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German Economic Team Moldova
Policy Paper Series [PP/04/2013]
Realising the Potential of
Moldova’s Information
Technology Sector
Jörg Radeke
Berlin/Chişinău, November 2013
About the German Economic Team Moldova
The German Economic Team Moldova (GET Moldova) advises the Moldovan government and other Moldovan state authorities such as the National Bank on a wide range of economic policy issues. Our analytical work is presented and discussed during regular meetings with high-level decision makers. GET Moldova is financed by the German Federal Ministry of Economics and Technology under the TRANSFORM programme and its successor. Our publications are publicly available at our website (www.get-moldova.de).
German Economic Team Moldova
c/o Berlin Economics
Schillerstr. 59
D-10627 Berlin
Tel: +49 30 / 20 61 34 64 0
Fax: +49 30 / 20 61 34 64 9
E-Mail: [email protected]
http:www.get-moldova.de
© 2013 German Economic Team Moldova
All rights reserved.
Realising the Potential of Moldova’s Information Technology Sector
Executive Summary
Moldova’s IT and the wider ICT sector already contribute significantly to the country’s
GDP and its export. In relative terms the GDP share of the wider ICT sector and its
export contribution a larger than those of regional rivals. However, the data and
anecdotal evidence suggest that the development is losing momentum and Moldova risks
to lose its advantage. Indeed, businesses suffer from a shortage of skilled staff as the
education system fails to provide staff with the skills the Information Technology sector
needs. Secondly, the – similar to businesses elsewhere in the economy – IT companies
suffer from a poor business climate.
As such, the Ministry of Information Technology and Communication is right to ask what
policies are needed in order to reduce obstacles to competitiveness, especially in the area
of skills and education as well as business environment. To that end, it has developed an
IT development strategy which we assessed and compared to international experience.
The strategy foresees to address the lack of suitably skilled workers. To do so, IT
colleges and universities need to become more demand oriented and businesses need to
have a say in what the content of the training should be. They should also be involved in
providing the practical training.
Addressing the business environment – such as the administrative burden, taxes and
fees and IT relevant regulation – is less straight forward and would require the input of
other ministries. As such, using the proposed instrument of IT Industry Parks could offer
a quick fix to some of the problems faced by IT companies. Indeed, with Industry Parks
and Free Economic Zones similar concepts already work more or less successfully in
Moldova. A detailed concept should outline how IT Industry Parks should be set up in
order to be successful.
The IT sector needs quick results to regain the past momentum. As such the main focus
should be on implementing some of the uncontroversial measures of the strategy in
parallel to developing it further. Using pilot projects and the support of the international
partners can also help to ensure that the strategy quickly results into improved
competitiveness for Moldova’s IT companies.
Author
Jörg Radeke [email protected] +49 30 20 61 34 64 7
Contents
1 INTRODUCTION ............................................................................................................................... 1
2 MOLDOVA’S ICT AND IT SECTOR: ECONOMIC CONTRIBUTION AND
COMPETITIVENESS ................................................................................................................................ 3
2.1 WIDER ICT SECTOR ECONOMIC PERFORMANCE .................................................................................. 3
2.2 HOW COMPETITIVE IS MOLDOVA’S WIDER ICT SECTOR? .................................................................. 4
3 MOLDOVA’S IT DEVELOPMENT STRATEGY AND BEST INTERNATIONAL
PRACTICE ................................................................................................................................................. 10
3.1 WORKFORCE AND EDUCATION ............................................................................................................ 12
3.2 REGULATION AND BUSINESS ENVIRONMENT ...................................................................................... 16
3.3 ICT INFRASTRUCTURE ......................................................................................................................... 21
4 SUMMARY AND RECOMMENDATIONS ................................................................................. 22
5 APPENDIX ......................................................................................................................................... 24
REFERENCES ........................................................................................................................................... 25
LIST OF RECENT POLICY PAPERS ................................................................................................. 26
-1-
1 Introduction
Motivation:
International Information Technology (IT) companies are footloose. They provide services
which can be provided remotely and often do not depend on the location of customers.
Consequently, Moldova’s IT sector is in competition with international IT hubs in India as
well as regional competitors such as neighbouring Romania and Ukraine but also Albania,
Armenia and Turkey.
At the same time it is often assumed that Moldova’s IT has further unrealised growth
potential. Thus, the government is right in wanting to create policies that are aimed at
improving the competitiveness of the IT sector. The Ministry of Information Technology
and Communication has developed a draft IT sector development strategy that aims at
providing suitable conditions for IT sector development. This paper assesses if the
current draft strategy can be instrumental to improve the competitiveness of Moldovan IT
companies.
The main focus of this policy paper is on IT services, including software publishing,
computer programming, computer consultancy, data processing, hosting and related
activities, web portals and other information technology and computer service activities.
IT services are part of the wider ICT sector and it is not always easy to clearly separate
them from other parts of the ICT sector. Indeed, many of the aspects discussed here are
equally relevant for the wider ICT sector. Thus we refer frequently to the wider ICT
sector especially within the quantitative assessment in the first section of the report. In
Table 1 below the relevant IT services within the wider ICT sector are highlighted in
italics. For both the ICT and the IT sector we use the OECD 2007 definition as shown in
the annex.
Table 1
Overview ICT and IT services components
ICT manufacturing industries ICT trade industries ICT services industries
5820 Software publishing 6110 Wired telecommunications activities 6120 Wireless telecommunications activities 6130 Satellite telecommunications activities 6190 Other telecommunications activities 6201 Computer programming activities 6202 Computer consultancy and computer facilities management activities 6209 Other information technology and computer service activities 6311 Data processing, hosting and related activities 6312 Web portals 9511 Repair of computers and peripheral equipment 9512 Repair of communication equipment
Source: OECD (2011)
-2-
Following a short assessment of the current economic contribution of the wider ICT
sector, we ask how the government can identify the measures to support
competitiveness. The basis should be an assessment of the factors that affect
competitiveness of IT companies (as we do in section 2). Then the question arises how
the government should intervene to address any short-coming identified. Such an
intervention should be based on international experience of instruments that have
worked (and avoid those which have not).
