TAM/BAS BRIEF FOR FYR MACEDONIA 2009-2011

September 2009

This document provides recommendations for TAM/BAS intervention in FYR Macedonia in 2009-11. It is a product of staff of the European Bank for Reconstruction and Development (EBRD) working in the TAM/BAS Programme team and the Office of the Chief Economist. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Board of Directors of the EBRD or the governments they represent. The EBRD does not guarantee the accuracy of the data included in this work. This Report has been prepared by a core team led by Lise Bruynooghe (Office of the Chief Economist), Caroline Bosa (TAM Programme) and Valeria Della Rosa (BAS Programme). The team was assisted by Craig Otter (TAM/BAS Programme) The team also acknowledges the support from: Booz Allen Hamilton (private consultancy working for USAID), USAID AgBiz Programme, USAID Competitiveness Project, USAID, World Bank, Economic Chamber of Macedonia, GTZ, Agency for the Promotion of Entrepreneurship (APPRM), Strengthening Entrepreneurship, Competitiveness and Innovation (a project funded by the British Embassy Skopje, administered by the APPRM), Embassy of the Kingdom of the Netherlands, Government Secretariat for European Affairs, Ministry of Economy, Department for Energy, Ministry of Economy, Department for Entrepreneurship and Competitiveness, National Bank of the Republic of Macedonia (NBRM), EC Delegation, Office of the EU Special Representative, University of St Cyril and St Methodius, EBRD Resident Office, Macedonian Bank for Development and Reconstruction, ICT Chamber of Commerce.

1. ABBREVIATIONS

BAS Business Advisory Services Programme BEEPS Business Environment and Enterprises Performance Survey ETC Early Transition Countries GCR Global Competitiveness Report GGM Grant Guideline Matrix GTZ Gesellschaft fuer technische Zusammenarbeit IFI International Financial Institutions LEF Local Enterprise Facility MSME Micro, Small and Medium sized Enterprises OCE EBRD Office of the Chief Economist OSCE Organisation for Security and Cooperation in Europe TAM TurnAround Management Programme USAID United States Agency for International Development

Previous TAM/BAS experience in FYR Macedonia

The TAM/BAS Programme supports economic transition by achieving enterprise change in potentially viable micro, small and medium enterprises in the EBRD countries of operation.

TAM TAM supports the introduction of international best practice in small and medium sized enterprises with the potential of becoming future leaders in their market through the introduction of international Advisors from developed countries with 15-20 years of professional experience in the relevant sector. TAM projects typically last around 18 months. The Programme also carries out seminar and training activities promoting international best practices by disseminating successful case studies to entrepreneurs. TAM has undertaken a total of 37 projects, one of which is still in progress, with four enterprises at the evaluation stage. TAM projects have a wide coverage across industry sectors with Food Manufacturing, Fabricated Metal Product, Accommodation and Food Product Manufacturing the most common sectors. TAM has worked with enterprises of varying size, but especially with medium-sized enterprises, many with a large turnover. There has been a wide geographic dispersion of projects, with almost two in three projects being undertaken outside the capital, Skopje. Of projects fully completed, 93% have been rated satisfactory or better. What has been identified as a key factor for TAM project success has been the degree of willingness and eagerness of the staff of assisted enterprises to learn from the TAM team.

BAS BAS acts as a facilitator for the use of local, private-sector consultants by MSMEs to obtain a diverse array of services. BAS works on the demand and the supply side. By assisting individual enterprises to engage with local consultants on narrowly-based, specific projects with a rapid payback, it stimulates demand and the understanding of the potential benefits of using external consultants. It also directly increases the supply and quality of local advisory services, through targeted market development activities. BAS supported projects typically last around four months. Since inception in June 2002, BAS in FYR Macedonia has undertaken a total of 393 projects, engaging 174 consultants – 92% of which were local. From the completed projects, 270 have been internally evaluated by the BAS Team in FYR Macedonia. The evaluation analysis shows that 95% of the evaluated projects were rated as “Highly successful” or “Successful”. The industry spread of projects has been wide, but there has been a focus on Food & Beverages, Construction/Engineering, Wholesale/Retail Distribution and Electrical/Electronics/IT. Over half the number of projects has been carried out in other locations than the main cities. Most projects have targeted Quality Management & Certification and Engineering Studies, and Computerized Financial/Management Information Systems. The most common cross-cutting objective has related to environmental issues and energy efficiency. The BAS Programme in FYR Macedonia has also undertaken a number of market development activities, promoting the benefits of advisory services to SMEs. For example, trainings for SMEs focusing on cross-cutting issues relevant to Environmental Management and Energy Efficiency, including Integrated Prevention Pollution and Control (IPPC), Environmental law Energy audit, Environmental Impact Assessment (EIA). Moreover, the BAS team carried out trainings for consultants to assist them in responding to MSME’s needs when apply for EU funding.

Linkages with banking To date, 7 TAM/BAS assisted companies in FYR Macedonia have attracted investments of € 26.4 million from the EBRD of which € 11 million through the EBRD Local Enterprise Facility (LEF).

