Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. Moldova Competitiveness Assessment: The Wine Cluster The larger wineries are better capitalized, often with foreign (Russian) investment. Yet, as long as they are operated as independent profit centers, they too can face serious cash flow problems inherent in the nature of their operations. These problems are exacerbated by the short maturities of loans, which require frequent refinancing. With respect to exports to Russia and the CIS, the export financing system is virtually nonexistent. Most Russian importers will pay for a wine shipment only after it arrives at the destination, and when part of it is sold. Letters of credit are not used. In effect, Moldovan exporters bear the full risk of nonpayment, mitigated by the long-standing relationships and cross-ownership pattern tying them into the Russian market. The risk of nonpayment is therefore reportedly low, around 5 percent. Even so, it represents a cost of doing business, since legal redress is uncertain, and debt collectors usually recover only 50-60 percent of the amount due in cases of nonpayment. Factor Conditions Moldovan wine production is built on favorable climatic and soil conditions, with the main grape-growing regions in the center and southern regions, at about the same latitudes as the Bordeaux and Burgundy regions of France. European grape varieties account for 90 percent of the plantings, with Pinot Gris, Chardonnay, and Sauvignon the most common white wine varieties for about 70 percent of total cultivated area. Red varieties, accounting for the remaining 30 percent, include Cabernet Sauvignon, Merlot, and Pinot Noir. A large portion of the planted vines has to be replaced. Replanting offers the opportunity to obtain better quality rootstock. Several local companies, both state-owned enterprises and recently established private operations, have begun to propagate vine seedlings. These initiatives include joint ventures with French firms, one of which is expected to yield about 500,000 vines per year. However, domestic producers of vine seedlings are somewhat disadvantaged by a lack of faith in their virus-free accreditation in comparison with imported seedlings. The lower price they offer is insufficient to offset these disadvantages. The cost of certified imported plant materials from Italy, France, or Germany is about Moldovan Leu (MDL) 16-19 (US$1.30-1.50), and for domestic seedlings, 13-15 MDL. Importers of vines need to obtain approval from the National Institute of Grapes and Wine, which is not an onerous requirement, but does take some time. Under the Soviet system, the irrigation network had been developed on the basis of low energy costs, favoring high pressure lift. Both the manner in which land privatization was carried out, and the shift to world market pricing for energy, contributed to the effective collapse of the irrigation system, down to about 7 percent of its coverage in 1985. The degrading of the irrigation network has exposed grape producers to greater risk, since droughts or semidroughts are a fairly common occurrence—a 20-percent chance of a drought, and a 40-percent chance of a semidrought in any given year. The wine industry would therefore benefit from the development of an efficient irrigation network, which would need to be a drip system to be economical. July 2004 • DRAFT Page 12
Development Alternatives, Inc. Moldova Competitiveness Assessment: The Wine Cluster Finally, Moldova benefits from a strong human resource base in winemaking, although there is a need for modernizing curricula, focusing more on the business aspects, in addition to the technical issues. The apparent trend toward increased involvement of European winemakers in Moldova is likely to accelerate the transformation, and to impart new skills needed to compete effectively in today’s global wine markets. Policy Aspects Government Role The government continues to play a strong, interventionist role in Moldova’s wine cluster, perhaps even more so than in other areas of the economy, given the “strategic importance” of the sector. There has been progress in the privatization of wineries, and in land reform, although a flawed approach has contributed to contraction of activity levels. The government has done little to facilitate the movement toward arrangements, like land swaps and other measures, to create larger, economically viable vineyards. Moreover, the government retains ownership of 11 of the larger wineries, most notably the Onoteca winery of Cricova. As an expression of the government’s proactive stance toward the development of the wine cluster, it created the Moldvin Agricultural and Industrial Department, with the mandate to articulate a strategy for viticulture development and promote wine exports. The Department also supervises the management of the 11 state-owned wineries and others in which the state retains an equity stake. While the Department’s specific mandate implies a fairly limited role, there remains some concern about a broader underlying agenda. The Moldvin Department becomes involved when wine exporters seek exemption from the regulation that all bottled wine be labeled in the Moldovan language to meet the requirements of importing countries. While it is not a particularly onerous process, the need for the regulation in the first place is not obvious. Taxes and Fees All wineries are obliged to pay an annual license fee. The fee has increased significantly in recent years, from MDL 9,000 in 1999 to MDL 36,000, irrespective of size. The flat license fee imposes a relatively greater burden on the smaller wineries. Using the destination principle for indirect taxation, the government currently places a 5percent value-added tax (VAT) on domestically produced grapes, and a 20 percent VAT and 30 percent excise tax on imported bottles and corks. In principle, all of these indirect taxes (except on fuel) are to be reimbursed when the goods are exported. The reimbursement of VAT and excise payments is routinely delayed by six months, and exporters have waited for more than a year. These delays add to cash flow problems, and the government closed a loophole that allowed for attempts to mitigate these impacts by trading VAT receivables at a discount. In effect, delays in the reimbursement of indirect taxes impose an export tax that can amount to 2-3 percent of total sales in a highly price-sensitive market segment. July 2004 • DRAFT Page 13
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