While any policy instrument and intervention should be part of a consistent strategy, the
main focus of this policy paper is on those actions that are easy to implement and lead to
quick results.
-3-
2 Moldova’s ICT and IT sector: Economic contribution and competitiveness
It is often argued that Moldova’s ICT and within it its IT sector has a high, unexploited
potential for development. The realisation of this potential, the argument goes, would
enable Moldova to serve as a regional destination for outsourcing ICT goods and services
and hence boost employment and economic growth. However, Moldova faces strong
international competition both from established players in this area such as the Czech
Republic, Hungary, Poland, Estonia, Romania and Bulgaria as well as regional peers with
similar ambitions such as Ukraine, Slovakia, Georgia, Armenia, Albania and Turkey.
In this section of the report we provide an overview of the status quo of Moldova’s wider
ICT sector and compare its performance and competitiveness to regional and
international competitors.
2.1 Wider ICT sector economic performance
The wider ICT sector in Moldova – of which the IT sector is a sub-sector – has made
significant progress growing on average by over 10% per year between 2005 and 2012.
Alongside telecommunication and IT services, the software and product development
subsectors are becoming increasingly significant contributors to job creation and
economic growth.
The ICT sector in Moldova (which includes production and wholesale trade of ICT
equipment like computers, telecommunication as well as IT services) employed,
according to official data, about 20,000 people in 2012. This excludes other workers that
carry out IT related tasks in the IT department of companies in other sectors of the
economy. While this figure represents only 1.6% of total employment, the ICT sector
contributed approximately 8.7% to GDP. Total ICT services export was USD 270 m in
2012 which represents almost 10% of export.
IT Industry economic contribution
Within the wider ICT sector, ICT services - which include development of software,
consultancy, and computer maintenance– employed around 7,000 employees
representing 35% of total ICT sector employment (ATIC 2012). It is estimated that the
economic contribution of the IT industry was around 0.9%1 of GDP in 2011 (National
Bureau of Statistics of the Republic of Moldova 2013). However, there is good reason to
believe that the actual number is much higher as many of the services provided – e.g.
through freelance platforms – are not captured in the official statistics.
Moldova’s IT sector exported services worth USD 55.8 m in 2011 which represents 1.3%
of total exports (National Bank of Moldova 2013). However, again this may grossly
underestimate the contribution of this part of the ICT industry.
1 K 72 Computer and related activities
-4-
International comparison
A comparison of two important indicators show that Moldova’s wider ICT sector is
performing well when compared with other countries in the region. Indeed, with ICT
services exports reaching almost 10% of total exports, Moldova’s ICT sector contributes
more to exports than the ICT sectors of neighbouring countries Ukraine and Romania.
The ICT export contribution is also higher than in Albania, Poland and Estonia (see Figure
1 below).
Figure 1
ICT Services exports as share of total exports
Source: World Bank (2013)
Moldova’s ICT sector seems also to contribute more to the economy than the ICT
industry in other countries. In 2012 Moldova’s ICT sector contribution to GDP was 8.7%
according to official data (Ministry of Information Technology and Communication (MITC)
2013) while Estonia’s ICT sector share was 5% of GDP, Poland 3.8% and Romania 3.2%
(Eurostat 2010)2. Thus, both indicators suggest that Moldova, at least in comparison to
the size of its economy, has a relatively well-developed ICT sector. It therefore supports
the common notion that the ICT sector has become a source of growth for the country.
The question for Moldova is if it can continue to compete successfully in the international
ICT and IT market.
2.2 How competitive is Moldova’s wider ICT sector?
The past growth rate and achieved specialisation provides some indication that Moldova
could become an important ICT player in the region. However, the ICT sector
2 As the Eurostat data is only from 201 so the current share maybe somewhat higher.
00
02
04
06
08
10
12
2005 2006 2007 2008 2009 2010 2011 2012
Albania Estonia Moldova Poland Romania Ukraine
-5-
development in the neighbouring countries was at least as buoyant as in Moldova and in
absolute terms Moldova’s ICT sector is obviously small compared to that of Ukraine or
Romania. To fully understand where Moldova stands relative to its immediate competitors
in the ICT industry, we analyse how Moldova’s ICT competitiveness compared with its
regional and international competitors.
To assess this we rely on interviews as well as the data analysed in the Global
Information Technology Report published by World Economic Forum WEF (2013). It uses
a large number of country indicators as well as a survey of executives to rank countries
competitiveness. The headline numbers are shown in the chart below.
The data indicate that Moldova’s overall ranking is rather poor. In the 2013 edition
Moldova was ranked only 77 – almost unchanged from the previous year following a
large improvement in 2011. This compares to rank 22 of Estonia, which – as shown
above – has a very successful ICT sector. It is also well behind Poland, which was ranked
49, but close to Romania (ranked 75). The below average performance is even more
surprising given Moldova’s good showing in areas like ICT infrastructure.
The conclusion for politicians is: There are some areas affecting overall competiveness
that are in serious need of reform. To identify these we take a closer look at the main
aspects that have shown to inhibit Moldova’s ICT competiveness.