TAM in FYR Macedonia in charts

Out of the 37 TAM projects 36 have been completed of which four await an evaluation

The vast majority of TAM projects have been evaluated as satisfactory or highly satisfactory

Status of TAM projects in FYR Macedonia

32

4 10

5

10

15

20

25

30

35

closed completed w ork in progress

Evaluation of closed TAM projects

Highly satisfactory

43%

Satisfactory50%

Un-satisfactory

7%

TAM projects have had a wide industry spread, with food manufacturing the most common sector

Projects have been dispersed throughout FYR Macedonia with a broad representation in all federal

districts TAM projects by industry

0 1 2 3 4 5 6 7 8

Electric pow er distribution

Electrical equipment

Printing and related support

Industrial machinery

Petroleum refineries

Pharmaceutical and medicine

Primary materials

Wood product manufacturing

Accommodation

Miscellaneous manufacturing

Fabricated metal product

Food and beverage manufacturing

TAM projects USDm turnover before and after* USDm before TAM USDm after TAM

0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00

Alkaloid AD

Mlekara

Alumina

Evropa

IGM Trade DOO

Zito Luks JSC

BIM a.d. (Environmental)

Ading AD

Frinko-Bitola

Algreta AD

ZI-VA

Ograzden AD

Ineks Drim

* For those companies where figures were available

TAM projects started over time

3 2 2 0 0 2 2 8 2 15 1 00

2

4

6

8

10

12

14

16

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

TAM Donors in FYR Macedonia since inception in

thousands of €

0

100

200

300

400

500

600

700

EBRD-EAR

Japa

n

EU (PHARE)

CEI

Irelan

d

Denmark

Italy

Sweden

Switzerl

and UK

Source : TAM/BAS Programme

BAS in FYR Macedonia in charts

BAS in FYR Macedonia has benefited from funding BRSF, CEI, EAR, EBRD, ESSF, DFID UK, The

Netherlands and Portugal

The overwhelming majority of BAS consultants is under local ownership.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

EARCEI

The Neth

erland

sESSF

EBRDBRSF

DFID U

K

Portug

al

BAS has assisted enterprises of all sizes, but especially micro enterprises.

There has been a wide spread of projects, with Food/Beverages, and Construction/Engineering

being the most common sectors.

BAS turnover by ownership Donor contributions to BAS FYR Macedonia

Local consultants96%

Locally owned by foreign consultants

1%

Foreign consultants3%

<5064%

>2009%

50<10017%

100<20010%

Industry Type % ProjectsFood & Beverages 29Construction/Engineering 13Wholesale/Retail Distribution 10Electrical/Electronics/IT 10Metals/Machinery/Equipment 9Other 7Textiles/Apparel/Footwear 5Glass/Rubber/Plastic 4Printing/Publishing 4Chemical/Pharmaceutical 3Wood Processing/Furniture/Forestr 3Travel/Tourism 2Media/Communications 1Health 1Transport 1

BAS projects by enterprise size

% BAS projects by industry

BAS-assisted enterprises vary greatly in terms of turnover and employee number.

Since 2002, there have been more projects in other areas than in the main cities.

0102030405060

<50 50<100 100<200 >200

€ m

illio

n

BAS projects by location BAS turnover by enterprise size

Main Cities41%

Other 59%

Data is the enterprise turnover average; dots represent the maximum turnover for enterprises by employee number.

In the first three years of operations, the distribution of projects was fairly split between the main cities and more rural areas. This tendency has been changing over time in favour of enterprises outside of the

main cities.

Main Cities52%

Other 48%

Main Cities34%

Other 66%

BAS projects by location, 2003-06

Food/Beverages remains the industry where enterprises have accounted for a significantly larger share of the total of BAS projects.

0% 5% 10% 15% 20% 25% 30% 35%Travel/Tourism

HealthChemical/Pharmaceutical

TransportMedia/Communications

WoodGlass/Rubber/Plastic

Construction/EngineeringPrinting/Publishing

OtherMetals/Machinery/Equipment

Textiles/Apparel/FootwearElectrical/Electronics/IT

Wholesale/Retail DistributionFood & Beverages

0% 10% 20% 30% 40% 50%Transport

HealthMedia/Communications

Printing/PublishingWood Processing/Furniture/Forestry

Glass/Rubber/PlasticTravel/Tourism

Textiles/Apparel/FootwearChemical/PharmaceuticalElectrical/Electronics/IT

Wholesale/Retail DistributionOther

Metals/Machinery/EquipmentConstruction/Engineering

Food & Beverages

Quality Management and Certification Systems as well as Computerised Financial and Management In formation Systems are the most popular types of advisory services throughout the period; the demand

for advice targeted at Engineering studies increased after 2005.

0% 10% 20% 30% 40% 50%Other

Partner Search

Engineering StudiesComputerised Manufacturing Systems

Reorganisation/restructuring Feasibility studies

Development planningMarket analysis & planning

Computerised financial/management Information SystemsTo Introduce Quality Management & Certification

0% 10% 20% 30% 40% 50%Computerised Manufacturing Systems

Partner Search

Feasibility studies

Reorganisation/restructuring

Other

Development planning

Market analysis & planning

Computerised financial/management Information Systems

To Introduce Quality Management & Certification

Engineering Studies

BAS projects by ry, 2005-09 indust BAS projects by industry, 2002-05

BAS projects by type of advice 2002-05 BAS projects by type of advice, 2005-09

BAS projects by location, 2007-09

The MSME sector and infrastructure of business advisory services

This section lays out some of the main challenges and transition obstacles for the MSME sector in FYR Macedonia. It provides insight into the level of entrepreneurial activity, the business environment, challenges faced by the MSME sector and the supply of business support services.

