ATTACHMENT_3_Moldova_Agriculture_and_USAID_Assistance_Summary.pdf

ATTACHMENT 3 - MOLDOVA AGRICULTURE AND USAID ASSISTANCE

SUMMARY

Moldova’s economy has been on a roller coaster ride over the past 20 years: GDP plunged in the 1990s to bottom out at 40 percent of its pre-independence level and then rebounded with steady growth averaging 5 percent per year over the last decade (World Bank 2012a). This struggle to transition from a centrally-planned to a market economy has been particularly painful for the agriculture sector, which is economically-dependent on a well-functioning, market-driven value chain.

In the wake of Moldova’s signing the DCFTA and Association Agreement with EU in June 2014, Russia has imposed a ban on key imports of fresh and processed Moldovan agricultural products. This trade ban further underscored the vulnerable situation of the Moldovan agricultural sector, heavily dependent on a single volatile market and highlighted the need for more export diversified markets. Historically, Moldova had been a large exporter of fresh and processed HVA products to the CIS markets, primarily to Russia. Russia accounted for the vast majority of exported Moldovan fruit in 2012 (90.6%, or $93.9 million). Prior to the ban, Moldova held 13% of the Russian fresh apple market and 20% of the Russian fresh table grape market.

Over the past 5 years, USAID’s agricultural support programs focused on building the resilience of core Moldovan agricultural value chains and the GOM’s export testing capacity, helping Moldovan agribusinesses adopt improved quality and market standards and tap into new, non-traditional markets. A key focus has been on reducing the dependency on the Russian market and supporting the export market diversification agenda, especially focusing on the untapped Middle East region, in partnership with the private sector, key HVA associations and the Moldovan Government institutions (National Food Safety Agency (ANSA), Ministry of Economy, and Ministry of Agriculture).

New markets in North Africa, the Gulf Region and South Asia offer good potential prospects for Moldovan fresh fruit, as has been demonstrated in the past two years with the interest shown by buyers met at previous trade shows and the positive response that Moldovan fruit has received as a result of the trial shipments supported by USAID (such as those to Bangladesh, Mongolia, Thailand, U.A.E). Initial concerns regarding the logistical challenges in getting Moldovan products to distant markets have been addressed and it is clear that with high quality packaging and adequate branding, Moldovan fruit can compete in these distant markets. The EU also is an attractive market for Moldova HVA crops, especially given the trade preferences offered by the DCFTA1 and Assistance Agreement and the increased duty-free quotas for a number of HVA crop categories.

In helping the HVA industry respond to the challenges posed by the Russian trade ban, USAID has significantly ramped up its market-led activities directed at expanding and diversifying market opportunities for Moldovan high-value agricultural (HVA) products in the Middle East markets and in the EU. This assistance combined elements of participation in a number of key international trade shows (INDAGRA Romania, ANUGA Germany, Private Label Amsterdam, World of Perishables Dubai, Fruit Logistica Berlin and GulFOOD Dubai) with a number of inward buyer visits to give foreign buyers from new markets an opportunity to see for themselves what Moldova has to offer and to meet with key producers. As a result of this robust assistance, USAID facilitated apple and table grape shipments to new markets such as Dubai, Egypt, Bangladesh, Thailand, Romania, Kazakhstan and Mongolia. These

1 The DCFTA sets up a free-trade area between the EU and Moldova, in line with the principles of the World Trade Organization. It removes import duties for most goods traded between the EU and Moldova and provides for broad mutual access to trade in services. It also includes provisions on business establishment, which allow EU and Moldovan companies to set up a subsidiary or a branch office on a non-discriminatory basis, benefitting from the same treatment as domestic companies in the partner's market. More information on the EU-Moldova DCFTA can be accessed at: http://ec.europa.eu/trade/policy/countries-and-regions/countries/moldova/ trade show events have generated increased visibility for Moldovan HVA products in these new markets.

