Draft

MINISTRY OF ECONOMY AND TRADE

Sectoral Operational Programme

“INCREASE of Economic Competitiveness”

Bucharest,October 2005

TABLE OF CONTENTS

  1. SOCIO-ECONOMIC analysis…………………………………………………………3
  2. Strategy……………………………………………………………………………….79
  3. The objectives, priorities and measures of the sectoral operational programme………………………………………………………………………..82

Priority I:Increase in economic competitiveness by enhancing the market access of enterprises, especially SMEs’......

Priority II: Development of a knowledge-based economy by promoting research and innovation and accelerating the development of the Information Society......

Priority III: Improvement of energy efficiency and better use of renewable energy resources......

Priority IV: Technical assistance......

2.2.Correlation with European policies and with national development

policies ………………………………………………………...... 100

2.3.Contribution to horizontal objectives (sustainable development, equal opportunities, information society, public procurement, competition policy)108

2.4.Indicators…………………………………………………………………………111

  1. Implementation system…………………………………………………………115
  2. Management and implementation……………………………………………….
  3. Management and control…………………………………………………………
  4. Data collection and transfer………………………………………………………
  5. Monitoring………………………………………………………………………….
  6. Evaluation………………………………………………………………………….
  7. Information and publicity………………………………………………………….
  1. PARTNERSHIP………………………………………………………………………….127
  2. Financial tables…………………………………………………………………...131

ANNEX 1:Methodology for setting the general objective of the Competitiveness

SOP ……………………………………………………………………………..135

ANNEX 2: Metohodology for the programming exercise within the SOP

Competitiveness ……………………………………………………………..137

ANNEX 3: Financial Allocation – Analysis…………………………………………….140

ANNEX 4: Gap indicators used in the programming exercise …………………....144

ANNEX 5: Methodological note regarding gap calculation for the IT sector……147

1. SOCIO-ECONOMIC ANALYSIS

(The current version will be modified / updated / compressed at a later stage, including review of translation into English)

PRODUCTIVE SECTOR

Competitiveness factors

The sustainable economic growth and the increase in people's living standard are determined by the economic competitiveness development in the context of global challenges (globalization, the opening of international markets, the quick technological changes, etc); all these challenges have to be converted into opportunities by the Romanian economy. The analysis of the competitiveness factors and the identification of problems that Romania is confronting with, in order of finding the optimum solutions to solve the problems, represent a need for assessing the future economic potential of the country.

The identification of the factors that are influencing Romania's competitiveness was based on a thorough analysis of economy, of business environment, of resources, both material and human, of expenses, of investment activity, and of innovation process.

The world states competitiveness survey performed by World Economic Forum (WEF) for 2003 ranked Romania the 75th place out of 102 analyzed countries, behind the new Member States, but also behind the other candidate countries: Bulgaria (place 64), Turkey (place 65). One year before, Romania ranked 67th place out of 80 analyzed countries keeping this position in 2003 too (compared with the 2002 listed countries). The competitiveness analysis was performed based on three types of factors: technology, institutional framework and macroeconomic environment. The-basic assumptions were that on long term no technology can maintain a high standard of life, exclusively based on capital accumulation; that institution framework ensures the property rights, contracts’ observance, efficiency and transparency of government expenditures while the monetary and fiscal policies and financial institutions’ stability plays an important role on long term growth.

What should be noted from this report (available indicators are from 2002) are the weak points which are placing Romania on the above position. From technology point of view Romania ranks the 55th place out of 80 analyzed countries, from macroeconomic environment’s one, the 58th, and in terms of public institutions the 67th (source: The Report of Global Competitiveness - World Economic Forum, 2003 and 2004).

In the last four years, Romania registered a macroeconomic stability, essential for the sustainable development, marked by a constant GDP increase based on investments, exports and less on consumption (2.1% in 2000, 5.7 in 2001, 5.0% in 2002 and 4.9% in 2003). A positive element indicating the structural changes that took place in Romania is the constant growth of private sector share in GDP (approx. 69.1% in 2003 compared to 63.7% in 1999).

In spite of the substantial progress achieved in the last years, Romania is still lagging behind the European competitors in terms of economic development; showed by Romania's GDP in PPP terms, that represents about 50% of GDP in new Member States and less than 30% of GDP of less developed Member States such as Greece and Portugal. The GDP/PPS value (27% of the EU average, in 2003), also shows the slow process of reducing the gap against EU.

Another important factor determining a country’s competitiveness is productivity. The evolution of labour productivity (GDP in PPP terms/occupied person) indicated a positive trend, but still in 2002, Romania’s productivity represented only 30.73% compared to the EU-15 productivity, and lower than in all other Candidate Countries, except Bulgaria.