Strong economic performance, yet

important structural and

political vulnerabilities

The Macedonian economy has performed well in recent years. GDP growth has a broad base, supported by a sharp increase in exports, strong industrial performance and higher household consumption. However, FYR Macedonia is still facing a number of challenges. The key short term policy challenge is to reduce unemployment and the trade deficit. The wider current account deficit together with the negative impact of the international financial turmoil on exports, foreign direct investment and remittances inflows highlight the need for a continuation of the government’s prudent fiscal stance. Reducing the influence of political parties on economic decisions and on the staffing in companies, government institutions, municipalities and the legal system, as well as an effective administrative system, will be crucial for further reforms and economic growth. In the medium term, however, sustainable economic growth is dependent not just on the country’s reform efforts, but also on the progress of negotiations for EU accession and the maintenance of domestic and regional stability.

A huge, yet rather vulnerable MSME

sector dominated by micro and

small enterprises

FYR Macedonia’s MSME sector accounted for 78.4% of employment and 54.3% of GDP in 2006. The informal sector remains large, although there are indications that it has been somewhat reduced, for example by improvements in tax collection, a lowering of the tax burden and financial incentives for registration. According to the EU definition in terms of the number of employees (adopted in 2004 with the Law on Trade companies) MSMEs account for 98.7% of active business entities registered with the Central Registry in 2006. There are very few large enterprises in FYR Macedonia. Small companies are mostly operating in the wholesale and retail trade sector (43.9%), while manufacturing (14.5%), together with health and social work (10%) and transport, storage and communication (9.4%) come second in terms of importance. Micro and small businesses are often family businesses. They lack a sufficient capital base and management experience, which makes them rather vulnerable and hardly suitable for business and employment growth. MSMEs are concentrated in the capital, Skopje. The MSME sector is characterised by low export penetration and low business sophistication.

MSMEs operate in an improving,

yet challenging business

environment

Among the Doing Business top reformer in 2008/2009, FYR Macedonia has significantly improved the ease of doing business. Progress has been achieved with the introduction of low and simplified taxation, customs reform, and improvement of the business registration process. However, FYR Macedonian businesses still work in a challenging business environment. According to BEEPS, broader economic development is needed to improve the business climate. This will be a long term process, and will need to include improvements in terms of infrastructure (in particular ensuring reliable power supplies), reform in the areas of employees’ social contributions, construction permits, bankruptcy procedures, access to finance as well as improved education facilities. Corruption, judicial shortcomings and weak protection of entrepreneurs’ rights with respect to enforcing contracts are major constraints for investors and entrepreneurs.

Strong need for business advisory

services yet lack of awareness of the

potential benefits

A change in attitude vis-à-vis external advice would be beneficial for Macedonian businesses in order to become more competitive. Introduction of quality and environmental standards is already well advanced, due to legislation making ISO 9000 (quality management system), ISO 14000 (environmental management system), HACCP (food) and IPPC (environment) compulsory. Capacity building is

particularly important in the ‘non compulsory’ areas of partner search (information, advice and support), HR management, management and marketing skills (packaging and branding) and long-term planning. In terms of sectors, external advice is particularly important in the export-oriented sectors, food processing, tourism, pharmaceuticals and IT. Other more traditional sectors that are all experiencing considerable difficulties but would benefit from business advisory services include: infrastructure development (utilities, building and construction), metals, textiles and clothing, as well as tobacco, wine and organic food production.

A growing, yet heterogeneous

infrastructure of business support

The private consultancy market is growing. Services offered include accounting and audit, legal advice, marketing economic research, advertising and product promotion. Some niche advisory services, such as head-hunting, are also beginning to develop in the market. However, only few consultants offer value in terms of international market insights, innovation or actionable strategies, specialized and targeted advisory services such as strategic planning, training and development. Improvements are needed with respect to provision of information, quality assurance, pricing and availability of an appropriate range of services. No accreditation system is yet in place. Business support infrastructure is regionally fragmented and relies heavily on donor support.

Lack of human and financial resources to

implement governmental SME support

policies

The Macedonian government adopted a small and medium-sized (SME) enterprise development action plan for the period 2007–2010. However, there are problems both with the staffing and financial resources available to perform the duties. There is furthermore a need to improve dialogue mechanisms with the private sector and between the different ministries, agencies and institutions in order to better coordinate support programmes and optimise the use of resources available.

Lack of coordination

between international

donor programmes

There are various international donors in FYR Macedonia, reflecting the country’s strategic importance for many countries and organisations. However, there is a lack of coordination and communication among international donors, and possible synergies are not being exploited. Most donors target their assistance at the policy level. Those intervening at direct enterprise level, tend not to help develop the local consultancy market, but bring in their own consultants and experts.

Macroeconomic context in charts

The Macedonian economy performed well in recent years

Contraction of domestic credit since the onset of the financial crisis

Domestic credit

-60

-40

-20

0

20

40

60

80

100

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Domestic credit % GDP Domestic credit growth % change

Economy size and growth

0

1

2

3

4

5

6

7

8

9

10

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

GDP Nominal USDbn GDP Real % change

The large current account deficit highlights the need for a continuation of the government’s prudent fiscal stance

Current-account

-40

-35

-30

-25

-20

-15

-10

-5

0

5

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Income balance, % GDPTrade balance, % GDPCurrent-account balance, % GDP

Government finances

0

1

2

3

4

5

6

7

1991

1993

1995

1997

1999

2001

2003

2005

2007

-0.40

-0.35

-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

Expenditure, % GDP (Left axis)Revenue, % GDP (Left axis)Balance, % GDP (Right axis)

High unemployment rate on a slight decrease

Growing inflation

Inflation

-2

-1

0

1

2

3

4

5

6

7

8

9

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Consumer price inflation % change

Employment and unemployment

0

5

10

15

20

25

30

35

40

1990

1992

1994

1996

1998

2000

2002

2004

2006

0%

10%

20%

30%

40%

50%

60%

70%

80%

Participation rate, % (Right axis)Unemployment rate, % (Left axis)Employment rate, % (Right axis)

Source: EBRD, IMF.

