the Moldova Education Reform Project, so we were able to manage the COVID-19 crisis. In our high school all subjects are taught remotely, even sports. Every day, the teacher coordinates with the students the exercises they have to do to maintain a healthy living in isolation.”