Labour Productivity (GDP/PPP per occupied person) (EU-15=100%) (%)

1999 / 2000 / 2001 / 2002 / 2003
EU-15 / 100 / 100 / 100 / 100 / 100
Luxemburg / 144.0 / 148.0 / 138.2 / 131.5 / 185.8
Greece / 80.2 / 80.8 / 80.7 / 82.5 / 86.0
Spain / 93.0 / 92.2 / 93.2 / 93.0 / 91.2
Portugal / 66.2 / 62.5 / 63.0 / 62.6 / 65.0
Slovenia / 67.9 / 68.6 / 70.8 / 72.7 / -
Hungary / 57.3 / 58.6 / 62.1 / 66.1 / -
Czech Republic / 55.3 / 53.9 / 56.62 / 55.96 / -
Slovak Republic / 54.2 / 53.5 / 52.77 / 52.3 / -
Poland / 42.5 / 46.0 / 46.6 / 48.33 / -
Estonia / 39.7 / 42.5 / 42.4 / 43.31 / -
Lithuania / 32.0 / 34.4 / 38.8 / 43.1 / -
Latvia / 30.5 / 34.2 / 36.5 / 37.0 / -
Turkey / 33.4 / 34.06 / 31.83 / 36.25 / -
Romania / 27.6 / 26.8 / 28.1 / 30.73 / -
Bulgaria / 32.6 / 31.0 / 29.3 / 28.46 / -

Source: Eurostat 2003

The labour productivity in industry had an average increase of 11.6%/year in 2000-2003, which is a higher rate than in many other countries in the region.

Labour productivity indexes - comparisons with Central and East European countries (against the previous year)

2000 / 2001 / 2002 / 2003 / Average 2000-2003
Czech Republic / 110.6 / 105.0 / 106.4 / 108.9 / 107.7
Estonia / 117.6 / 115.3 / 110.3 / 111.1 / 113.5
Hungary / 116.6 / 105.3 / 105.3 / 108.8 / 108.9
Latvia / 105.0 / 106.7 / 105.8 / 105.1 / 105.7
Poland / 114.3 / 105.4 / 107.6 / 112.0 / 109.8
Romania / 113.8 / 106.9 / 113.7 / 112.1 / 111.6
Slovenia / 108.4 / 103.5 / 105.6 / 98.0 / 103.7
Slovak Republic / 111.6 / 108.6 / 103.0 / 113.6 / 109.1

Source: CANSTAT 4/2003

Although the above indicator had a positive evolution, Romania is still lagging behind the average of EU member states, and of other countries in the region, for most of economic activities. Productivity increase depends not only on technological development, but also on product quality increase, of marketing and of other factors that generate higher value added. Foreign Direct Investments (FDI) could bring a substantial increase of productivity not only because of new technology but also of best practice experience.

The economy competitiveness is intrinsic determined by products and services quality as a general of characteristics which grants the ability of a product/process/service, to satisfy the expressed and implicit exigencies. Attempt, assessment, and certification of conformity must prove the level of achieving the specified standards. The European policy for quality has in view the promotion of a culture and of an image of European quality by developing instruments, technical and human resources, as a partnership with industry and other interested parts. In order to comply with these requirements, Romania has identified three main objectives: the improvement of legal, institutional and procedural framework, development of stakeholders within the conformity assessment framework, training for economic agents. The economic agents are using the results of stakeholders within the infrastructure for conformity assessment.

At national level the efforts were focused on the adoption of the Community aquis, by transposition in the national legislation of EU regulations and by ensuring the conditions for implementation of regulations according to EU exigencies.

The legal framework was improved by adoption of law with regard to assessment of conformity for products and filled with other subsequent regulations. These normative documents refer mainly to procedures which are used in the process for conformity assessment. The institutional infrastructure was built on main areas such as: national standardization (The Association of Standardization from Romania - ASRO), metrology (Romanian Office for Legal Metrology-ROLM), accreditation of laboratories and certification and inspection bodies (The Accreditation Agency from Romania - AAR). The Ministry of Economy and Commerce was appointed to coordinate the infrastructure of quality and conformity assessment.

The adoption of more than 80% of the European standards is a positive element, but a relative large number of standards were adopted by endorsement, a simple and inexpensive method. The method of endorsement determines in some areas problems of implementation. The implementation of European standards and establishment of an efficient, transparent and responsible system for assessment of conformity contributes in a significant manner to facilitate the access on unique market of Romanian products. Also this system offers opportunities for Romania's business environment in order to improve its position at international level on basis of technical performance.