Figure 2
Regional Comparison of the Networked Readiness Index - Ranks in 2013
Source: World Economic Forum WEF (2013)
Although combined indicators like this one, have many short-comings (for example, the
weighting of individual aspects in the overall ranking) they can still help identifying
crucial shortcomings. They are based on a wealth of data which has been made
comparable between the countries and also include the view of executives. Thus, the
Moldovan government could do worse than using this and similar indicators to identify
83
77
75
73
49
22
0
10
20
30
40
50
60
70
80
90
Albania
Moldova
Romania
Ukraine
Poland
Estonia
Country ranking
-6-
areas for reform need and track the performance of any reforms implemented the ICT
sector.
As a first step, to identify areas for policy intervention, it makes sense to take a closer
look at which factors affected Moldova’s below average competitiveness ranking. To do
so we distinguish three areas of ICT competitiveness3:
• ICT infrastructure
• Workforce and education
• ICT related regulation and business environment
ICT Infrastructure
Interestingly, rankings like the Global Information Technology Report (WEF) and other
indicators suggest that Moldova has a rather competitive ICT infrastructure. This is not
surprising since Moldova – like many other East Bloc countries – had to fully renew their
infrastructure and therefore can now draw on a relatively modern infrastructure. It ranks
among the best (15th) in international internet bandwidth, coming ahead of the Baltic
States, Poland but behind Romania.
Based on millions of recent test results from Speedtest.net, this index compares and
ranks consumer download speeds around the globe. The value is the rolling mean
throughput in Mbps over the past 30 days where the mean distance between the client
and the server is less than 300 miles. For Apr 17, 2011 - Oct 16, 2013 Moldova ranks an
impressive 17th in the world.
In terms of relative cost of broadband (the mean broadband subscription cost divided by
the gross domestic product per capita) the Republic of Moldova only ranks 57th at
10.75% ($15.18/month).
However, while bandwidth and other specific infrastructure aspects are good, the
situation is worse for accessibility of digital content 4 (rank 66) and secure internet
servers5 (rank 78). Furthermore, electricity supply and connection to the grid remain a
serious constraint which can only be tackled through a systemic energy sector reform.
3 While those categories are naturally somewhat arbitrary, they are based on our literature review and the areas of competiveness distinguished in rankings such as the WEF Network readiness ranking discussed in this chapter. 4 Based on the results of a survey of executive which asked: “In your country, how accessible is digital content
(e.g., text and audio-visual content, software products) via multiple platforms (e.g., fixed-line Internet, wireless Internet, mobile network, satellite)?” [1 = not accessible at all; 7 = widely accessible], 2011–2012 weighted average. 5 Measured according to the number of secure internet servers per million population with Moldova providing
19.7
-7-
Figure 3
Regional Comparison of selected competitiveness indicators
Source: Global Information Technology Report (WEF)
Workforce and Education
The most important resource for the IT industry is skilled workers. Thus the supply and
cost of sufficiently skilled workers are two important factors of the overall IT sector
competitiveness.
Figure 4
Average net wages in the ICT sector - selected countries in 2010
Source: Own analysis based on National Statistical Bureaus and National Central Banks
0
200
400
600
800
1.0
00
1.2
00
1.4
00
1.6
00
Ukraine
Moldova
Albania
Romania
Poland
Hungary
Turkey
EUR per month
79
74
55
47
38
26
0 20 40 60 80
Albania
Ukraine
Moldova
Romania
Poland
Estonia
Infrastructure and digital content ranking
108
103
70
68
52
49
0 40 80 120
Romania
Moldova
Ukraine
Poland
Albania
Estonia
Quality of educational system ranking
124
117
106
102
62
27
0 35 70 105 140
Ukraine
Moldova
Romania
Albania
Poland
Estonia
Political and regulatory environment ranking
-8-
The wage statistics in the region indicate that Moldova still has a cheap workforce in the
region with average salaries below 400 Euros per month for ICT workers. In comparison,
in Romania the average wage is at least double and in Estonia even three time that of
Moldova6. In addition, Moldova has a generous tax exemption in place for ICT workers.
Despite the seemingly competitive wage level, Moldovan ICT workers remain among the
best paid professionals in the country (whose wages are only matched by staff working
for international donor organisations). This reflects a lack of supply of suitably qualified
ICT professionals. Although the system produces more than 2000 graduates a year,
employers in the field only deem 10-15% of them suitably qualified for employment. The
international rankings of the quality of the educational system in Moldova seems to
support this assessment. Moldova was ranked only 103rd in the world in terms of quality
of the educational system by the WEF. This is in line with the result from our fact finding.
Among the main issues stated by the companies we talked to are a lack of practical
relevance of the training provided in higher and vocational education, outdated content
of the training as well as a lack of access to the latest software and equipment during the
training. As such, the quality of the students with an ICT background still remains a
major issue. This is currently one of the main limitations for further growth of the sector
ICT related regulation and business environment
As the various surveys and anecdotal evidence indicate, the business environment in
Moldova remains challenging for any kind of business. This is reflected in the poor rating
Moldova received in the WEF Global Information Technology Report where the country
only ranked 117 of the 144 countries surveyed.
One of the biggest issues is the administrative burden as we highlighted in previous
research (GET Moldova 2011). While this is a general obstacle of doing business in
Moldova, it is likely to affect the IT sector disproportionately. Most companies start-off as
small enterprises which do not have the knowledge or the resources to handle the
administrative burden resulting from accounting practices, tax and other frequent
inspections (such as the various health, safety and environmental inspection etc.).
Additionally providers of IT services are required to obtain burdensome and unnecessary
certificates from the “National Regulatory Agency for Electronic Communication and
Information Technology” in order to be allowed to provide or export “nationally important
automated information systems and software”. These are difficult to obtain and the type
of services falling under it are ill-defined (ATIC 2012).