The MSME sector in charts

Small enterprises dominate the economy with a low official contribution to employment

Number of enterprises across size, 2006

0%

20%

40%

60%

80%

100%

Small Medium Large

Contribution to employment across enterprise size, 2006

0%

20%

40%

60%

80%

100%

Small Medium Large

Small enterprises are concentrated in wholesale and retail trade

While medium-sized enterprises operate mostly in manufacturing, community services

other than health and social work and wholesale and retail trade

sectoral repartition of small enterprises

0% 10% 20% 30% 40% 50%

Agriculture, hunting and forestry

Manufacturing

Construction

Wholesale and retail trade

Hotels and restaurants

Transport, storage and communication

Real estate, renting, business activities

Education

Health and social work

sectoral repartition of medium-sized enterprises

0% 5% 10% 15% 20% 25% 30%

Agriculture, hunting and forestry

Manufacturing

Construction

Wholesale and retail trade

Hotels and restaurants

Transport, storage, communication

Real estate, renting

Education

Health and social work

Other community services

As of December 31, 2007, MBDP’s credit portfolio amounted to €39,786,976

(commissioning excluded)

Large enterprises contribute most to value-added, while small enterprises would need

some improvements in productivity

Macedonian Bank for Development Promotion: credit portfolio by credit line in EUR

02,000,0004,000,0006,000,0008,000,000

10,000,00012,000,00014,000,00016,000,000

Cou

ncil

of E

urop

eD

evel

opm

ent B

ank

DEG

-GM

F

KfW

Mic

ro-C

redi

t Lin

e

Italia

n C

redi

t Lin

e

Wor

king

Cap

ital

Expo

rt Fi

nanc

ing

SME

Fina

ncin

g

Contribution to value-added across entrerprise size, 2006

0%

20%

40%

60%

80%

100%

Small Medium Large

Source: EBRD

Business environment in charts

Overall improving business environment in the South-Eastern region, albeit from a low level

Dealing with construction permits, employing workers and closing a business are areas of

major weakness Doing Business ranking

0

1020

3040

50

6070

8090

10020

08

2009

Bulgaria Montenegro FYR Macedonia Serbia

Doing business ranking

0

50

100

150

200Starting a Business

Dealing with ConstructionPermits

Employing Workers

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Trading Across Borders

Enforcing Contracts

Closing a Business

Good progress in privatisation and enterprise reform, yet poor railways, roads, water and waste

water infrastructure and lack of reform of non-financial institutions

Low broadband penetration and poor landline infrastructure, but high level of PC ownership

and internet users

Communications technology: ITU indexes

0

20

40

60

80

100

120

140

160

Net

wor

ksin

dex

Upt

ake I

ndex

Inte

nsity

inde

x

Ski

lls in

dex

FYR Macedonia South-Eastern Europe average EBRD average

Energy intensity is significantly higher than

regional average Perceived corruption is fairly low, with a sharp

backdrop in 2007

Energy use

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2000 2001 2002 2003 2004 2005

US

PP

P d

olla

rs p

er k

ilgra

m o

f oil

equi

vale

nt

FYR Macedonia Transition country average

Corruptions Perceptions Index

0

2

4

6

8

10

2004 2005 2006 2007 2008

Transparency International uses survey data to prepare the Corruption Perceptions Index. The Index ranges between 0 and 10, with 10 representing the lowest perceived corruption all countries surveyed.

Source: EBRD, World Bank, Transparency International.

Recommendations for future TAM/BAS interventions

This Brief finds strong support among interviewed stakeholders for TAM/BAS to continue operating in FYR Macedonia in the 2009-2011 period.

Continuation of TAM The main impediments faced by Macedonian MSMEs, which could be addressed by the TAM programme assistance, relate to

• poor management skills (operational, organizational, human resources, marketing)

• deficiencies in long term business planning, and • a lack of exposure to international best practices.

Many companies are reluctant to pay for advisory services other than technical know-how, so that TAM could seize the possibility of convincing companies of advantages of good management skills thus addressing the demand side problems of the business advisory market. In terms of sectors, textiles, food processing (mushrooms and peppers in particular), automotive and car-parts industry, metals, construction and pharmaceuticals would benefit from international industrial expertise, especially when it comes to technological know-how. Companies especially need assistance with export promotion and quality management and certifications. TAM should continue its regional scope beyond the capital Skopje where management advisory services are not available. However, in selecting its free of charge management advisory projects, TAM should pay attention not to crowd out private sector providers in the capital. TAM should focus on market dissemination of expertise acquired in the context of its projects and other market development activities as opportunities arise.

and BAS The main impediments faced by Macedonian MSMEs, which could be addressed by BAS Programme assistance, relate to basic business skills in order to ease access to finance (business planning, presenting financials), management culture (need for HR management, introduction of a general corporate governance and integrated management systems more advanced than ISO), partner search, foreign investment consulting, marketing (packaging, labeling), and long term strategic planning. In the Macedonian MSME sector, the smaller the companies, the more they are vulnerable to the effects of the global financial crisis. Therefore, the BAS grant should remain a key component of BAS assistance, thus helping financially constrained enterprises to access consultancy services. At the same time, targeted market development activities should be a big component of BAS assistance in FYR Macedonia. A Grant Guideline Matrix is proposed in order to prioritise intervention and to avoid duplication of efforts from international donors. Higher grants should be given to:

• Size of enterprise: Higher grants should be given to smaller enterprises and lower grants are proposed for companies with more than 200 employees as their ability to pay for consultancy services is generally higher.

