GRAIN AND OIL TERMINALS AT GIURGIULESTI INTERNATIONAL FREE PORT PHOTO BY KRISTEN HARTPENCE FOR USAID PRELIMINARY TRADE CORRIDOR ASSESSMENT Moldova Structural Reform DISCLAIMER This report is made possible by the generous support of the American people through the United States Agency for International Development (USAID). The contents are the responsibility of Nathan Associates Inc. and its subcontractors and do not necessarily reflect the views of USAID or the United States Government. TABLE OF CONTENTS EXECUTIVE SUMMARY 1 1. INTRODUCTION TO TRADE CORRIDORS AND TRADE CORRIDOR ASSESSMENTS 1 INTRODUCTION TO TRADE CORRIDORS 1 ASSESSING TRADE CORRIDOR PERFORMANCE 0 PURPOSE OF THIS REPORT 2 2. CONTEXT OF MOLDOVA’S TRADE CORRIDORS 4 MOLDOVA’S TRADE COMPOSITION 4 OVERVIEW OF MOLDOVA’S TRADE CORRIDORS 8 MOLDOVA’S TRADE CORRIDOR INFRASTRUCTURE, SERVICES AND REGULATIONS 13 3. PRELIMINARY ASSESSMENT OF MOLDOVA’S TRADE CORRIDORS 29 OVERVIEW OF PERFORMANCE 29 KEY CHALLENGES AND POTENTIAL OPPORTUNITIES 33 4. FULL TCA METHODOLOGY 36 APPROACH 36 METHODOLOGY 39 FIGURES Figure 1. Typical Logistics Chain ............................................................................................................................. 1 Figure 2. Map of Moldova’s Trade Corridors ...................................................................................................... 2 Figure 3. Moldova’s Import Values by Region, USD, 2010-2016 .................................................................... 5 Figure 4. Structure of Moldova’s Imports, 2016 ................................................................................................. 6 Figure 5. Moldova’s Export Values by region, USD, 2010-2016 ..................................................................... 7 Figure 6. Structure of Moldova’s Exports, 2016.................................................................................................. 8 Figure 7. TRACECA Routes Through Moldova ................................................................................................ 10 Figure 8. Black Sea Ring Highway Map ................................................................................................................ 11 Figure 9. Map of European Agreement on main international traffic arteries (AGR) .............................. 12 Figure 10. Moldova Railway Map ........................................................................................................................... 13 Figure 11. GIFP Traffic, 2007-2016 ....................................................................................................................... 16 Figure 12. GIFP Traffic Composition by Volume, 2016 ................................................................................... 17 TABLES Table 1.Moldova’s Top 5 Import Countries by Value, 2016 ............................................................................ 5 Table 2: Moldova’s Top 5 Export Countries by Value, 2016 ........................................................................... 7 Table 3. Preliminary Comparison of Selected Ports and Routes serving Moldova................................... 18 Table 4. World Bank International LPI, Moldova .............................................................................................. 29 Table 5. World Bank International LPI, Moldova and Regional Countries, 2016 ..................................... 30 Table 6. Domestic LPI, Moldova and Other Countries, 2016 ....................................................................... 32 Table 7. Representative List of Potential Products to Assess in Full TCA ................................................. 37 Table 8. Proposed Corridors to Assess in Full TCA ....................................................................................... 38 USAID.GOV PRELIMINARY TRADE CORRIDOR ASSESSMENT 2 ACRONYMS AEO Authorized Economic Operator AGR European agreement on main international traffic arteries BCP Border Crossing Point (Customs Post) CFM Calea Ferata din Moldova (Moldovan Railways) CEMT Conférence européenne des ministres des Transports (European Conference of Ministers of Transport) DCFTA Deep and Comprehensive Free Trade Area EBRD European Bank for Reconstruction and Development EFTA European Free Trade Association EU European Union EUBAM EU Border Assistance Mission to Moldova and Ukraine FDI Foreign direct investment FEZ Free Economic Zone FTA Free Trade Agreement GIFP Giurgiulesti International Free Port IRU International Road Union BRITE Business Regulatory, Investment, and Trade Environment CEFTA Central European Free Trade Agreement CIS Commonwealth of Independent States LPI Logistics Performance Index MCC The Millennium Challenge Corporation Ro-Ro Roll-on/Roll-off