Chapter 1

Table 1.1 shows the transition scores for all sectors and countries, including for the SEMED region (discussed later in the chapter). Annex 1.1 contains the component ratings for market structure and market-supporting institutions and policies, respectively.² The extent of the transition gaps are represented in a "heat map", with the dark red colour indicating major gaps and, therefore, low scores. Upgrades and downgrades (higher and lower scores) in Table 1.1 are highlighted by the upward and downward arrows, respectively. This year there have been 17 upgrades and 9 downgrades, the reasons for which are outlined in the rest of this section. (See also the Country Assessments later in this Report.)

Table 1.1

Source: EBRD.
Note: The transition indicators range from 1 to 4+, with 1 representing little or no change from a rigid centrally planned economy and 4+ representing the standards of an industrialised market economy. For a detailed breakdown of each of the areas of reform, see the Methodological Notes on page 160. There were one-notch upgrades this year in 17 cases: agribusiness (Romania), sustainable energy (Azerbaijan and Serbia), water and wastewater (Russia), roads (Croatia), railways (Russia and Ukraine), banking (Poland), insurance and other financial services (FYR Macedonia and Moldova), MSME (Georgia and Serbia), private equity (Romania, Slovenia and Turkey) and capital markets (Montenegro and Poland). There were nine downgrades: agribusiness (Belarus), natural resources (Hungary), sustainable energy (Kazakhstan and Turkey), electric power (Bulgaria, Kazakhstan and Romania) and insurance and other financial services (Turkey and Ukraine). In addition, there were historical revisions in the following cases to take account of new data and to achieve greater cross-sector consistency: railways (Montenegro and Romania), banking (Turkey), insurance and other financial services (Tajikistan) and private equity (Ukraine).

The energy category – comprising natural resources, sustainable energy and electric power – is unusual this year in that, for the first time since the EBRD started scoring transition progress by sector, there are more downgrades than upgrades. In the electric power sector there have been downgrades for Bulgaria, Kazakhstan and Romania. In the case of Bulgaria and Romania, both EU members since January 2007, the downgrades partly reflect the slow progress of institutions and policies to meet EU commitments to deliver competition and encourage new private sector entrants to the market. Both countries have incurred EU action over delays in implementing liberalisation measures and the failure to eliminate regulated prices. A further troubling development in Bulgaria has been the government's intervention to discourage more investment in renewable generation. In Romania a leading state-owned hydroelectric company was declared insolvent in July 2012, delaying attempts at partial privatisation. In both countries, however, changes were made to energy legislation in mid-2012 that, if implemented, should address some EU concerns. Kazakhstan's downgrade reflects the introduction of legislation in July 2012 creating a centralised investment incentive system, which is a significant retreat from a market-based regime.

Lack of competition and the dominance of state-owned companies also persist in Ukraine, as evidenced by the fact that recent tenders for shares in distribution companies attracted only two bidders. In Hungary the market institutions transition gaps in respect of the power and natural resources sectors have been raised from "negligible" to "small", reflecting a significant decline in private investment. This has been attributed to the introduction of a tax on energy groups in 2010 and state interference with the regulator's independence in the gas sector. In the natural resources sector Hungary's transition score has been downgraded from 4 to 4-.

In the sustainable energy sector, the picture is a little more encouraging. Azerbaijan and Serbia have received upgrades in recognition of the registration of Clean Development Mechanism (CDM) projects (one in Azerbaijan and four in Serbia), while in Mongolia a national action programme on climate change has been developed. However, new data on climate change emissions point to a growing problem in Latvia, consequently raising the transition gap for market structure.

One of the more positive features to emerge from the crisis has been the resilience of the financial sector throughout the transition region. Over the past year, there have been a number of modest improvements that have warranted an upgrade in sector scores, although downgrades have also occurred. The only banking upgrade has been in Poland, where Financial Supervision Authority regulations have been strengthened and the systemically important PKO bank has become majority privately owned. In Latvia the market structure gap has been lowered from "medium" to "small" following the progress in resolving the portfolio problems of Parex Bank.