In addition, USAID interventions were successful in effectively promoting the new country brand for fresh HVA products “Moldova- Taste makes the difference”, reinforcing Moldova’s strong message with the taste profile across fresh and processed items and the emphasis to the buyer community on the “value proposition” with good pricing for products that taste distinctly different. In addition, USAID assistance has focused on helping Moldovan authorities establish bilateral trade cooperation with new destination markets, such as India and Egypt. In early 2015, USAID worked with the Moldovan Food Safety authorities to prepare a Pest Risk Analysis and other supporting phytosanitary documents that have been submitted to the Indian Food safety authorities for clearance. The signing of a phytosanitary protocol by the Moldovan and Indian authorities would enable the start of exports of Moldovan apples and table grapes to India. USAID-conducted market research on the Indian fruit market has ascertained that there is strong potential for exports of Moldovan HVA products to this distant market.

Moldovan producers and processors need to become more competitive in all aspects of product branding, packaging, labeling and international certifications as well as understanding, and adhering to, market payment terms. The producers and the associations need to learn more about export logistics to new markets, freight lanes/rates and shipping payment terms so that they understand the logistics for all key expansion markets. Interventions under this objective should target significant engagement of local sector associations/producer groups in all market development activities, in order to ensure long-term sustainability and local capacity development.

The Moldovan agricultural sector has the potential to evolve into an engine of economic growth and generate significant value-add, lifting a substantial share of rural population out of poverty and stimulating local job growth. The significant EU trade liberalization prospects offered by Moldova’s entering into a DCFTA and Association Agreement with the EU represent a major window of opportunity and incentive for the sector to modernize. Accelerating the integration with EU markets will reduce the dependency of the Moldovan agricultural sector on highly volatile traditional markets and instill a European culture of entrepreneurship and transparency among Moldovan agribusinesses.

Moldovan agricultural value chains must leap to a higher, technologically-advanced stage and implement new processes and innovations to address productivity and competitiveness gaps, generate higher value-added, and be able to grow and effectively compete with agribusinesses and products imported from the EU, within a 5-7 year timeframe. Moldovan agricultural value chains and agribusinesses should capitalize upon these market openings and innovate into higher-value market segments. To achieve this objective, Moldova must continue to develop a competitive agribusiness sector and improve product quality and compliance with European and international food standards, and aggressively develop market linkages to facilitate trade and investment, especially in the framework of the DCFTA trade liberalization with the

EU.

Over the past five years, USAID’s agricultural competitiveness programs focused on building the resilience of core export-oriented Moldovan agricultural value chains and the Government of Moldova’s (GOM) export testing capacity, helping Moldovan agribusinesses adopt improved quality and market standards and tap into new, non-traditional markets. A key focus has been on reducing the dependency on the Russian market and supporting the export market diversification agenda, especially focusing on the untapped Middle East region, in partnership with the private sector, key high-value agriculture (HVA) associations and key Moldovan Government institutions (National Food Safety Agency (ANSA), Ministry of Economy, and Ministry of Agriculture). The initial results in opening new markets for agricultural producers achieved with USAID support should be further expanded and made sustainable in the long-term leading to increased resilience against potential trade bans and pressure from the East.

Despite these significant gains realized in the agricultural sector over the past decade and the combined donor and GOM investments in agricultural infrastructure, productivity in agriculture has been growing at moderate levels and recent World Bank analysis showed that labor generates much less value-added in agriculture compared to other sectors. Exceptionally high volatility of output in agriculture reflects underdeveloped risk mitigation instruments, varying access to irrigation, low adoption of climate-resilient crop varieties/technologies and low rate of adoption of modern agricultural technologies and innovative practices.

The lack of modern post-harvest infrastructure (cold storage, packing, sorting, grading) is one of the critical gaps impeding the speedy development of a robust export oriented HVA sector, and despite robust public and private investments over the past years2, Moldova has only one-fifth of the needed cold storage capacity enabling consistent and value adding exports to strategic markets. Strategic long-term investments by both donors, foreign and local investors, including through innovative public-private partnership mechanisms, are required to help address this challenge and boost exports.

An additional cross-cutting challenge relates to Moldova’s high level of out-migration, with up to 25% of the active labor force already outside the country. High-outmigration of skilled workforce, coupled with a lack of coordination between the public and private sectors with regard to technical and vocational education perpetuates the lack of a skilled workforce. Restoring the missing connections between the educational sector and the private sector through public private partnerships can help close this gap and increase the economic opportunities in rural areas.