Moreover the lacking protection and enforcement of intellectual property rights and
licenses is another serious concern. Moldova has among the highest software piracy rates
in the world with around 90% of software in use being illegal copies. This is a serious
6 The official sources may not fully reflect the actual wage level in the sector due to – like in most other sectors
– unofficial employment combined with data collection issues. However, since this is a common problem in the region, the data should nevertheless provide a good proxy for comparison.
-9-
deterrent for IT sector development, especially content producers, whose business model
depends on the protection of the content they created.
Conclusions
In this chapter we explored the economic contribution and international competitiveness
of Moldova’s ICT sector. The analysis suggests that Moldova’s ICT competitiveness is
below average – internationally as well as in comparison to regional peers.
A closer inspection shows that Moldova has a competitive infrastructure but that
Moldova’s ICT competiveness is held back by a lack of suitably skilled ICT graduates
which should form a major aspect of any strategy to improve competitiveness.
Furthermore, the ICT sector development – like other parts of the economy – is held
back by a poor business climate and administrative burden. This hampers in particular
small- and medium sized businesses. More specifically for the ICT sector, development of
sub-sectors like software development and communication may be held back by the
difficulty to enforce property rights such as software licenses and network licenses.
The Ministry of ICT has rightly identified most of these challenges in their draft strategy
and the largest problems are well known among ICT stakeholders. As such, the main task
lies in identifying and implementing policy measures to address the current short falls.
-10-
3 Moldova’s IT development strategy and best international practice
Following our assessment of the ICT competitiveness, we now look at what would be
suitable policy responses to improve Moldova’s competitiveness and support the
development of the IT sector. The recommendations made here are based on a literature
review of IT industry policy. We compare Moldova’s draft IT development with best
practice in order to highlight potential policy gaps.
General comments
The Ministry of Information, Communication and Technology is right in using a strategy
to guide its policy intervention. However, a strategy is only a tool and the main focus
should be in formulating and implementing specific actions which are in line with the
strategy and the overall objective. Thus, the main focus of our recommendations is on
measures that can be implemented quickly and which remove the main barriers for
international competitiveness.
Our literature review has identified three main policy areas for policy intervention in the
IT area. The first two are in line with the main policy areas identified in the draft strategy
of the MITC.
• Workforce and education
• ICT related regulations
• ICT infrastructure
Below we outline our recommendations with in each of the areas.
-11-
Box 1
Moldova’s IT sector development strategy 2013-2022
Moldova’s Ministry of Information Technology and Communication developed a draft
strategy with the aim of providing policies to assist the development of the IT sector.
The strategy distinguishes three main policy areas:
• “Excellence in IT education”
• “Business environment, economic incentives and innovation in IT”
• “International markets and partnerships”
For each policy area specific objectives have been defined and performance indicators will be
used to track the progress. Finally, the strategy formulates specific policy measures which are to
reduce some of the shortcoming. That way the ministry hopes to improve how well IT companies
can compete with their many international rivals and, in turn, promote IT sector growth.
The table below provides an overview of the specific policy measures proposed in the strategy.
Within this policy paper we will assess and comment the various measures discussed in the
strategy.
Excellence in IT Education Business environment, economic
incentives and innovation in IT
International markets and partnerships
• Establish a joint working group
on IT training programs
• Add business development,
marketing, management skills
to IT curricula
• Commercial study
programmes
• Partnerships with foreign
universities
• Institutionalization of private
IT companies participation in
higher education
• Encourage practical training in
IT companies
• Establish Centre of Excellence
• Update occupational classifier,
introduce IT specialities
• Awareness campaigns for IT
education / training
• Certification of IT
professionals
• Retraining of unemployed /
retired individuals
• Establishing an interdepartmental
working group for regular
consultation with IT companies
• Cancel the licensing of activities IT
systems
• Extension of e-Government Centre
mandate
• Analysing the effect of existing tax
incentives on the IT companies
• Draft law on IT technology parks and
regulatory impact analysis
• Implementing a special economic
and tax regime for the IT technology
parks
• Encouraging the use of IT in
different economic
• Promoting excellence in business
• Organising start-up events
• Implement Law on Electronic
Commerce
• Awareness campaign on copyrights
• Public procurement rules for local IT
companies participation
• Grant programs oriented towards
R&D and IT start-ups
• Establish venture capital funds for IT
companies
• Programs focused on attracting
transnational IT companies
• Signing IT cooperation agreements
with advanced countries in IT field
• Promoting Moldova image as a
regional IT centre
• Encouraging participation of
Moldovan IT companies in
international exhibitions
• Opening commercial
representations on the main target
markets for Moldovan TI products
and services
Source: Ministry of Information Technology and Communication (MITC) (2013)
-12-
3.1 Workforce and education
The MITC has rightly identified workforce and education as the main issue inhibiting IT
sector development. In this context it is also important to understand that the lack of
skilled staff is a quality not a quantity problem. The education system produces enough
IT graduates; however, their skills do not match the demand of employers. This is due to
outdated curricula, lack of access to modern equipment and software and teaching staff
who often do not meet international standards. Those problems are aggravated by a
serious lack of practical experience in higher and vocational education.
Table 2 below shows the policy measures planned in the current draft version of the IT
development strategy which are related to workforce and education. The table also
provides a comparison to what we have identified as best international practice through
our literature review. In the following section of the report we comment the proposed
measures.