Another encouraging development in the past year has been the rise, if often from a low base, of private equity markets in the region. Three countries – Romania, Slovenia and Turkey – have been upgraded in this respect, reflecting increases in fund activity and strategies available in net committed capital. However, local capital market development across the region remains at a generally low level, and the only changes to the scores for this sector were an upgrade in Montenegro from 2 to 2+, following improvements in the functioning and monitoring of the stock exchange, and one for Poland (4- to 4) for progress in the legal and regulatory framework. In the insurance and other financial services sector, there were upgrades in FYR Macedonia, as a result of a significant increase in pension fund assets, and in Moldova, where leasing legislation has been improved. Leasing penetration has decreased substantially in Turkey, however, warranting a downgrade from 3+ to 3, while Ukraine was also downgraded in this sector, in part because it is no longer a member of the International Association of Insurance Supervisors (as of 2012). In respect of finance to micro, small and medium-sized enterprises (MSMEs), there were upgrades for Georgia, where the civil code was amended to broaden the range of assets that can be used as collateral, and for Serbia, reflecting improvements to the credit information and land registry systems.

A common theme across financial sectors in the transition region, which is not fully apparent in this sectoral assessment, has been the development of local currency financing and local capital markets more generally. This reflects an increasing awareness that the growth model on which much of the region had relied in the pre-crisis period, based on cheap inflows of foreign capital to fund credit booms, was inherently risky and unsustainable, and that developing local sources of funds and greater lending in local currency could lead to "safer" growth in the future.

There were notable developments in this regard in Hungary, Poland, Russia, Serbia and Ukraine, although in Hungary and Poland the large stock of foreign-currency mortgages remains an area of concern. In Hungary the government and the main banks reached agreement in December 2011 on burden sharing and alleviating bank losses arising from a previous provision that allowed mortgage holders to repay loans at preferential exchange rates. Meanwhile, the authorities in Poland have strengthened bank supervision, especially with regard to foreign currency mortgages, and the financial regulator has initiated a number of working groups to develop long-term bond issuance, including that of covered mortgage bonds. The Russian authorities have made progress towards establishing Moscow as an international financial centre through further liberalisation of the domestic sovereign rouble bond market, making it easier for non-residents to trade in Russian securities. In Serbia the central bank has been pursuing a "dinarisation" strategy and signed a Memorandum of Understanding with the previous government in April 2012 on the promotion of dinar use in financial transactions. In Ukraine amendments to the law on the securities market will, following parliamentary adoption, enable international financial institutions to issue bonds denominated in the local currency (the hryvnia).

In most infrastructure sectors covered by this analysis, progress in the past year has been very limited, although Russia achieved two upgrades in the railways and the water and wastewater sectors, respectively. The former reflects cumulative progress over the years to the point where reforms are comparable to, or go beyond, those in many EU countries. In particular, the private sector provides well over half of all freight wagons and traffic, and competition in wagon provision (including through leasing) is intense. The water and wastewater upgrade is the result of an improved regulatory system (transferring functions from municipalities to a regional regulator) and the wider availability and use of commercial funds. There was also an upgrade for Ukraine's railways sector, although from a low level (2 to 2+), as a long-awaited restructuring and corporatisation law was finally adopted by parliament and private provision of wagons increased to about one-quarter of the market. The only other infrastructure upgrade was in the roads sector in Croatia, reflecting cumulative improvements over time, better procurement practices and the introduction of automatic tolling in the past year.

Corporate sector reforms warranting an upgrade have been limited over the past year. There were noticeable improvements in productivity in the agribusiness sector in Bulgaria and Romania, sufficient in the latter case to merit an upgrade from 3- to 3 (level with Bulgaria). However, Belarus was downgraded because of restrictions introduced in mid-2011 on the trade of agricultural goods, which (unlike other restraints – see below) have not been reversed. Other developments were mainly in the information and communications technology sector. Although scores remained unchanged in all cases, the market institutions gap was reduced in Bulgaria, Georgia and Poland, to reflect improved alignment of the regulatory framework with EU standards, and in Serbia, following the introduction in 2012 of full liberalisation of the fixed-line telecommunications service.