• Type of advisory service: Higher grants should be given to support projects involving consultancy services where market supply is less mature, particularly in the areas of environmental management and food safety (HACCP, Euro Gap, ISO 22000).

• Cross-cutting issues: Higher grants should be given to enterprises in rural areas and to enterprises with a high percentage of women in their labour force.

in addition to targeted It is recommended to complement TAM/BAS assistance at the enterprise level with the

market development activities

following market development activities in order to maximise the Programme’s transition impact in FYR Macedonia:

• Visibility and dissemination: In order to maintain the position and to further disseminate the role and results of the programme, TAM/BAS Programme in FYR Macedonia should strengthen promotional activities. Visibility tools could include: hiring of a PR agency to promote the objectives and outcomes of the TAM/BAS activities; disseminating information on business advisory services and best practices via booklets and other publications; participating in trade fairs and exhibitions. In addition, more seminars and trainings related to international best practices should be organised TAM.

• SME and consultancy training: Trainings focusing on capacity building for consultants should be organised to help broaden the country’s supply and quality of local advisory services. The BAS team should continue to carry out targeted trainings which would directly support consultants to extend their skills into new product areas and establish their track record with the help of initial BAS projects.

• Support to and development of existing local institutions: BAS Market Development Activities should assist the country in establishing and using formal accreditation schemes for consultants, aligning the local advisory services markets with international standards. These activities should be carried out supporting and working closely with business associations or accreditation bodies for local consultants.

with a strengthened focus on addressing cross cutting issues

In order to address cross-cutting issues that are pertinent to FYR Macedonia’s MSME sector development, the TAM/BAS Programme should devote efforts to supporting measures that increase energy efficiency and environmental management given that enterprises need to comply with the EU IPPC Directive (Integrated Pollution Prevention and Control) by 2014. Beyond mere compliance with directives and standards, BAS should furthermore encourage long term strategic planning and development taking into account EU environmental standards and regulations. Reaching areas outside of the capital should remain a high priority for TAM/BAS. Rural development initiatives have the potential to further both development outside Skopje and to exploit FYR Macedonia’s potential in industries related to agriculture (especially food-processing). MSMEs in regions in the East, where the textile industry is concentrated, appeared to be in need of donor assistance to improve quality, promote exports and compete with imports. In the West, where industrial activities tend to gather, enterprises need assistance with meeting international requirements for export and pollution and in promoting their products as exports. TAM/BAS should also devote efforts to supporting women entrepreneurs and encouraging women’s access to middle management and executive positions primarily by the continuation of targeted initiatives. Trainings specifically target skills and needs of women in business, young entrepreneurs and rural businesses should be organised.

This Brief as contribution to EBRD’s policy

dialogue

By thoroughly analysing the business environment and clearly identifying the challenges faced by the MSME sector, this brief further strengthens the EBRD’s policy dialogue toolkit. Future challenges for the government (among others) are identified as enhancing the protection of investors, implementing intellectual property rights, reducing burdensome social contributions for employers, reducing the grey economy, improving infrastructure and enhancing inter-ministerial cooperation as well as dialogue between the government and businesses.

An input for enhancing linkages

with banking

In line with the TAM/BAS Strategic Plan 2008-2010, TAM/BAS should continue to assist the Bank in meeting its objective of generating a commercially viable project pipeline for Bank’s direct investments by:

i) identifying potential pipeline projects (pre-investment level) ii) providing “consulting and business” services for the preparation and

support of Bank private enterprise financing projects and for the enterprises themselves

iii) providing candidates for non-executive board member positions.

In addition, the Programme should link MSMEs in need of finance with local financial institutions supported by the EU/EBRD SME Finance Facility and the EBRD Local Enterprise Facility (LEF). This will strengthen the Bank’s impact in the enterprise sector and in the financial sector, as outlined in the EBRD Country Strategy for FYR Macedonia.

2. ANNEXES

2.1. FYR Macedonia MSME Factsheet

Former Yugoslav Republic of Macedonia MSME Country Brief

Key MSME Sector Challenges

Source: EBRD

Source: BEEPS (2005)

Country DataSeries Name 2002 2003 2004 2005 2006 2007 2008GDP per capita, PPP (constant 2005 international $)* 6921 7099 7374 7664 7957 8420 8837Unemployment, total (% of total labor force)* 32 37 37 37 36 35 .. Unemployment, female (% of female labor force)* 32 36 38 38 37 36 .. Rural population (% of total population)* 36 36 35 35 34 34 ..Total businesses registered (number) .. .. .. 55,742 .. .. ..Enterprise Restructuring (EBRD transition indicator)** 2+ 2+ 2+ 2+ 2+ 2+ 3-Competition Policy (EBRD transition indicator)** 2.00 2.00 2.00 2.00 2.00 2.33 2.33Source: *WDI (2007) and **EBRD