Additional challenges to a competitive HVA sector in Moldova include:

• Lack of financing for orchard establishment, improvement and installation of much-needed post-harvest infrastructure (cold stores, sorting/packing lines, packaging equipment);

• Transition to market-demanded cultivars of fruits, vegetables and nuts, hindered in part by a cumbersome government’s variety testing and registration system;

• A government food safety system that is fragmented, unreliable, under-funded and rent-seeking, and is split among several agencies; the system is unable to deliver reliable certifications related to Sanitary and Phytosanitary (SPS) standards demanded in more exacting markets such as the EU;

• Fragmented and small-scale landholdings among HVA producers that result in low volumes of products and leads to lower prices for producers;

• A legacy of collectivization from the Soviet era that has resulted in few farmer-owned businesses such as cooperatives that would address some of the challenges facing small-scale HVA producers with limited economic power in marketing and procurement of production inputs;

• Weak, poorly-funded commodity and industry organizations that do not yet provide high-value services to their producer-members;

• An agricultural education and training system out of synch with the workforce needs of the HVA sector;

• An agricultural research system that is disconnected from the interests and needs of the private agricultural sector.

Previous USAID Programming in Agriculture

Over the past 20 years, USAID has invested approximately $130 million in supporting the development of a private-based, competitive agricultural sector in Moldova. Over the past 10 years, USAID has actively supported the development of a competitive HVA sector, through its Agribusiness Development

2 The share of capital spending in the total public expenditure in agriculture budget has been increasing over the last years, and accounted for 60 percent in 2013, up from only 36 percent in 2009. Source: World Bank, Moldova Public Expenditure Review: Agriculture, May 2015 project (2004-2009) and currently through its five-year Agricultural Competitiveness and Enterprise Development Project (ACED) ending in March 2016.

Over the past 5 years, USAID has invested over $17 million to improve Moldova’s HVA sector economic performance, working in value chains representing market growth potential such as tomatoes, table grapes, tree fruits and nuts, and fruit and vegetables. USAID assistance improved the competitiveness of Moldovan high value agriculture by addressing binding constraints in targeted fruit and vegetable value chains at the marketing, production and post-harvest handling and policy levels. USAID support also helped improve GOM’s phytosanitary inspection and testing capabilities and made the business enabling environment more supportive of HVA production and exports.

Complementing Millennium Challenge Corporation (MCC) investments in irrigation system rehabilitation, USAID assistance provided critical market development and technical assistance support needed by farmers to transition to irrigated HVA production. USAID also piloted its first agricultural development effort in the break-away region of Transnistria and helped micro-, small- and medium-sized enterprises (MSMEs) in the Transnistrian region grow and become more competitive.

Workforce

During the USAID/Moldova CDCS development process and in preparation for the Ag Lead design, USAID/Moldova has conducted extensive stakeholder consultations that have challenged the long-held understanding that Moldova had a ready and skilled workforce in place to respond to increased employment opportunities across multiple sectors, including in the agricultural sector. At present, the Moldovan labor force suffers from a high rate of out-migration of skilled workers. The International Organization for Migration (IOM) reported in 2012 that data analyzed for the period 2005-2010 showed a consistently high migration outflow of Moldovan citizens, involving an estimated one-quarter to one-third of the working-age population at any given time in that period.

A recent International Labor Organization (ILO) report (2013) found that the skills mismatch in Moldova’s labor market is due to: 1) deficiencies in skills forecasting which impacts enrollment in training institutions; 2) lack of information and vocational counseling for young people; and 3) inconsistencies between education quality in professional training and employers’ expectations.

Demand for skilled labor appears to be strong in Moldova, but businesses are frustrated by both a lack of skilled workers and the quality of their technical education. Over the past 10 years in the agriculture sector in Moldova, in spite of adequate financing and plans to expand production among the agribusinesses surveyed, a lack of specialized labor in mechanization, orchard work, wine-making, agronomy, plant protection and irrigation had resulted in these businesses not being able to grow.