Exports and investments represented the engines of economic increase in the last years.

Romania's export had a marked positive evolution, but was based especially on products with a low value added. The highest volume of exports was registered in the textiles industry and clothing industry, in which the inward processing activity (lohn) is prevalent, followed by the metallurgic industry (which produces mainly lower quality steel). Progress was recorded also in the export of high value added products like electrical, electronic and communication equipment.

Romania's export by main economic activities (Mil. Euro)

Activity / 2000 / 2001 / 2002 / 2003 / Growth
rate
2003/2000
(%)
EXPORT-total / 11,273 / 12,722 / 14,675 / 15,613.7 / 38.5
AGRICULTURE,HUNTING,FORESTRY AND PISCICULTURE / 289 / 324 / 311 / 334.1 / 15.6
INDUSTRY / 10,978 / 12,391 / 14,355 / 15,250 / 38.9
Extractive Industry / 37 / 42 / 44 / 45,5 / 23.0
Manufacturing Industry, from which: / 10,890 / 12,280 / 14,205 / 15,135 / 39.0
Textile and textile products / 2,258 / 2,787 / 3,079 / 3,224.9 / 42.8
Leather and shoes / 908 / 1,176 / 1,343 / 1,391.8 / 53.3
Crude oil processing, coal coking and nuclear fuel treatment / 758 / 724 / 1,050 / 947.9 / 25.1
Chemistry and synthetic and man made fibers / 687 / 982 / 697 / 744.9 / 8.4
Rubber and plastics processing / 98 / 126 / 218 / 340.9 / 247.9
Metallurgical industry / 1,725 / 1,565 / 1,679 / 1,818 / 5.4
Metallic constructions and metal products / 178 / 208 / 244 / 266.6 / 49.8
Machinery and equipment industry / 562 / 750 / 858 / 939.7 / 67.2
Electric machinery and appliances industry / 403 / 575 / 825 / 1,029.4 / 155.4
Furniture and other industrial activities not elsewhere classified / 560 / 668 / 767 / 841.7 / 50.3
Electric and heat energy, gas and water / 51 / 69 / 106 / 69.7 / 36.7
Other Activities (IT, services for enterprises, entertainment, sport and cultural activities) / 6 / 7 / 9 / 28.9 / 381.7

Note: 2003 provisional data

Source: National Institute for Statistics (NIS)

According to a survey of the Ministry of Economy and Commerce for the year 2002, high technology exports accounted for 10% of total exports; medium technology exports accounted for 17% and the balance is low technology exports. With regard to imports, the share of high technology products is almost equal with to the share of low technology products. This demonstrates that Romania's technology is mostly imported and only in a small proportion is created at local level. Foreign companies are the promoters of research as technological transfer, but the transfer refers mostly to low added value products, and the technology is not the last generation. The high value of imports in last years (that has determined deficits of trade balances) was due mainly to the imports from highly industrial countries of industrial machinery/equipment for new investments and the modernization of the industrial capacities.

It can be stated that Romanian export products are mostly competitive in terms of price and not in terms of innovation.

The low cost of labour is the main source of competitive advantage; this advantage will progressively decrease during Romania's accession process to the EU, so in this regard the majordirection to take is to promote domestic research and innovation which will lead to lower imports of technology and equipment and a higher added value of Romanian products on the internal and foreign markets. In accordance with the European Federation of Employers the minimum wage on the economy in Romania is EUR 68, which could be considered similar with Bulgaria (EUR 61), but much lower compared with the new Member States (Hungary - EUR 212, Czech Republic - EUR 211, Poland - EUR 183, Malta - EUR 536 a.s.o.)

With regard to investments, the last period has recorded an increase of FDI in Romania. In 2003 the FDI flow was EUR 1627 million, a raise by about 34.2% compared to the same period of 2002, positioning Romania on the 3rd place in the region, according to a survey of International Economic Studies Institute from Vienna. This trend is continuing; according to a survey called "The Assessment of the Global Investment Prospects" (AGIP) made by UNCTAD experts, Romania is ranked the third together with Russia, behind Poland and Czech Republic in a ranking of top locations for foreign direct investments in 2004-2005. The classification was the result of studies made by 87 experts in international investments location, by national agencies for promotion of investments and by biggest transnational corporations.

Romania still has the lowest level of investment per inhabitant in the region.

Foreign investments level (USD/ inhabitant in 2003)

Country / Foreign Investment (USD/inhabitant)
Czech Republic / 468
Slovak Republic / 270
Hungary / 207
Slovenia / 171
Poland / 168
Bulgaria / 79
Albania / 66
Romania / 52

Source: EBRD, The report on transition countries, 2003

Public investments were characterized by a slower dynamics mainly as a result of the limited budgetary resources; the private sector investments is accounted for aprox. 67% of total investments in 2003.

