SOL-165-17-000001_Attachment_5.docx

ATTACHMENT 5: BACKGROUND INFORMATION FOR OFFERORS

1. Linkages to the Economic Growth Portfolio

In the upcoming period (2017-2020) the EG portfolio will also consist of projects for improving the business environment and access to finance. The Partnership for Better Business Regulations, a project implemented by EPICentar and three of the four main chambers in the country, aims to help MSMEs improve their compliance with legal requirements and help business organizations engage in a constructive dialogue on streamlining of regulation. The Modernizing Inspections Authorities Project, implemented by Ideas Depo, introduces a modern, business friendly, and predictable inspection system that will seek to achieve enhanced efficiency of inspection authorities, as well as voluntary compliance by implementing best practices and principles into the inspection process. The Business Ecosystem Project is not expected to work on improving the business regulations, but rather cooperate with these two projects on such issues.

In the area of access to finance, the Mission is implementing a Microfinance Inclusion and Innovation Project, implemented by Alliance of Microfinance Organizations, with the objective to improve access to finance tailored to the needs of low income households, entrepreneurs, and MSMEs through introduction of new financial products utilizing innovative technologies. The Mission also has two DCAs, one on agriculture with five partner financial intuitions expecting to leverage $26 million in agricultural and rural development loans, and one on the bonds to the diaspora for the investment fund SEAF MAC II. In the near future, the Mission is contemplating to support Factoring as a stand-alone project. In addition, as part of the CEED’s Micro and Small Enterprises project, the Mission is supporting a Micro Investment Fund, a Business Angels club and a start-up accelerator and co-working space HUB Skopje, all of which are expected to become legacy organizations after the project ends in December 2017.

2. Research and Analysis

The USAID/Macedonia Economic Growth Team conducted a review of relevant reports:

· World Economic Forum Competitiveness report,

· EU progress report,

· Competitiveness Strategy and Action Plan of the Republic of Macedonia 2016-2020,

· Draft MSME strategy 2017 - 2022 prepared by the Macedonian Ministry of Economy (not publicly available), and

· Sector studies produced by the Regional Economic Growth Project.

These reports indicate that while MSMEs should be the driving force of the economic development and the main job creators in Macedonia, they are still very anaemic and with limited growth potential. According to the EU progress report for 2015, “businesses remained concentrated in low-productivity activities and it is necessary to increase the value added in productive sectors. Further investment is needed to boost labour productivity growth and speed up the transformation of the economy.” In the World Economic Forum competitiveness ranking for 2015 -2016 of 140 total countries, Macedonia scores low in labour market efficiency (rank 84), technological readiness (rank 63), business sophistication (rank 72) and innovation (rank 58). MSMEs face challenges of integration into international markets and FDI supply chains.

Several factors contribute to this condition of the MSME sector, including:

· the lack of business skills,

· the poor business support ecosystem,

· lack of available, accessible, and diverse sources of financing,

· inefficient production technology, and

· the unstable business environment.

Governmental MSME support services are severely underfunded, and therefore virtually non-existent. Some non-governmental business support organizations do exist, but less than a third of MSMEs use their services. The local market for advisory services needs further development to improve the quality, diversity, accessibility, and affordability of their services. Furthermore, their services are predominantly available in the capital (Skopje), targeting larger companies, while MSMEs in other areas of Macedonia are neglected. The awareness of MSMEs of the available support measures and advisory services is moderate, and information and consultation mechanisms need to be strengthened.

The design of this project is largely based on the findings and development objectives identified in the Competitiveness Strategy and Action Plan of the Republic of Macedonia 2016-2020.[footnoteRef:1] Its overall objective is to strengthen the legal, institutional and research environment for business operations, including the implementation of the internal market Acquis. Further objectives include improving the competitiveness and innovation of the economy, at both national and local level; increasing FDI; increasing research and development activities; increasing export and diversification; a more sustainable economic growth; and, real convergence with the EU. This overall objective is realised through three specific objectives, and four priority areas of action included in the Government’s Competitiveness Strategy and Action plan, illustrated below. [1: The Government of Macedonia prepared this strategy as a driving document to design donor assistance in the area of improving private sector competitiveness.]

To improve liquidity and access to finance of MSMEs.

Proposed activities will address four of its seven strategic objectives to various extents:

· A more entrepreneurial and productive MSME sector

· A more dynamic export sector

· A more skilled and entrepreneurial labour force

· A higher volume of finance to the enterprise sector

Similarly, according to the national SME strategy 2017-2022, Productive and Competitive MSME sector (PILLAR 2) could be achieved through programs for improving the business development services, access to finance, and value chain development as shown in the table below:

Competitive Macedonian MSMEs drive inclusive economic growth and the creation of more productive and decent employment.

PILLAR 1

Conducive Business Environment

PILLAR2

Productive and Competitive MSME Sector

PILLAR3

Dynamic Entrepreneurship and Innovation Ecosystem

PROGRAMS

PROGRAMS

PROGRAMS

Enhance Policymaking and Coordination Simplify the Legal and Regulatory Environment Strengthen and Institutionalize Social Dialogue Coordinate MSME Data and Monitoring and Evaluation National MSME Association

Improve Business Development Services

Improve Access to Finance

Facilitate Internationalization

Support Value Chain Development

Expand Entrepreneurship in Education and Training

Enhance Science, Technology and Innovation in MSME development

Establish Science and Technology Parks and Innovation Incubators

Moreover, from October 2016 to February 2017, the Mission conducted a Private Sector Engagement Assessment to determine ways to initiate or expand engagement with the private sector in development assistance. It revealed that some of the lead companies in Macedonia have begun to develop Corporate Social Responsibility awareness. However, they are still mostly directed to general philanthropic activities, focussing less on development of their potential suppliers, the potential future employees or the economic development of the community in which they operate.

Gender Analysis: Both the 2010 gender assessment and the 2014 gender analysis, which was conducted as part of the 2014 DRG assessment, revealed that Macedonians largely do not see gender inequality as a serious issue in the country, partly due to the legacy of the former Yugoslavian state ideology which emphasized gender equality, and partly because the country does not suffer from the sorts of glaring gender gaps encountered in some regions. Nonetheless, both the gender assessment and the gender analysis found that many Macedonians subscribe to a patriarchal gender ideology, and that gender gaps continue to exist. The uneven distribution of these gaps across sectors and their invisibility to most citizens means that particularly close attention is required to identify and overcome them.

This is also evident in the private sector. While there are no legal obstacles to women’s participation in business, there are cultural norms and family obligations that make it more difficult for women to successfully manage a business or move up to management positions. Female entrepreneurship is just now beginning to develop in Macedonia and is very much supported by different donors. However, female entrepreneurs, especially those in smaller towns, need additional support. Women-owned businesses are especially rare in the Muslim communities and even those that exist are to a large extent home-based. Therefore, the Contractor must have to take extra effort to ensure that women owned/run businesses and female participants are adequately represented in all activities (at least 35%) and equally benefit from the assistance.

Sustainability Analysis: The whole premise of the project is to help existing business support organizations and financial institutions improve and expand their services and activities to meet the needs of the MSMEs. The project will provide technical assistance and award sub-grants to the business support organizations to help build their capacity to think through and implement the activities with assistance from the Contractor. The activities are designed to build a stronger relationship between the private sector as recipient of these services and the organizations that will deliver them, so that they can continue to cooperate in the future. A co-financing model is introduced to the extent possible, so that the businesses learn the value of the services they receive and develop a habit to pay for them in the future.

Business Ecosystem Project (BEP) SOL No. SOL-165-17-000001 Attachment 5 – Page 1 of 4