TCA Trade Corridor Assessment TEN-T Trans-European Transport Networks TFA Trade Facilitation Agreement TIR Transports Internationaux Routiers (International Road Transport) TRACECA Transport Corridor Europe-Caucasus-Asia USAID United States Agency for International Development WTO World Trade Organization PRELIMINARY TRADE CORRIDOR ASSESSMENT EXECUTIVE SUMMARY Moldova is a landlocked country, reliant on its trade corridors for access to imported goods and for exporting its products. Trading through trade corridors allows for economies of scale, network effects and concentration of resources for transport sector improvements. Corridors provide landlocked countries with important access to ports, which are critical for trade. Despite Moldova’s reliance on its trade corridors, many issues exist in terms of infrastructure, services and regulations. Reducing transport costs and increasing the ease of access to markets by improving Moldova’s trade corridor infrastructure could fuel economic growth. The country maintains a very high trade imbalance and therefore current account deficit. This is fueled by a variety of factors, including increased consumption and imports funded by remittances despite low employment and industry levels, as well as an increase in imports of goods for use by Moldova’s national industry. Much of the country’s development strategy is based on export-led growth, focusing on value-added products in seven priority sectors including textiles, agrifood (value added/processed), ICT, business process/outsourcing, electrical equipment, automotive, and manufacturing of machinery and parts. As Moldova is able to grow its industries, its trade deficit will fall due to the combination of an increase in exports plus a reduction of imports as the country is able to domestically fill more of its own consumption needs. But first, the country needs to make it easier for businesses to move goods. Much progress has been made in improving Moldova’s trade corridors in recent years, with large infrastructure projects rehabilitating roads, improvements to customs laws, institutional and regulatory reforms as part of DCFTA implementation, etc, However, challenges still remain. For example, delays at the border with Romania threaten the reliability of automotive parts and other exports; poor road conditions limit imports through Moldova’s only port at Giurgiulesti; overloaded vehicles damage trucks and roads; and a shortage of authorizations limits the ability of Moldovan trucking companies to transport goods to/from Ukrainian ports. Moldova’s infrastructure investment needs are well known by the government and development partners. There are many ambitious plans to rehabilitate roads, border posts, railway tracks and to purchase locomotives. But a $150 million investment in a road to save an hour of driving time has minimal impact on overall transport times if a truck sits idle two days waiting to cross the border. This is where complementary reforms to service markets and regulations are essential to increasing trade corridor performance. Nonetheless, when funds are constrained, it is difficult for governments and development partners to prioritize investment needs, and often “soft” reforms (such as services and regulatory issues) are overlooked. This is the first in a series of two reports aimed at assessing Moldova’s trade corridor performance and providing prioritized recommendations on improving it. In this preliminary report, we provide an introduction to trade corridors and set the context of Moldova’s trade corridors, trade and transport infrastructure. We discuss our preliminary thoughts on potential constraints, which will be further validated and assessed in the full report. Finally, we provide an overview of our proposed methodology for the full trade corridor assessment. The assessment is timely as we are halfway into Moldova’s 2013-2022 National Transport and Logistics Strategy, which is an appropriate time to perform a midterm assessment and stocktaking, realigning priorities to fit present realities. The result of these studies will provide the government, USAID, and other development partners with a road map and action plan for improving the competitiveness of Moldova’s trade corridors. i | PRELIMINARY TRADE CORRIDOR ASSESSMENT USAID.GOV 1. INTRODUCTION TO TRADE CORRIDORS AND TRADE CORRIDOR ASSESSMENTS INTRODUCTION TO TRADE CORRIDORS Trade corridors are comprised of routes connecting centers of economic activity, which can be regions, countries, cities, industrial areas or farmlands. These routes consist of a network of links and nodes, as graphically depicted in Figure 1: Links are connectors including roads, railways, inland waterways, and marine shipping. Nodes consist of areas where costs