The national economy branches have showed different attractiveness degrees over time: the share of private investments in industry (from total investments) was between 22.2% and 23.5% in the period 2001-2003, while investors' interest decreased for agriculture and increased for commerce (from 4.4% in 2001 to 9.3% in 2003).

A major element for the increase of investments, both foreign and domestic, is the existence of a stable and predictable business environment. To this purpose an Action Plan was elaborated to eliminate administrative barriers in the business environment, including a large number of specific measures targeting the elimination of the causes of corruption and bureaucracy. By implementing this action plan, the simplification of the legal and administrative procedures related to business setup and development on a competitive basis and a more efficient licensing/registration process were achieved.

Taking into account the requirements of domestic business environment and proposals and recommendations of FIAS (Foreign Investments Assistance Service) within the World Bank for theimprovement of business environment, and following the monitoring of the already taken measures, a regional map was elaborated for maximum state aid levels and a similar action plan for the development of business environment was formulated for 2003.

In Romania important steps forward have been made in the elimination of administrative and bureaucratic barriers in the simplification of business setup procedures. In 2003 the registration process of a company (with limited liability) implied 6 procedures, 27 days and a price of about USD 220, which placed Romania above the average of new Member States.

The tacit approval procedure was introduced in May 2003. This procedure is applied for the issuance and renewal of 477 licenses issued by the authorities of public administration, except a small number of domains (ammunition, nuclear activities, and national security). According to this procedure, a license is considered issued/renewed if any negative answer is not received from the issuing authority within the legal period of 30 days starting with the first day of completing the procedure by the applicant.

At the end of 2003, the institutional framework for the implementation of competition and state aid policy was reorganized through the unification of the two previous institutions into one responsible authority, the Competition Council. Also, a new legislative framework was adopted in the field of competition and state aid for the harmonization in accordance with the relevant EU regulations. This legislation has started to be implemented more vigorous, as an essential condition in order to assure an honest competitive environment. In Romania there are about to be clarified special regimes for state aid, such as industrial parks, free zones and depressed areas.

With regard to industrial parks, these were created in order to quicken the economic development and to reduce unemployment in areas affected by restructuring process. By mid 2004, there were 28 industrial parks of which 7 are private; in 18 the land belongs to the local public authorities and 3 are public-private partnerships. The industrial parks initiated by public authorities are confronted with important financial problems. They have modest financial resources being dependent on government grants, local authorities’ funds, and payments made in advance by commercial companies operating within the industrial park. The critical moment from financial point of view is the start of activities which requires the largest financial effort mainly in cases of greenfield industrial parks, when significant funds are needed for infrastructure investment.

The improvement of Romania's economic performance can be stimulated by cluster development. Although public clusters (industrial parks, technological and scientific parks) were established by law, few of them are operational. With regard to clusters created in a natural way by companies there were identified a lot of potential clusters in the wood processing industry (Harghita county), software industry (Bucharest, Timisoara, Cluj and lasi), china industry (Alba), apparel and textile industry (Focsani, North-East Region - specially Bacau county and West Region - specially Timis county), furniture industry (Bucharest) and metal processing (Centre Region).

The FDI level was determined to a large extent by the quality of the transportation, communication and energy infrastructure, which is not up to European standards .

Romania's road infrastructure recorded a continuous development. Still, the public roads density (33 km/100km2) continues to be lower than the European average (116 km/100 km2). 400 million Euro are allocated yearly to the road sector for maintenance and extension works but this is also the yearly rate of depreciation for the road infrastructure.

The railway system's length is 11,077 km (which means 46.4 km/1000km2, below EU average which is 65 km/1000 km2). The problem is the technical condition of the railway system, which implies reduced average speeds compared to neighbor countries (speed limitation on 70% of the network length); this means a reduced competitiveness of Romanian railway services compared to other national transportation modes and to European specific market standards.

The current share of railway system from total transportation systems is about 30.1% for merchandise transportation and about 43.2 for passenger's transportation (at the end of 2003), overrun the EU average and even new members' average.

An explanation for the large share of railway transportation is insufficient development of the road infrastructure. The situation is going to change soon, because 2 highway projects are under construction, although the railway transportation will remain a significant transportation manner.

There are 17 airports, 4 of which international airports. The “Henri Coanda” Airport from Bucharest is the most important, covering about 79% of international transportation for merchandise and passengers. The modernization strategy of the “Henri Coanda” Airport envisages a transportationcapacity three times higher than the present one.