EBRD

Transition Report 2012 INTEGRATION ACROSS BORDERS

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Chapter 1

Sector Transition Indicators

The sector scores in the SEMED region (see Table 1.1) suggest significant transition gaps across the four broad sector categories (corporate, energy, financial and infrastructure).

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Table 1.1 - Sector transition indicator scores, 2012
0 Corporate sectors 2 3 4 Energy 6 7 Infrastructure 9 10 11 Financial sectors 13 14 15 16
Agri-business General industry Real estate Telecom-munica-tions Natural resources Sustainable energy Electric power Water and waste-water Urban transport Roads Railways Banking Insurance and other financial services MSME finance Private equity Capital markets
Central Europe and the Baltic states
Croatia 3 3+ 3+ 4 4- 3- 3 3+ 3+ 3+# 3- 3+ 3 3- 2+ 3
Estonia 3+ 4+ 4+ 4 4 3- 4 4 4- 3 4 4- 3+ 3 3- 3
Hungary 4 4- 4- 4 4-$ 3 4- 4 3+ 4- 3+ 3+ 3 3 3 3+
Latvia 3 4- 4- 3+ 3+ 3+ 3+ 3+ 4- 3 4- 3+ 3+ 3 3- 3
Lithuania 3+ 4- 4- 4- 3+ 3+ 3+ 3+ 4- 3 3 3+ 3+ 3 2+ 3
Poland 3+ 4- 4- 4 3 3 3+ 4- 4- 4- 4 4-# 4- 3 3+ 4#
Slovak Republic 3+ 4+ 4 4- 3+ 3 4 3+ 3+ 3- 3+ 4- 3+ 3+ 2+ 3
Slovenia 4- 3+ 4 3+ 3+ 3+ 3 3+ 3+ 3 3 3 3 3 3-# 3
South-eastern Europe
Albania 3- 2+ 3- 3+ 3- 3+ 3 2+ 3- 3- 2 3- 2 2+ 1 2-
Bosnia and Herzegovina 3- 2 2- 2+ 2 2 2+ 2 2+ 3 3+ 3- 2+ 2+ 2- 2-
Bulgaria 3 3+ 3+ 4- 3+ 3- 3+$ 3 3+ 3- 3+ 3 3+ 3- 3- 3
FYR Macedonia 3- 3 3- 4- 2+ 2+ 3 2+ 3- 3- 3- 3- 3-# 2+ 1 2-
Montenegro 2+ 2+ 2+ 3+ 3+ 2 2+ 2 3 2+ 2+ 3- 2+ 2+ 1 2+#
Romania 3# 3+ 3+ 3+ 4- 3+ 3+$ 3+ 3+ 3 3+ 3 3+ 3- 3-# 3
Serbia 3- 3- 3- 3 2 2+# 2+ 2+ 3- 3- 3 3- 3 3# 2- 3-
Turkey 3- 3 3+ 3+ 3+ 3$ 3+ 3 3+ 3- 3- 3+ 3$ 3- 3-# 4-
Eastern Europe and Caucasus
Armenia 3- 3 3- 3 3- 3- 3+ 3- 2+ 3- 2+ 2+ 2 2+ 1 2
Azerbaijan 2+ 2 2 2- 2+ 2+# 2+ 2- 2 2+ 2+ 2 2 2 1 2-
Belarus 2+$ 2 2 2 1 2 1 2- 2 2 1 2 2 2 1 2-
Georgia 3- 3- 3- 3- 2 3- 3+ 2 2+ 2+ 3 3- 2 3-# 1 2-
Moldova 3- 2- 2+ 3 3 2+ 3 2 3- 3- 2 2+ 2+# 2 2- 2+
Ukraine 3- 2+ 3- 3- 2- 2+ 3 2+ 3- 3- 2+# 3- 2+$ 2 2 3-
Russia 3- 3- 3- 3+ 2 2 3+ 3# 3 3- 4-# 3- 3- 2 2+ 4-
Central Asia
Kazakhstan 3- 2 3 3 2- 2-$ 3$ 2+ 2+ 2+ 3 3- 2+ 2 2- 3
Kyrgyz Republic 2+ 2 2+ 3 2+ 2 2+ 2- 2 2- 1 2 2- 2- 1 2-
Mongolia 3- 2+ 2 3 2 2 2+ 2 2 2- 3- 2+ 2 2 2- 2+
Tajikistan 2 2- 2- 2+ 1 2+ 2 2 2 2- 1 2 2- 1 1 1
Turkmenistan 1 1 1 2- 1 1 1 1 1 1 1 1 2- 1 1 1
Uzbekistan 2 1 2 2 1 2- 2+ 2- 2 1 3- 1 2 1 1 1
Southern and eastern Mediterranean
Egypt 2 2 2+ 3 1 2+ 2+ 1 2 2+ 2- 2+ 2+ 2- 2 2+
Jordan 2 2+ 3- 3+ 2+ 2+ 3 2- 2+ 3- 2 3 3- 2+ 2 3-
Morocco 2+ 3- 3- 3+ 2- 3 2 2+ 3 3- 2 3- 3- 2+ 2+ 3-
Tunisia 3- 3+ 3- 3 2 3- 2 2 2+ 2+ 2+ 2+ 2+ 2 2- 2+