Water User Associations Investments in the irrigation infrastructure are therefore critical for the long-term competitiveness of the HVA sector, and an increase in on-farm productivity and crop yields cannot be achieved without access to irrigation. Moldova is characterized by variable semi-humid continental climate, often with high moisture deficit in the soil, frequent droughts, hail, floods and frosts. In terms of climate, agriculture is one of the most vulnerable sectors of the national economy. Climate volatility is one of the main causes of low yields and presents an eminent risk for Moldovan agriculture. Production declines in the agricultural sector due to natural hazards (including droughts, floods, hail, frosts, and severe storms) translate into estimated annual losses of 3.5–7.0 percent of Moldova’s GDP.3 To begin to address this situation, during the 2010-2015 timeframe, the MCC Moldova Compact has successfully rehabilitated 10 centralized irrigation systems located on the Prut and Nistru rivers, and has supported the creation of 10 associated Water User Associations (WUAs). The WUAs were created under a new Law on Water User Associations, passed in July 2010. The 10 MCC-rehabilitated irrigation systems cover 11,500 ha, with an addition 3,500 ha available for extension with private investments from producers. The WUAs were created as user associations to manage the rehabilitated systems, and management of the systems was legally transferred from the State Agency “Apele Moldovei” to the 10 WUAs as part of the broader MCC Compact program of infrastructure rehabilitation and transition to high-value agriculture. The MCC investment in irrigation systems, in conjunction with USAID’s support, has been accompanied by intensive training in water resources management, high-value crop production, post-harvest handling, and HVA crop marketing both domestically and internationally.

Significant progress has been made with USG assistance through the MCC Compact to lay the foundation for a competitive irrigated agricultural HVA sector, increasing the sector’s resiliency to climate change factors and creating a public –private partnership model for effectively managing the rehabilitated irrigation systems. This major U.S. Government (USG) investment in irrigation infrastructure through the rehabilitation of 10 Central Irrigation Systems (CIS) systems has created tremendous opportunities enabling an expedited transition from lower-value crop production to higher-value agricultural production using modern irrigated technologies.

Prior to the MCC Compact institutional irrigation sector reform, Moldovan farmers were paying an excessively high price for irrigation water delivery service than they should have been, and no preventive maintenance was performed on the CIS systems. This led to a severe deterioration of the irrigation infrastructure, discouraged investments in high-value agriculture and severely hindered Moldova’s capacity to compete in regional markets. Through the newly established WUA model, the rehabilitated irrigation systems are managed similarly to irrigation districts in the West, preventive and routine maintenance is built into the annual budgets, the cost of water delivery service is transparent and reasonable, and farmers have bigger incentives to invest in high-value agricultural crops and in modern pressurized irrigation water application methods like drip and sprinkler. This model builds on the development experience in many countries where irrigation management transfer programs have been successfully implemented and led to growth in high-value agricultural productivity and access to markets.

Interventions under this objective shall be fully consistent with the value chain approach/philosophy of the Ag Lead activity and should be fully supportive of and integrated with the activity interventions targeting market access/export diversification, on-farm productivity/post-harvest improvements, organizational development and public-private sector engagement.

The continued organizational development and institutional strengthening of the 10 WUAs supported by the MCC Compact is perceived as critical for ensuring the sustainability of the U. S. Government’s investments in the Moldovan irrigation sector and also as a successful pilot/model for other emerging WUAs/donors wishing to engage in further supporting the rehabilitation of the remaining 68 central irrigation systems. Given that the 2016 season will be the first season when the 10 WUAs supported during the MCC Compact will start the actual management of the water resources and newly rehabilitated infrastructure, it is anticipated that these organizations will need assistance in both the technical aspects of managing irrigation systems, as well as building the WUAs into strong well-administrated operations.

Table 1. Status of the 11 MCC-supported WUAs

3 National Agriculture and Rural Development Strategy for the period 2014-2020

CIS

Years of training (by end of compact)

Seasons of experience with working system (by end of compact)

Qualitative assessment of current capacity

Criuleni 4.5 1 Good Lopatna 4.5 1 Very Good

Jora de Jos 4.5 1 Good Roscani 4.5 1 Very Good

Puhacenii 4.5 1 Very Good Cosnita 4.5 1 Very Good Grozesti 4.5 0 Good Blindesti 4.5 0 Poor

Leova Sud 4.5 0 Very Good Chircani-Zirnesti 4.5 0 Very Good

Coordination with other Donors (part of) Relevant donor assistance in this respect and linkage to the new project objectives is described below.