BEEPS (2005)Change in Performance in Last 36 Months

Small Companies

Medium Companies Initiatives Undertaken in Last 36 Months

Small Companies

Medium Companies

Sales % change -3.6 -0.234.0 42.4

Exports % change -0.1 4.542.9 54.5

Fixed assets % change 4.5 4.06.8 15.2

Material inputs % change 1.0 -0.916.3 12.1

Employment % change 19.5 493.94.1 18.2

% of companies adopted new technology 35.4 46.7

6.8 9.1

% of companies changed organisational structure 24.1 37.5

24.5 27.3

% change in capacity utilisation 3.8 -3.94.1 24.2

Source: BEEPS (2005) Source: BEEPS (2005)

Global Competitiveness Report (2009-2010)Rank (out of

134) Score(out of 7)

Global Competitiveness 84 3.95 Ease of… 2008 2009 2008 2009

Higher Education and training 70 3.9 75 69 15 15 0Extent of staff training 103 3.45 21 13 3 3 0Goods Market Efficiency 76 4.1 76 151 8 17 -9Brain Drain 125 2.31 128 122 24 22 2Technological readiness 52 3.87 91 88 18 20 -2FDI and technology transfer 108 4.09 48 41 12 12 0Firm-level technology absorption 127 3.66 83 88 13 15 -2Personal computers 30 36.78 99 28 9 1 8Business sophistication 96 3.56 72 63 13 9 4Strength of auditing and accountin 83 4.4 84 62 23 20 3Burden of government regulation 62 3.27 127 131 25 25 0Source: WEF The Global Competitiveness Report (2009-2010) Source: World Bank Doing Business Survey (2008, 2009) and EBRD

Developed successfully a major new product line/service Upgraded an existing product line/service

Discontinued at least one product (not production) line/service

• While the registration process of businesses has been greatly simplified, generally administrative procedures e.g., in dealing with the judiciary and the regulative environment for SMEs remain weak. • The low availability of skills is a major challenge for Macedonia's SME environment. General availablity of training programmes and quality assurance require significant improvement in order to effectively meet the training needs of SMEs. In addition, education for entrepeneurship is below regional levels and needs to be given priority.

Agreed to a new joint venture with foreign partner

Obtained a new product licensing agreement

Outsourced a major production activity/service that was previously conducted in-houseBrought in-house of a major production activity/service that was previously outsourced

Registering property

Getting credit

Obtained a new quality accreditation (ISO 9000, 9002 or 14,000, AGCCP, etc)

Doing Business (2008-2009)

Doing business

Transition Country Rank (out of 28)

Closing a business

Global Rank (out of 181 in '08 and out of 183 in '09)

Change in Transition

country rank

Protecting investors

Starting a business

Paying taxes

Trading across borders

Enforcing contracts

Dealing with licences

Employing workers

Business Obstacles for SMEs in FYROM, 2005

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Financing

Infrastructure

Taxes

Macroeconomic instability

Licensing and regulation

Functioning of judiciary

Corruption

Street crime

Organised crime

Anti-competitivebehaviour

2.2. Overview of the key governmental and non-governmental MSME stakeholders

Governmental MSME Stakeholders Ministry of Economy and Energy

Ministry of Economy and Energy is responsible for the policy formulation and the support of SME development. The Ministry has the following departments: General Affairs, Legal Affairs, European Integration, Internal Markets, International Trade Cooperation, Energy, Mineral Resources, Industry, Support of Entrepreneurship and Competitiveness, Tourism and Catering, Informatics and Communications, Investments and Economy Promotions. Agency for promotion of entrepreneurship

Agency for Foreign Investments

Macedonian Bank for Development promotion

Agency for Financial Support in Agriculture and Rural Development

SME representative agency Investment promotion Financial support Financial support Agency for Promotion of Entrepreneurship is state owned institution, established to realize the Program on measures and activities for promotion of entrepreneurship and creation of competitiveness of the small business in FYRM and other programs adopted by the Government, concerning entrepreneurship and small business. APERM is the major player on national level for the implementation and coordination of national and international support to the SME Sector.

“Invest Macedonia” is the primary government institution supporting foreign investment in FYR Macedonia. The agency mission is to win new investment projects into FYR Macedonia and support the expansion of the existing base of overseas companies in the country. It provides a number of services both for foreign and domestic investors like background information on investment incentives, legal advice, identification of potential business partners, linkages with research institutes etc.

Macedonian Bank for Development Promotion was established in November 1998, with the Law on establishing of MBDP as a Bank that needs to contribute in the achievement of the development politics of FYR Macedonia, through providing finance for export oriented production and export of small and medium enterprises (SME), financing of investments for development of small and medium enterprises, as well as providing insurance for export claims of the SMEs. Macedonian Bank for Development Promotion acts as an Agent for providing short-term export insurance against commercial risk (bankruptcy of the foreign buyer or protracted default for more than 90 days).