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 main challenges facing the manufacturing and services sector relate to the general business environment. While reforms carried out over the past two decades have improved the ease of doing business in the SEMED countries, market structure and institution reforms still need to be accelerated to enhance competitiveness, efficiency and productivity. In Egypt the privatisation agenda remains unfinished and weak institutional capacity (such as lack of judicial and competition authority independence), together with continued state involvement in many sectors, have hampered private business growth. To a lesser extent, Jordan and Morocco also need to improve competition policy and the business environment in key industrial sectors (and face similar challenges to those of FYR Macedonia and Georgia, for example). However, privatisation efforts have generally proceeded at a faster pace in Jordan and Morocco than in Egypt. Meanwhile, Tunisia's successful reform efforts – from price and trade liberalisation to privatisation and tax incentives – have created a thriving offshore sector, although the onshore sector's development is hampered by legal complexities such as weak contract enforcement and low investor protection.

In the agricultural sector, the SEMED countries face comparable reform challenges, although Morocco (where the government's Plan Maroc Vert aims to reform the sector to increase production by improving the quality and efficiency of value chains and increasing crop diversity) and Tunisia score better than Egypt and Jordan. As net importers of food, all are vulnerable to the volatility of global prices for commodities such as grain, on which they are highly dependent. In addition, fuel and food subsidies have led to market distortions and inefficiencies along the whole food value-chain. In Jordan, Morocco and Tunisia particularly, efficient use of scarce water resources is crucial to improving agricultural productivity, while all four countries are disadvantaged by underdeveloped processing, logistic and distribution capacity and (as in Russia and Serbia) fragmented land holdings. The state remains heavily involved in the agricultural sector across the SEMED region, whether through its presence in rural financing provision or through price controls and guarantees for core commodities (as in Turkey). Untargeted subsidies for consumers and producers are also in place in all four countries.

The SEMED countries have significant challenges in the energy sector, most comparable to those in Central Asia and eastern Europe. Heavy state involvement and the prevalence of vertically integrated utility companies are defining characteristics of the sector across the region (and indicate a stage of development similar to that in Serbia and Ukraine). Privatisation has not progressed substantially, and the different subsectors have not been fully unbundled. Together with continued fuel and electricity subsidies, this has led to poor energy efficiency and distorted markets. In all four SEMED countries electricity tariffs are not cost reflective, placing additional fiscal burdens on governments. At the institutional level, there is a gap between reform intentions and actual implementation. The regulatory agencies that exist in Egypt and Jordan have no tariff-setting authority and political interference in their activities and in price control is considerable. In Morocco and Tunisia, with no independent energy regulators, tariffs and prices are set directly by government. Jordan and Morocco, however, face slightly narrower transition gaps as efforts have been made to reduce Jordan's dependence on imported fuels and to achieve energy sustainability in Morocco.

According to the transition scores, the SEMED region's level of infrastructure development is most comparable to that of the countries of eastern Europe and the Caucasus. Significant challenges still loom. This is partly due to the weak municipal infrastructure across the region, which reflects low private-sector participation, poor regulatory frameworks and limited financing options outside of central government. In all four SEMED countries, the water and wastewater sector is characterised by heavy state involvement and/or centralisation, low tariffs below cost- and investment-recovery levels and extensive subsidisation across sectors and of consumers (as in Belarus and Georgia). In Jordan a National Water Advisory Council was created at the end of 2011 to oversee and coordinate institutional efforts towards a harmonised water policy. Across the SEMED urban transport sector commercialisation and cost recovery are low. Jordan and Morocco, however, fare slightly better, due mainly to greater private-sector participation and decentralisation. This is similarly the case in Georgia and Moldova, although municipal transport services continue to suffer from weak regulatory capacity and service quality.

A more varied picture emerges in the SEMED region's financial sector, the level of development of which (apart from Tunisia) is most comparable to that of south-eastern Europe on the institutional side, but closer to central Europe in terms of market structure. In Egypt the greatest challenges are improving access to finance for MSMEs and deepening insurance and other financial services (as is the case in Moldova). Jordan, on the other hand, has a stronger banking sector (and is comparable to Croatia in respect of financial market development), but needs to strengthen the effectiveness and enforcement of bankruptcy procedure. A private credit bureau should be established in 2012, helping to broaden bank lending capacity. Morocco's financial sector is also relatively well developed, but struggles to secure long-term funding to ease maturity mismatch risk. Tunisia's financial sector, however, is hampered by balance sheet weakness, high non-performing loans and state involvement in the leading banks (similar to Slovenia), as well as poor governance and capital market development. There remains much scope for improvement in capital markets and the provision of insurance and other non-banking financial services across all the SEMED countries.

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