Introduction

The last year has again seen significant variation across the EBRD region in terms of the measures adopted in response to new and continuing political and economic challenges. The financial sectors of many crisis-hit countries have shown further signs of stabilisation, continuing to recover strongly following the recapitalisation of banks and the restructuring of non-performing loans (NPLs). Other countries, meanwhile, have experienced severe solvency or liquidity crises as deteriorating external conditions have exposed vulnerabilities in their banking sectors or their economies as a whole. Differing policy measures appear to be having an equally divergent impact on the region’s corporate sectors, with some governments implementing successful privatisation and liberalisation plans, while others have responded with increasingly burdensome tax regimes or trade restrictions. Recent developments in energy and infrastructure have generally been favourable, with the positive trend towards better frameworks for energy markets continuing and increases in private-sector participation supporting improvements in the provision of transport and municipal services.

The EBRD has been systematically tracking the progress of transition and structural reforms since the first Transition Report was published in 1994. Since 2010, its focus has been on transition at the sectoral level, with 18 sectors being assessed in each country in terms of the progress made with the establishment of market structures and market-supporting institutions. The methodology underlying these sector-level scores is currently the subject of a thorough review and may be altered substantially in the coming years. As a result, the Transition Report 2015-16 adopted a “light-touch” approach, which is repeated this year. Rather than carrying out a full update, this section reviews some of the main developments over the last year and flags major changes that could potentially – but will not necessarily – warrant the upgrading or downgrading of those sector-level scores in the future. In a small number of cases, scores have been updated, resulting in upgrades or downgrades, rather than merely being placed on watch. The watch list that has been compiled this year shows a mixed picture of progress and reversals which is discussed in more detail on a sectoral basis in the sections that follow. The online country assessments contain in-depth country-specific analysis of progress and reversals over the last year (see tr-ebrd.com/countries).

This year, Greece has been included in this analysis for the first time. In addition, a new set of transition indicators looking at the financing and development of small and medium-sized enterprises (SMEs) is presented. This assessment reflects the more comprehensive and integrated approach that the EBRD has adopted in recent years in support of SMEs. Rather than focusing purely on the financing of SMEs and supply-side issues, this new assessment also takes account of the role that skills and standards play for such firms, as well as important aspects of the business environment, where shortcomings can have a disproportionate effect on SMEs.

Lastly, this section updates the EBRD’s inclusion scores. The availability of new survey data thanks to the third round of the Life in Transition Survey (LiTS III), which is analysed in detail elsewhere in this report, has resulted in a reassessment of regional inclusion gaps. The youth and gender inclusion scores have also been updated, but they have not changed significantly relative to last year’s report.

Sector-level transition indicators

Table S.1 presents the current transition scores – which range, as usual, from 1 (denoting little or no progress with market-oriented reforms) to 4+ (denoting the standards of an advanced industrialised economy) – for 17 sectors1 in 36 countries in the EBRD region. As explained above, the scores are mostly the same as those published in the Transition Reports of 2014 and 2015, since a full update has not been carried out. However, major reforms and other developments have taken place over the last year that may potentially entail changes to scores in the future. Consequently, a number of scores in the table are shaded in green, indicating that they have been put on “positive watch” (or, in a few cases, upgraded), while others are shaded in red, signalling that they have been put on “negative watch” (or, in a couple of cases, downgraded). Again, the former outnumber the latter – by 15 to 10 – although the margin has narrowed somewhat relative to last year. Some of the scores on last year’s watch list are still there, while others (which are shaded in beige) have been removed owing to anticipated developments stalling, being reversed or having an unexpectedly limited impact. In addition to one new upgrade that had not been flagged last year, three of the scores that were on positive watch last year have been turned into one-notch upgrades, whereas we have two downgrades this year. At a broad sectoral level, the largest number of new developments is in the financial sectors, with five scores placed on positive watch or upgraded and six placed on negative watch or downgraded. Positive developments outnumber negative developments in all of the other sectors, continuing the more positive outlook seen last year.