-13-
Table 2
Proposed policy measures and comparison to best international practice
IT sector development strategy Best practice / recommended policies
• Establish a joint working group on IT training programs • Set up and make use of the Sectorial Committees as proposed in Moldova’s
vocational training strategy
• Add business development, marketing, management skills to IT curricula • Delegate to Sectorial Committees
• Commercial study programmes • Should come private sector initiative or PPP as part of a wider Industrial Park
Concept
• Partnerships with foreign universities
• Institutionalization of private IT companies participation in higher education (software practice, teaching, joint projects, investments)
• Encourage practical training in IT companies • Dual apprenticeships in which the companies provide practical training while the
state provides the theoretical school-based training
• Make sure fiscal code provides the right incentives
• Establish Centre of Excellence • PPP as part of a wider Industrial Park Concept
• Make use of technical assistance
• Update occupational classifier, introduce IT specialities • Use of sectorial committees for continuous review
• Import’ relevant IT professions from abroad
• Awareness campaigns for IT education / training • Delegate to industry bodies and associations
• Lack of IT skills is rather a quality problem
• Certification of IT professionals • Establish common standards and certificates so IT training and skills outside the
state system can be easily recognised and compared
• Delegate to industry bodies or chambers
• Retraining of unemployed / retired individuals • Through PPP and private sector initiatives
Source: Own analysis
-14-
Adjusting curricula to the demand of the IT sector
Recommendation 1 and 2 are rightly aimed at changing the outdated curricula. The
question is how to achieve this. Indeed, the ministry should clear away from “micro-
managing” the content of IT training. Demand-orientation means that businesses need to
have large weight in what is trained. Using working groups with representatives from
business, academia, and the ministries is therefore the right approach. Those reviews
need to be institutionalised with clear rules and – most important – they need to be
binding so that inputs and recommendations lead to genuine change. Businesses will not
participate in yet another working group if it does not have a binding mechanism to
change the content of the training. For vocational training colleges the Ministry of
Education currently sets up “Sectorial Committees” which have the task to change the
content of vocational training. This is best international practice and the MITC is well
advised to support and use a dedicated ICT sectorial committee to change the relevant IT
professions.
Recommendation 1: Set up and make use of the “Sectorial Committees” as
proposed in Moldova’s vocational training strategy to change the curricula of
IT professions and introducing new occupational profiles
Sectorial committees can also identify which profession are yet missing and need to be
introduced (MITC recommendation 8). However, professions and their curricula do not
have to be invented from scratch. Moldova should make use of IT occupations that have
shown to work internationally. Technical assistance from various donor organisations is
available to “import” new relevant professions and curricula.
Recommendation 2: Since those reviews are time and cost intensive, it
makes sense to use technical assistance to “import” and adjust working IT
curricula from countries with a well-developed IT training and education
Finally, commercial study programmes (e.g. those that provide participants with CISCO,
Oracle, SAP or any other certificates) are a useful addition to the skills offered through
the public sector and the MITC should support such initiatives.
How to involve companies in practical IT Training
The MITC has correctly identified that private companies should play a much larger role
in providing the practical training of IT students. Currently, only a small share of the
graduates is employable and employers need retrain graduates to supply them with the
skills needed. This “double-training” is inefficient and costly. Thus, in addition to
adjusting the content of the training, using the afore-mentioned sectorial committees,
companies should also get involved providing IT training.
This way companies can train graduates to their specific needs. How can companies get
involved? A successful approach is the Dual Apprenticeship System in use in Central
Europe. For example, the occupation “IT System Engineer” is trained in Germany during
a three year long apprenticeship consisting of school intervals and practical intervals in
the company with which the apprentice has a formal work contract. Elements of such a
-15-
dual apprenticeship would be best international practice instrument to get companies
involved into providing practical IT training – especially for Moldova’s IT colleges. Both
the ministry of education and economy currently explore the use of such a dual system.
The MITC should support this effort. Initially this approach could be tested in pilot
projects involving large companies. This would also tie in perfectly with the concept of IT
parks where IT colleges could be operated in Public Private Partnership between the state
and the companies. Setting up Public Private Partnership (for example in IT Parks) for the
training of IT students, where also commercial study programmes could be provided,
would provide an initial basis for creating the desired “Centres of Excellence” which have
been left otherwise vague in the current strategy.
Recommendation 3: Dual apprenticeships in which the companies provide
practical training while the state provides the theoretical school-based
training would be a good approach to involve companies into the training of
students and make IT training more relevant.
Certification of IT skills obtained outside the formal sector
Due to the lack of demand orientation, many firms train their own staff outside the
official VET system. Although this is in general a shortcoming of the current system, such
training is per definition demand oriented. It is also a good way of reacting to sudden
changes in demand, for example in the case that a new investor sets up production in
Moldova and requires a large number of newly trained workers and/or workers with skills
that are currently not provided by Moldova’s centralised, school-based system. The
government should provide ways for companies and students to formalise the
qualifications gained outside the state VET system. This would have several advantages.
First, the current system would be less reliant on the state-based system. Companies
could quickly react to changes in demand by training their own students.
Second, recognising the skills learned outside the state system benefits the entire
economy. Workers trained that way and furnished with a certificate documenting their
skills could more easily move from one company to the next, increasing labour mobility
and thus the productivity of Moldova’s economy. Such an approach has been rightly
proposed (as recommendation 10 in the strategy). International experience suggests that
the ministry can delegate this task to industry bodies or chambers.
Recommendation 4: Establish common standards and certificates so IT
training and skills outside the state system can be easily recognised and
compared to official degrees.
Regarding other measures such as the proposed awareness campaigns for IT education
this is a measure which is best delegated to industry bodies and associations.
Furthermore, the lack of skilled IT professionals seems to be not due to a lack of
students enrolling for this subject. Similar the retraining of retired and unemployed is for
now best left to the private sector. The most efficient way for now is improving the way
IT skills are trained in the vocational training and higher education systems.