Major Donor Project Areas of focus Linkages with AG LEAD

World Bank

Agricultural Competitiveness Project MAC-P (2012–17, total financing $25.4

MLN)

Seeks to address HVA competitiveness by promoting market access for farmers and supporting their integration into complex supply chains. Through its pilot infrastructure investment activity, MAC-P is incentivizing small numbers of “productive partnerships” to legally register their enterprises (minimum five members) in order to be eligible for the matching grant program.

Synergy should be achieved in the area of coordinating support to producer groups and the issuance of post-harvest investment grants to producer groups.

EU

Support for VET Sector in Moldova (2014-2017)

The objective of improving the governance of the VET system in Moldova by reforming the VET institutions network and enhancing the quality of the learning process and learning outcomes in line with the labor market demand. To address deficiencies in Moldova’s VET system, the European Union is providing budget support to the Government of Moldova in the amount of €25 MLN. The reform plan proposes to develop ten “Centers of Excellence” to be selected from among the best-performing schools and colleges and will serve as pilot and demonstration schools for good practices.

IFAD,

DANIDA,

GEF

IFAD VI Program, 26 mln $

The objective of the program is to help rural entrepreneurs increase incomes and increase resiliency by:

• Enhancing farmer adaptation capacity to climate change (mainstreaming conservation agriculture practices and technologies)

• Increase access to finance of rural population

• Increase productivity, expand investments and access to markets

Facilitating through TA agribusiness and farmer access to finance Cooperation/coordination on the youth in agribusiness grant program implemented by IFAD

GIZ

Support to Investment Attraction Team under Prime Minister

Foreign investment attraction through country image building, investment generation, investment aftercare, and policy advocacy for investment climate.

Cost-sharing trade show exhibits for targeted value chains, and similar collaboration is envisioned with the new activity

Polish Credit

PMU

$100 mln credit line access to finance

EIB

Total cost: EUR 300 million

- NIF: EUR 8.2

million of which 2.2 million technical assistance;

- EIB Fruit Garden Program credit line 120 million EUR;

- Promoter and other sources: EUR 171.8 million

Provides 120 mln EUR credit for production and post-harvest investments in the Moldovan fruit sector.

Objectives: Project supports the horticulture sector to enable private and public sector companies take full advantage of the DCFTA by:

• Providing support in order to comply with the EU standards and be successful in the EU;

access to finance

• Enhancing competitiveness of Moldovan agri-food products;

• Covering the entire horticulture value chain, from the educational system, production of saplings, restructuring of existing plantations, cold transportation, storage, grading and sorting, packing, processing, to the provision of related goods and services, phyto-sanitary and quality controls and international business development.

EU

ENPARD Program EUR 52.8 million for budget support;

- EUR 11.2 million for complementary support

The specific objectives are to:

1) improve the financial capability of the government to achieve agricultural and rural development policy objectives;

2) promote agricultural and rural development policies and reforms;

3) improve service delivery and governance in the agricultural and rural sector;

EU bilateral

Support to the DCFTA Process in the Republic of Moldova

• EUR 25

million for budget support;

• EUR 5

million for complementa ry support

The specific objective is to support the implementation of DCFTA process in Moldova in the following areas:

• Quality infrastructure, in particular standardization , metrology, conformity assessment, testing, accreditation and international cooperation in these areas including recognition;

• Market surveillance and enforcement, including industrial and non-industrial products and services;

• Development and diversification of the Moldovan internal and external market conditions and opportunities for SMEs increased competitiveness;

• Extensive public awareness program promoting competitiveness/DCFTA long-term benefits through public events for citizens, civil society representatives and businesses.

Post-Compact Moldovan Government’s MCA Entity

2015-2017

Manage approximately $5 mln of the MCC Compact’s Access to Agriculture Fund reflows

• Further advance the WUAs to effectively operate and maintain irrigation systems,;

• Improve access to finance for financing HVA through coordination of lines of credit/programs ad reforms efforts of key legislation in the access to finance area;

Ag Lead implementer is expected to coordinate closely with the MCA entity in the area of WUA support and organizational capacity development, to avoid assistance overlaps and duplication of activities.

Coordination in the access to finance area activities is expected as well.

ATTACHMENT 3 - MOLDOVA AGRICULTURE AND USAID ASSISTANCE SUMMARY