The Agency for financial support of agriculture and rural development (AFSARD) was granted national accreditation by the National Authorizing Officer (NAO) on the 5th of March 2009, as a part of the operating structure for implementing the funds from the fifth component of the Instrument for Pre-Accession assistance from the European Union (IPARD). This accreditation is a part of an overall process of fulfilling the right of the FYR Macedonia as a candidate country for full membership in the European Union (EU), to manage the pre-accession funds of the EU funds from the 5th component of pre-accession assistance (IPARD) in the area of agriculture and rural development,

Non-Governmental MSME Stakeholders Economic Chamber of Commerce

Human Resources Development Fund

FYR Macedonian Chambers of Commerce

Chamber of Information and Communication Technology (MASIT)

Management Consulting Association (MCA 2000)

Interest Group Human Resource Development Interest Group/ Lobbying Interest Group/ Lobbying Interest Group All business and craftsmen are organized in the respective chambers that represent their interests in politics and monitor and evaluate government policies that affect the business sector. Apart from that, they offer information and business advice on all important legislation and support programmes for MSMEs.

The Human Resources Development Fund for Enterprises (HRDF) is a nation-wide platform active in promoting quality Executive Management Training and Management Consulting. It is founded as a programme with its hub at Agency for Promotion of Entrepreneurship of the FYR Macedonia (APPRM)..

FYR Macedonian Chambers of Commerce (aka MCC) is an independent, non-political and non-profit organization, and serves as an umbrella organization of the six constitutive chambers of commerce. The registration was made in the court of Skopje in September 2004.

MASIT is a volunteer, non-profit chamber of commerce. The chamber was founded in 2000 as an initiative of the top fifteen FYR Macedonian IT companies and was operating as an Association within the Economic Chamber of Macedonia. In April 2007, on the Annual Assembly of MASIT, the legal transformation of MASIT from Association to Chamber of commerce was agreed.

MCA 2000 is non-political, independent, voluntary and not-for-profit organization of associated management consultants. As such, the Association is professional, non-Governmental and non-political organization. The activities of the MCA-2000 are public and transparent.

2.3. Grant Guideline Matrix (GGM)

BAS applies a graduation policy for grants which is reviewed annually to reflect the market conditions of local business advisory services. As the intervention’s additionality in a specific market segment decreases, BAS will phase out by lowering the grant amount and eventually exiting. For FYR Macedonia, the grant percentage varies depending on assessments of the overall additionality:

• Size of enterprise: Higher grants should be given to smaller enterprises up to 75% in order to address present financial crises and concerns related to internal debt and liquidity. Lower grants are proposed for companies with more than 200 employees as their ability to pay for consultancy services is generally higher.

• Type of advisory service: Higher grants should be given to support projects involving consultancy services where market supply is less mature, particularly in the areas of environmental management and food safety (HACCP, Euro Gap, ISO 22000). Meanwhile, lower grants should be given to quality management projects due to the high proportion of such projects in the past; therefore, ISO 9000 projects will be funded with only a 45% subsidy.

• Cross-cutting issues: Higher grants should be given to enterprises in rural areas and to enterprises with a high percentage of women in their labour force. For bigger companies, with more than 200 employees, the grant component will generally be 40-45%; however, for bigger companies located in rural areas and those that employ more than 50% females, the grant component will be 50%. For companies located in Skopje (capital city) the grant value will be 45%, but for companies that are managed by women or having more than 50% employed females, the grant component will be 50%.

to improve market performance (Market analysis & planning, Development planning, Feasibility studies, Partner Search )

to improve management effectiveness (Reorganisation/restructuring, Computerised financial/management Information Systems)

to reduce costs (Computerised Manufacturing Systems, Engineering Studies)

to introduce Quality Management & Certification

to improve environmental management (Energy efficiency, Environment)

< 50 60% 60% 60% 50% 75%50 = 99 45% 45% 45% 45% 70%100 =199 45% 45% 45% 45% 65%200 40% 40% 40% 40% 50%< 50 60% 60% 60% 50% 75%50 = 99 50% 50% 50% 45% 70%100 =199 50% 50% 50% 45% 65%200 45% 45% 45% 40% 50%< 50 60% 60% 60% 50% 75%50 = 99 50% 50% 50% 45% 70%100 =199 50% 50% 50% 45% 65%200 45% 45% 45% 40% 50%< 50 60% 60% 60% 50% 75%50 = 99 50% 50% 50% 45% 70%100 =199 50% 50% 50% 45% 65%200 45% 45% 45% 40% 50%< 50 60% 60% 60% 50% 75%50 = 99 50% 50% 50% 45% 70%100 =199 50% 50% 50% 45% 65%200 45% 45% 45% 40% 50%< 50 60% 60% 60% 50% 75%50 = 99 50% 50% 50% 45% 70%100 =199 50% 50% 50% 45% 65%200 45% 45% 45% 40% 50%

Region 4* Pelagonija (Bitola, Prilep,

Krusevo)

Region 5* East (Strumica, Radovis, Stip, Vinica, Berovo,

Kocani)

Type of Advisory ServiceLocation/ Size

Capital

Region 1* North (Kumanovo, Kriva Palanka, Kratovo)

Region 2* West Tetovo, Gostivar,

Kicevo, Struga Ohrid)

Region 3* Vardar area (Veles,

Negotino, Kavadarci Gevgelija)

2.4. Background information on MSME stakeholder interviews in Skopje

In February 2009, 17 interviews were conducted with major stakeholders in the MSME sector and the consultancy market. This annex provides a list of the interview partners.

