174 IBA 02 Fadi FARRA

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Sofia, 20 November 2007 Private Sector Development Division Investment Compact Programme Targeting Reforms Through a Sector Specific Approach Fadi Farra OECD Principal Administrator

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Agenda Regional approach: Western Balkans Country specific approach: Moldova

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Agenda Regional approach: Western Balkans Country specific approach: Moldova

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Increasing investment and trade in the Western Balkans Overriding question: How to increase investment and trade in a selected number of industry sectors in the Western Balkans? What are the end-customer requirements in those sectors and what are the industry/supply implications? How attractive and competitive are the sectors? What is the recommended positioning to attract investment and trade to the selected sectors? What are the main barriers and how to remove them? What are the implementation steps needed to attract investment and trade? Objective

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Sources: National Statistics, UNIDO, OECD analysis, market research companies NOTES: 1 Points allocation has been weighted against 2005 real GDP figures for Albania, Bosnia and Herzegovina, Croatia, FYR Macedonia and Serbia 2 Variables in Market Attractiveness and weights: market growth (20%), total output share and growth rate (20%), value added (20%), exports as a proportion of total exports (10%), trade balance (10%), degree of industry consolidation (10%), number of establishments (10%) 3 Variables in Country Benefits and weights: FDI stock (20%), employment level (20%), potential for employment generation (20%), potential for innovation (20%), spill-over to other industries (20%) 4 OECD classification based on NACE codes; includes ICT and BPO services 5 OECD classification based on NACE codes; includes automotive components 6 OECD classification based on NACE codes; included in consumer goods and retailing Mean: 39 Prioritising sectors rigorously The OECD Sector Prioritisation Index Preliminary Methodology Sample output

Example 1: Business Process OutsourcingSEE countries have the basics to compete: 

Example 1: Business Process Outsourcing SEE countries have the basics to compete Relative comparison of average monthly labour cost in services (2005) Source: International Labour Organization; zdnetasia; Wall Street Journal, OECD interviews Note: Monthly wages have been calculated on 2003-05 or 2003-06 average; using the LABORSTA Labour Statistics Database and covering, unless specified only the category J (financial intermediation) and K (business activities, real estate and renting). For Albania overall figures are based on category I (transport, storage and communications) due to the absence of statistics on J/K in the ILO databases (1) average monthly wages in all services Hungary Poland Croatia BiH Montenegro Serbia Moldova India Index (100: Hungary) (1) Leveraging their competitive labor costs in services Sample of CEE countries SEE countries covered by the project Other references FYR Macedonia Albania UNMIK/Kosovo Business Process Outsourcing

Opportunities also exist to attract investments from global players already present in the region: 

Opportunities also exist to attract investments from global players already present in the region Indian players like Wipro are also allocating assets in Eastern Europe Note: (1) Offshoring: business process offshoring and IT, both captive and outsourced; Eastern Europe = Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, FTEs: Full-Time Equivalents; Source: The overlooked potential for outsourcing in Eastern Europe, McKinsey Report, 2006 http://www.mckinsey.com/clientservice/bto/pointofview/pdf/MoIT10_eastern_euro.pdf) BPO strategy

Skill gaps and infrastructure are the key barriers to address in priority: 

Skill gaps and infrastructure are the key barriers to address in priority Note(s): (1) To provide certifications like the Capability Maturity Model Integration CFA: Certified Financial Analyst; CPA: Certified Public Accountant BPO barriers Based on preliminary survey results

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Example 2: Textile and garment Speed to market and differentiation now mainly drive the sector The global market for apparel is evolving rapidly with changing end-customer and consumer requirements influencing the structure of the industry Sources : Bureau Of Labor Statistics, UC Council Consumers are devoting a greater share of their money to non-apparel goods and activities Apparel retailers are responding by increasing the number of products offered and decreasing the time to market Textile & garment Time to market has reduced from 12-16 weeks in 1995 to 2-5 weeks in 2006

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SEE can differentiate through cost and speed advantage The Western Balkans could be a prime off-shore production location for leading EU apparel retailers based on its geographic proximity to EU markets, low labour cost and know-how in value-added manufacturing, especially in the clothing sector Source: OECD Regional Capability Survey (RCS) in the Western Balkans 2007, KSA History: Long and reliable history of providing EU apparel retailers Speed: Able to ensure quick delivery of goods to EU markets, especially Italy Quality and Technology: High quality with increasingly sophisticated use of technology in business operations Skills availability: University system with a history of producing graduates in design and textile-related engineering Trade: Preferential trading relationship with the EU and opportunity of diagonal cumulation of origin within the region and extension of the pan-European diagonal cumulation of origin Textile & garment advantage …Supported by other key strengths

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Short and long term barriers to address Early survey results indicate that firms in the Western Balkans are constrained by sector specific barriers Lack of training – Few programmes in place to assist garment firms in training new employees Significant delays at customs borders for the Importation of raw materials Longer term barriers to address: Limited and expensive access to finance for new investments and working capital Basic infrastructure, especially electricity, is not reliable, particularly in Albania Textile & garment barriers Example of import / export delays in 2006 Example of sector specific barriers to address Source: OECD Regional Capability Survey (RCS) in the Western Balkans 2007 ; World Bank 2006

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Example 3: Automotive components Focus on cost reduction leading to opportunities for components suppliers The global automotive industry is mature and characterised by slow growth and focus on cost reduction in the past decade Sources : Standard and Poor DRI, OECD, ACEA, US Bureau of Transportation Statistics, JAMA, To increase profits, Automotive Manufacturers are increasingly outsourcing components In recent years car sales have been stagnating in OECD countries Automotive sector % of car value outsourced 1985-2000 Asian Development Bank, 2002

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SEE has both a cost and EU proximity advantage Sources: OECD interviews, MIGA, Locomonitor, Automotive components advantage

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… and an opportunity to work with many component suppliers Mercedes-Benz C-Class Sedan: Components outsourced Automotive components advantage

Skill gaps and standards are sector specific barriers to address in priority: 

Skill gaps and standards are sector specific barriers to address in priority Note(s): (1) To provide certifications like the Capability Maturity Model Integration CFA: Certified Financial Analyst; CPA: Certified Public Accountant Automotive components barriers Based on preliminary survey results

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Agenda Regional approach: Western Balkans Country specific approach: Moldova

How to: address skill gapsThe call center example: 

How to: address skill gaps The call center example Example of actions to address skill gaps in Moldova Quantity Awareness Quality Cost(1) Notes (1): Ranking: (1) Poor; (5) outstanding Source: OECD field survey with 200 students and 40 companies Job fairs at universities Develop company chaired courses Competitive cost positions in call centers, among the lowest in South Eastern Europe Up to EUR 6/ hour vs. EUR 10-12/hour on average in Europe Develop anti-poaching guidelines to limit salary inflation Link ministry of education and economy priorities Increase the number of languages graduates focusing on niche areas like Italian Consider one/two other languages like Swedish to carve an unique position Offer internships Company universities and training Cost Quantity Awareness Quality

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How to: Find relevant local and foreign companies Building a database with company profiles and offering

How to: directly target key companies: 

How to: directly target key companies Targeting BPO companies directly – The Moldova case Road-show involving minister of economy and experts