-16-
To sum up, the main focus of policy measures affecting the IT workforce and education
should be more demand orientation of the IT training. To achieve this the MITC, in
cooperation with the Ministry of Education, needs to provide ways to involve companies
in the IT training and give them a larger say in which skills are needed and which are
not.
3.2 Regulation and business environment
Regulation and a conductive business environment is the second large area of policy
actions covered in the draft strategy. This includes aspects such as:
• Companies’ administrative burden (e.g. tax and other inspections, permits and
licenses)
• Taxation and subsidies affecting the IT industry
• Public procurement rules
• Copyrights
Table 3 below provides an overview of the actions proposed in the draft strategy and
compares them with best practice and recommended policies based on our research.
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Table 3
Policy measures proposed in the ICT strategy related to the business environment
IT sector development strategy Best practice / recommended policies
• Establishing an interdepartmental working group for regular consultation with IT companies
• Generally recommended • Needs to be provided with sufficient resources and binding procedures
• Changing the current legislation in order to abolish the licensing of IT activities
• Extension of e-Government Center mandate • Not analysed
• Draft law on IT technology parks incl. regulatory impact analysis • IT Industry Parks should try to replicate some of the well-working features of Free Economic Zones while leaving out the problematic ones
• Regulatory exemptions recommended • Tax incentives problematic and should be considered with caution • IT Park concept should be analysed in a separate analysis and stakeholder
consultation
• Programmes to encourage the use of IT in different sectors • Case for outright subsidies is weak • Least problematic fiscal instrument are depreciation rules • Assess and compare if there is a case for change of existing rules
• Promoting excellence in business • Delegate to chambers or industry associations
• Organising start-up events • Delegate to chambers or industry associations
• Implement Law on Electronic Commerce
• Awareness campaign on copyrights • Delegate to chambers or industry associations • Actively implement DCFTA commitments on copy-rights and other international
obligations
• Public procurement rules for local IT companies participation • The case for use of public procurement and local content rules is weak and should not be part of policy instrument to develop Moldova’s IT sector
• Grant programs oriented towards R&D and IT start-ups
• Establish venture capital funds for IT companies
Source: Own analysis based on Ministry of Information Technology and Communication (MITC) (2013)
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Administrative burden
It is a well-known fact that the administrative burden represents significant cost to
businesses operating in Moldova – including those operating in the IT sector. Indeed,
administrative burden tends to weigh heavier on small-and-medium sized enterprises
(SME). Since many IT companies fall into this category, reducing the administrative
burden is especially important for the development of the sector. Reducing this burden
requires a long-term reform effort; however, investors and businesses cannot wait that
long. This poses the question of how to reduce the burden quickly? A relatively effective
policy instrument that is in use already in Moldova is so-called “Special Economic Zones”.
They offer resident companies advantages such as simplified customs procedures, a
reduced administrative burden and (although this varies from one zone to the next) a
professional management which can assist the companies in overcoming the
administrative burden. The existing zones also offer a reduced profit tax rate, a VAT
exemption as well as an exemption from customs duties as long as goods do not leave
the zones. However, fiscal exemptions are not without problems and need to be
considered carefully. Similarly, in Moldova there are 10 industrial parks which offer a
dedicated infrastructure but none of the regulatory exceptions granted to Free Economic
Zones.
With Free Economic Zones and Industrial Parks there are proven concepts available that
could be used as a short term measure to overcome the administrative burden for IT
companies. Thus, the MITC may want to explore if IT Industry Parks can offer some of
the aspects of Free Economic Zones and Industrial Parks that have proven successful –
especially a dedicated management and protection from arbitrary inspections. A detailed
concept should be elaborated in a separate study and involve all relevant stakeholders.
Furthermore industry parks (aka technology parks, aka IT clusters) could also serve
other objectives and interventions proposed in the IT development strategy and industry
bodies. They could serve a business incubators for immature companies, as technology
parks for mature companies and be part of the so-called centre of excellence (ATIC
2012).
Recommendation 5: IT Industry Parks should try to replicate some of the
well-working features of Free Economic Zones while leaving out the
problematic ones, especially tax exemptions. A detailed concept should be
developed as part of a separate analysis and stakeholder discussions.
Furthermore, the ministry is right in considering an interdepartmental working group for
regular consultations of the government with IT companies. However, there is no lack in
working groups and it is important that a new forum adds value compared to the existing
channels and instruments of dialogue with the government. It requires a permanent set-
up such as a secretary and binding procedures which regulate how issues are followed up
and lead to real change.
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Taxation and subsidies affecting the IT industry
The general level of taxes and fees is another important aspect which affects the
competitiveness of IT companies – and those operating in the rest of the economy.
Standing currently at 12% the headline profit tax in Moldova is generally low and, as
such, does not represent a competitiveness issue. Indeed, the level of taxation is not
something investors usually complain about in discussions.
Additionally, wage tax of IT professionals already enjoys generous exemptions, so there
is already ample fiscal stimulus in place for the sector.
Indeed, best international practice and manifold examples from other countries suggest
that the government is best advised to keep tax exemptions to a minimum. Such
measures are usually costly, they benefit companies or individuals who would have
invested in any case, encourage fraud and create unwanted distortions. Additionally, the
IMF – an important partner for Moldova – does advice against fiscal exemption.
However, while this general critique is justified, the decision about tax incentives should
also factor in the tough regional and international competition Moldovan business face.
Regional competitors such as Romania and Serbia make ample use of tax reliefs and/or
outright subsidies. Therefore, practitioners in investment attraction argue that at least a
token signal is needed in order to put Moldova on the map of international investors.
With that in mind there is a case for keeping the existing tax incentives for a limited
period of time.