Table 1: List of interview partners Organisation Name/ Position Booz Allen Hamilton (private consultancy working for USAID)

Aleksandar Sahov (Director), Dimitar Dimitrovski (Senior Legal Advisor), Kirial Minoski (Senior Advisor for Labor Market and Pension Reform)

USAID AgBiz Program James Maxwell (Chief of Party), Jeton Starova (Deputy Chief of Party)

USAID Competitiveness Project Nimish Jhaveri (Chief of Party) USAID Marcia K. Wong (Director, Economic

Growth Office), Margareta Lipkovska Atannasov (Project Management Specialist, Economic Growth Office)

World Bank Evgenij Najdov (Economist), Gordana Popovik (Business Environment Specialist)

Economic Chamber of Macedonia Jadranka Arizankovska (Senior Advisor) GTZ Jens Adler (Team Leader, Regional

Economic Development in Macedonia), Hari Shutoski

Agency for the Promotion of Entrepreneurship (APPRM)

Eleonora Bozinovska (Senior Expert Associate)

Strengthening Entrepreneurship, Competitiveness and Innovation (a project funded by the British Embassy Skopje, administered by the APPRM)

Igor Nikoloski (Project Co-ordinator)

Embassy of the Kingdom of the Netherlands Slobodanka Matakova Lakinska (Advisor Economic Affairs), Ivan Ivanovski (Economy and Trade Officer)

Government Secretariat for European Affairs Pero Dimsoski (State Secretary), Petra Kamcev (Sector for Integration)

Ministry of Economy, Department for Energy Violeta Keckarovska Ministry of Economy, Department for Entrepreneurship and Competitiveness

Imerali Baftijari (Head of Department), Suzana Arsova-Kostadinova (Deputy Head of Department)

National Bank of the Republic of Macedonia (NBRM)

Dimitar Bogov (Vice Governor)

EC Delegation, Office of the EU Special Representative

Dieter Thiel (First Counsellor), Elisabeta Georgieva (Task Manager)

University of St Cyril and St Methodius Silvana Mojsovska (Professor in International Economics)

EBRD Resident Office Elena Urumovska Macedonian Bank for Development and Reconstruction

Dragan Martinovski

ICT Chamber of Commerce Vasko Kronevski

2.5. Programmes supporting MSMEs in FYR Macedonia

The market for government or international donor funded programmes or projects which provide direct or indirect (by operating in the business environment) support to MSMEs is exemplified in the diagram below. On the one hand, assistance can be provided by working directly with a wide variety of beneficiaries including: single enterprises, governmental institutions, business development service providers; financial institutions and the national workforce (this includes the inactive or unemployed, as well as students and graduates). On the other, it can be provided by an array of instruments including consulting, financial grants and training, TAM/BAS is unique however programmes providing broadly comparable services to can be broadly defined as programmes or projects which fall within the grey areas in Figure 23. Figure 1: TAM/BAS within the market for MSME support programmes

Direct support

Indirect support

MSMEs

Governments

Business Development Service Providers

Financial Institutions

Workforce

Consulting Grant Provision* Training

Provide guarantee or grant

Provide consultancy service

TAM BAS TAM/BAS

BAS

Organize training for SMEs

*Excludes microfinance

Instrument

Direct Beneficiaries

MSM

Es

Direct support

Indirect support

MSMEs

Governments

Business Development Service Providers

Financial Institutions

Workforce

Consulting Grant Provision* Training

Provide guarantee or grant

Provide consultancy service

TAM BAS TAM/BAS

BAS

Organize training for SMEs

*Excludes microfinance

Instrument

Direct Beneficiaries

MSM

Es

2.6. National and international programmes in support of the MSME sector

National programmes

Booz Allen Hamilton (private consultancy working for USAID)

USAID AgBiz Program

USAID Competitiveness Project

World Bank Economic Chamber of Macedonia

GTZ

Consulting Yes Yes Yes (IFC PEP-SE) Yes YesTraining Yes Yes Yes (IFC PEP-SE) Yes YesIncubationFinancing YesGovernment Yes Yes Yes YesBusiness Development Service Provider

Yes Yes Yes Yes

Financial Institutions Yes Yes YesWorkforce Yes Yes Yes

Programmes

Direct Intervention to SMEs

Indirect Intervention to SMEs

International programmes

Agency for the Promotion of Entrepreneurship (APPRM)

Strengthening Entrepreneurship, Competitiveness andInnovation (a projectfunded by the BritishEmbassy Skopje,administered by theAPPRM)

Embassy of the Kingdom of the Netherlands

Government Secretariat for European Affairs

Ministry of Economy, Department for Energy

Ministry of Economy, Department for Entrepreneurship and Competitiveness

Consulting YesTraining Yes YesIncubation Yes

Programmes

Direct Intervention to SMEs

2.7. References

European Commission, “Macedonia 2008 Progress Report”, November 2008. International Communications Union, telecommunication statistics (09 March 2009): http://www.itu.int/ITU-D/ICTEYE/Default.aspx OECD, European Commission, EBRD and European Training Foundation (2009), Report on the Implementation of the European Charter for Small Enterprises in the Western Balkans (forthcoming) The World Economic Forum (2008), “The Global Competitiveness Report 2008-2009”, WEF, Geneva, Switzerland. USAID (2008), “Report on foreign trade of Macedonia”, USAID Business Environment Activity, Ministry of Economy World Bank (2008), “Doing Business 2009 – FYR Macedonia”, World Bank Group, Washington D.C., USA. World Bank/EBRD (2005), “Business Environment and Enterprise Performance Survey (BEEPS) 2005 – FYR Macedonia”