Best international practice suggests that, if exemptions are considered, the focus should
be on tax exemptions. For example, VAT exemptions for investments in IT equipment or
software. However, in a well-working VAT system companies would get their VAT re-
funded in any case. Exemptions for consumers are likely to spur imports with little effect
on domestic business.
Recommendation 6: While existing incentives are largely justified, there is
good reason to believe that Moldova’s IT sector does not need any
additional subsidies or further tax exemptions. Existing tax exemptions
should be reviewed on a regular basis.
An instrument mostly used in many countries is depreciation rules for software and IT
equipment. Shortening the depreciation times for those assets allows companies to claim
higher depreciation costs, which reduces the profit tax bill. Companies have the incentive
to renew their equipment more often and invest more.
Recommendation 7: The most common and least problematic fiscal
instrument to encourage general investment in IT hardware and software
are depreciation rules. Moldova should assess and compare its rules to
establish if there is a case for change.
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Public procurement rules
Using public procurement to support Moldova’s IT industry is in general warranted but
the outcome depends on which policies are used. The primary aim of public procurement
is getting best value for money. Supporting the domestic IT sector or SME companies is
secondary to that. Local content rules for are an instrument which can have higher costs
than benefits. To start with, Moldova as a WTO member is bound to clear rules as to use
of public procurement and using it to support the domestic industry only can easily be
interpreted as an unfair trade measure. The Deep and Comprehensive Free Trade
Agreement (DCFTA) which is likely to come into force in 2014 also has strict rules on
public procurement and requirements on local content are unlikely to comply with it.
Additionally, the economic case for use of public procurement and local content rules as a
policy instrument is not very strong. Protecting Moldovan IT companies in such a way
from international competition may actually be counterproductive to the MITC’s aim of
improving competitiveness. Furthermore, the public sector may end up with services of
lower quality at higher cost – putting an additional burden on the budget available for
more effective policy instruments.
However, a legitimates policy tools used in many countries, are (UNCTAD; 2013):
• A common IT procurement policy among all government departments assisted
through an dedicated agency,
• A transparent best practice procurement process,
• Preferential treatment of trusted local suppliers if this is in line with the overall
objective,
• Provisions that allow smaller companies to form consortia so they can bit together
for a larger tender and
• Reducing administrative barriers to bid participation
Recommendation 8: The case for use of public procurement and local
content rules is weak and should not be part of policy instrument to develop
Moldova’s IT sector.
However, there are a number of legitimate instruments that can support
domestic providers to participate in public procurement which should be
implemented swiftly.
Copyrights and intellectual property
Copyrights and other intellectual property are an important incentive for IT companies,
especially software and content developer, to produce a product in the first place. Most of
their products represent intellectual property and without protection they face high risks
and costs when producing software, web contents and the like. As such, the protection of
intellectual property is a major competitiveness issue of producing IT services in
Moldova. It also affects the attractiveness of Moldova as a business location. Therefore,
the proposed policy intervention should not stop at awareness campaigns.
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Similar as public procurement rules, the protection of intellectual property is an
important aspect of the forthcoming DCFTA. As such, the government has already a clear
goal and guideline as to how to proceed in terms of protecting intellectual property
according to international standards. The government may also use technical assistance
in order to fulfil its DCFTA commitments. However, as with most reform efforts,
implementation and enforcement are essential for the success. Here the MITC has an
important role to play.
Recommendation 9: Guaranteeing intellectual property is a major
competitiveness issue and implementing the DCFTA requirements and other
international commitments will go a long way in improving the
competitiveness and attractiveness of the IT sector.
3.3 ICT infrastructure
ICT-related infrastructure, especially broadband speed and mobile networks, is where
Moldova has a competitive advantage compared to other countries and could – if
maintained – function as an engine for IT sector growth. However, other infrastructure
aspects may undermine this advantage.
However, other important infrastructure aspects are weak. Reliability of electricity supply
and the time it take for a connection to the electricity grid remain serious constraints for
many businesses and are also likely to constraint IT sector development. However,
improving the electricity supply requires fundamental energy market reform and lies
possibly outside the mandate of the MITC. Against this backdrop, the proposed
instrument of IT Industry Parks could be used to provide quick connection to the grid and
reliable supply. A dedicated management, as is often a feature of the well-functioning
Free Economic Zones, would streamline connection to the grid, investments in sub-
stations, etc.
A similar approach could be used to overcome the issue of a lack of secure servers which
has the potential to inhibit IT sector development. Such investments are much more
efficiently used among several companies and could be part of the infrastructure offering
of IT Industry Parks.
Recommendation 10: Use IT Industry Parks to overcome infrastructure
short-comings such as reliable electricity supply and access to secure
servers.
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4 Summary and outlook
The wider ITC sector and within it the IT sector has shown a remarkable development
over the past years and its contribution to GDP and exports is larger than that of regional
competitors. However, for the sector to continue to outperform the rest of the economy
and to be able to compete internationally some of the obstacles that have become
apparent need to be removed.
The MITC has correctly identified skills and education as well as the business
environment as two of the main factors braking growth of IT companies. Having assessed
the strategy and compared it with international experience we recommend the following:
To address the lack of suitably qualified IT staff:
Recommendation 1: Set up and make use of the “Sectorial Committees” as proposed in
Moldova’s vocational training strategy to change the curricula of IT professions and
introducing new occupational profiles
Recommendation 2: Since those reviews are time and cost intensive, it makes sense to
use technical assistance to “import” and adjust working IT curricula from countries with a
well-developed IT training and education
Recommendation 3: Dual apprenticeships in which the companies provide practical
training while the state provides the theoretical school-based training would be a good
approach to involve companies into the training of students and make IT training more
relevant.
Recommendation 4: Establish common standards and certificates so IT training and skills
outside the state system can be easily recognised and compared to official degrees.
To improve the business environment of IT companies:
Recommendation 5: IT Industry Parks should try to replicate some of the well-working
features of Free Economic Zones while leaving out the problematic ones, especially tax
exemptions. A detailed concept should be developed as part of a separate analysis and
stakeholder discussions.
Recommendation 6: While existing incentives are largely justified, there is good reason
to believe that Moldova’s IT sector does not need any additional subsidies or further tax
exemptions. Existing tax exemptions should be reviewed on a regular basis.
Recommendation 7: The most common and least problematic fiscal instrument to
encourage general investment in IT hardware and software are depreciation rules.
Moldova should assess and compare its rules to establish if there is a case for change.
Recommendation 8: The case for use of public procurement and local content rules is
weak and should not be part of policy instrument to develop Moldova’s IT sector.
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Recommendation 9: Guaranteeing intellectual property is a major competitiveness issue
and implementing the DCFTA requirements and other international commitments will go
a long way in improving the competitiveness and attractiveness of the IT sector.
Recommendation 10: Use IT Industry Parks to overcome infrastructure short-comings
such as reliable electricity supply and access to secure servers.
One of the core proposals in the IT sector development strategy is the use of so-called IT
Industry Parks. And indeed there are a number of international examples that show that
this approach can work well as a tool to support IT sector development. However, is
would require a detailed concept which considers international experience as well as
Moldova’s existing experience with Industry Parks and Free Economic Zones. If feasible
and implemented successfully IT Industry Parks could overcome a number of the current
issues such as the high administrative burden, provide demand-oriented training and
education and pool resources for infrastructure such as secure servers. Additional
features could be start-up support and funding which have only been touched upon in the
current strategy.
The government is right to focus first on removing barriers to competitiveness. Once this
has been achieved a second question should be, how can Moldova position itself to
participate in some of the IT mega trend.
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5 Appendix
Figure 5
OECD 2007 ICT Sector definition
Source: OECD (2011)
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References
ATIC (2012). ICT Sector in Moldova - Policy White Book 2012.
Eurostat (2010). http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tin00074&plugin=0.
GET Moldova (2011). Proposals for Reducing the Administrative Burden of Tax Regulations in Moldova.
Ministry of Information Technology and Communication (MITC) (2013). The strategy for growing IT industry competitivenss (unofficial translation).
National Bank of Moldova (2013). The international accounts of the Republic of Moldova.
National Bureau of Statistics of the Republic of Moldova. (2013). Statistical Databank. Contribution of economic activities to the formation of Output by Economic activities and Years Retrieved 15/10/2013, from http://statbank.statistica.md/pxweb/Database/EN/databasetree.asp.
OECD (2011). OECD Guide to measuring the Information Society 2011. OECD Publishing.
UNCTAD; (2013). Promoting Local IT Sector Development through Public Procurement. United Nations Publications.
World Bank. (2013). http://data.worldbank.org/indicator/BX.GSR.CCIS.CD. from http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD.
World Economic Forum WEF (2013). The Global Information Technology Report 2013 - Growth and Jobs in a Hyperconnected World.
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List of recent Policy Papers
• Moldova’s trade policy: Strategy, DCFTA and Customs Union, by Jörg Radeke, Ricardo
Giucci and Adrian Lupusor, Policy Paper 03, June 2013
• Liberal Professions in Moldova – Neglected Economic Potential, by Alexander Knuth
and Marcel Chistruga, Policy Paper 02, June 2013
• Current Account Sustainability in Moldova: Policy Implications, by Ricardo Giucci and
Robert Kirchner, Policy Paper 01, April 2013
• The DCFTA between Moldova and the EU – A Risk Assessment, by Jörg Radeke, Policy
Paper 03, September 2012
• FDI Attraction to Moldova: Facts, Potential and Recommendations, by Ricardo Giucci
and Jörg Radeke, Policy Paper 02, April 2012
• Emission Trading as a Catalyst for Energy Efficiency Improvements: Options and
Potential for Moldova, by Jörg Radeke and Georg Zachmann, Policy Paper 01, February
2012
• Credit Growth in Moldova: Empirical Analysis and Policy Recommendations, by Enzo
Weber and Robert Kirchner, Policy Paper 03, July 2011
• Options for a Deep and Comprehensive Free Trade Agreement between Moldova
and the EU, by Matthias Luecke, Alex Oprunenco and Valeriu Prohnitchi, Policy Paper
02, May 2011
• Proposals for Reducing the Administrative Burden of Tax Regulations in Moldova, by
Ricardo Giucci, Alexander Knuth, Natalia Cotruta and Ana Popa, Policy Paper 01, March
2011
List of recent Policy Briefings
• Economic impact of the Eurozone crisis on Moldova: Identification and quantitative
assessment of transmission channels, by Robert Kirchner, Ricardo Giucci and Adrian
Lupusor, Policy Briefing 01, April 2013
• Eurozone crisis and its impact on Moldova, by Ricardo Giucci, Policy Briefing 03,
November 2012
• The inflation targeting regime 2013-2017: Analysis and Recommendations, by Ricardo
Giucci and Cyrus de la Rubia, Policy Briefing 02, September 2012
• The Third Energy Package and Electricity Market Reform, by Jörg Radeke and Georg
Zachmann, Policy Briefing 01, June 2012
• Moldovan Carbon Credits beyond 2012, by Georg Zachmann, Policy Briefing 09,
December 2011
• Comments on the Draft Law on Small and Medium Enterprises as of October 2011, by
Alexander Knuth, Policy Briefing 08, October 2011
• Reform Proposals for Primary Documentation in Moldova, by Alexander Knuth and
Natalia Cotruta, Policy Briefing 07, October 2011