Table S.1

Sector-level transition indicators in 2016: overall scores
Corporate sectors Energy  Sustainable Resources   Infrastructure  Financial sectors
Agribusiness General industry Real estate ICT Natural resources Electric Power Sustainable energy Materials efficiency Water efficiency Water and wastewater Urban transport Roads Railways Banking Insurance and other financial services Private equity Capital markets
Central Europe and the Baltic states
Croatia 3 3+ 3+ 4 4- 3 3- 3 3 3+ 3+ 3+ 3- 3+ 3+ 2+ 3+
Estonia 3+ 4+ 4+ 4 4 4+ 3- 3+ 3 4 3+ 3 4 4- 3+ 3- 3
Hungary 4 4- 4- 4- 4- 3 3 3+ 3+ 3+ 3+ 4- 3+ 3 3 3 3+
Latvia 3 4- 4- 3+ 4- 3+ 3+ 3 3+ 3+ 4- 3 4- 3+ 3+ 2+ 3+
Lithuania 3+ 4 4- 4- 4- 3+ 3+ 3+ 3 3+ 4- 3 3 3+ 3+ 2+ 3
Poland 3+ 4- 4- 4 3 3+ 3 3 3 4- 4- 4- 4- 4- 3+ 3+ 4-
Slovak Republic 3+ 4+ 4 4↑ 4- 4 3 3+ 3+ 3+ 3+ 3+ 3+ 4- 3+ 2+ 3
Slovenia 4- 3+ 4 3+ 3+ 3 3+ 3 3 3+ 3+ 3 3 3 3+ 3- 3+
South-eastern Europe
Albania 3- 2+ 3- 3+ 3- 2+ 3+ 2 2 2+ 3- 3- 2 3- 2 1 2-
Bosnia and Herzegovina 3- 2 2- 2+ 2 2+ 2 2 2+ 2 2+ 3 3+ 3- 2+ 2- 2
Bulgaria 3 3+ 3+ 4- 3+ 3 3- 3- 3- 3 3+ 3- 3+ 3 3+ 3- 3-
Cyprus 3- 4+ 3 4- 3- 3 3- 2+ 3- 3+ 3+ 3 Not applicable 3↑ 3* Not available 3+
FYR Macedonia 3- 3 3- 4- 2+ 3 2+ 2 2 2+ 3- 3- 3- 3- 3- 1 2-
Greece 4+ 4+ 3+ 4- 3- 3 4- 3- 3- 4- 4- 3+ 3- 3+ 3* 3* 3+*
Kosovo 2+ 2- 2- 2+ 2 2+ 2- 2 2- 2+ 2+ 2+ 3- 2+ 2 1 1
Montenegro 2+ 2+ 2+ 3+ 3+ 2+ 2 2+ 2+ 2 3 2+ 2+ 3- 2+ 1 2
Romania 3 3+ 3+ 3+ 4- 3+ 3+ 3- 3- 4- 3+ 3 3+ 3 3+ 3- 3-
Serbia 3- 3- 3- 3 2 2+ 2+ 2+ 2 2+ 3- 3- 3 3- 3 2 2
Turkey 3- 3 3+ 3+ 3+ 3+ 3 3- 2+ 3- 3 3- 3- 3+ 3 3- 4
Eastern Europe and the Caucasus
Armenia 3- 3 3- 3 2+ 3+ 3- 2- 2 3- 2+ 3- 2+ 2+ 2 1 2
Azerbaijan 2+ 2 2 2- 2+ 2+ 2+ 2 2- 2- 2 2+ 2+ 2 2 1 2-
Belarus 2+ 2 2 2 1 1 2 2+ 2 2- 2 2+↑ 1 2 2 1 2-
Georgia 3- 3- 3- 3- 2 3+ 3- 2- 2- 2 2+ 2+ 3 3- 2 1 2-
Moldova 3- 2- 2+ 3 3 3 2+ 2 2 2 3 3 2 2↓ 2↓ 2- 2
Ukraine 3- 2+ 3- 3- 2- 3 2+ 2 2 2+ 3- 3- 2+ 3- 2+ 2 2
Russia 3- 3- 3- 3+ 2 3+ 2 3- 3- 3 3 3↑ 4- 3- 3- 2+ 4-
Central Asia
Kazakhstan 3- 2 3 3 2- 3 2- 1 2 2+ 2+ 3- 3 2+ 2+ 2- 2
Kyrgyz Republic 2+ 2 2+ 3 2- 2+ 2 1 2- 2 2 2- 1 2 2- 1 2-
Mongolia 3- 2+ 2 3 2 2+ 2 1 2+ 2 2 2- 3- 2+ 2 2- 2-
Tajikistan 2 2- 2- 2+ 1 2 2+ 1 1 2 2 2- 1 2 2- 1 1
Turkmenistan 1 1 1 2- 1 1 1 1 1 1 1 1 1 1 2- 1 1
Uzbekistan 2 1 2 2 1 2+ 2- 1 2- 2- 2 1 3- 1 2 1 1
Southern and eastern Mediterranean
Egypt 2 2 2+ 3 1 2+ 2+ 2- 2- 1 2 2+ 2- 2+ 2+ 2 2+
Jordan 2 2+ 3- 3+ 2+ 3 2+ 2 2 2- 2+ 3- 2 3 2+ 2 2
Morocco 2+ 3- 3- 3+ 2- 2 3 2 2+ 2+ 3 3- 2 3 3- 2+ 3
Tunisia 3- 3+ 3- 3 2 2 3- 2+ 2+ 2 2+ 2+ 2+ 2+ 2+ 2- 2+

Green shading denotes country/sector on positive watch.
Red shading denotes country/sector on negative watch.
Beige shading denotes removal of previous watch list flag.

SOURCE: EBRD.

NOTE: The transition indicators range from 1 to 4+, with 1 representing little or no change relative to a rigid centrally planned economy and 4+ representing the standards of an industrialised market economy. For a detailed breakdown of each of the areas of reform, see the methodological notes in this section of the Transition Report website.. A colour code is used to indicate that a country/sector has been placed on positive/negative watch or upgraded/downgraded: green indicates positive developments over the last year, while red indicates negative developments. An upgrade or downgrade is denoted by an arrow next to a score. Watch list entries from last year that have been retained are denoted by a green or red frame, whereas removals from the watch list are shaded in beige. The SME finance indicator has also undergone an assessment of positive and negative developments, but is presented in Table S.2 with its new components. * denotes that overall score reflects market structure gap only.

Infrastructure

The effects of developments in the infrastructure sector that were reported last year have become much clearer. This has led to some rating changes following countries being put on watch last year. However, it has also resulted in a number of countries being removed from the watch list where reforms have ended up advancing more slowly than expected or the effects of changes have been more limited than expected.

Two countries, for instance, that were put on positive watch last year in the roads sector have been upgraded. The first is Belarus, which has moved from 2 to 2+. A key factor in this upgrade is the introduction of an electronic toll system in 2013 and the fact that it has subsequently been extended to cover larger parts of the country’s road network. Similarly, the introduction of a new system for collecting tolls from heavy goods vehicles has resulted in Russia’s score being upgraded from 3- to 3. Slovenia has been put on positive watch in light of the country’s motorway management company Družba za Avtoceste v Republiki Sloveniji (DARS) having awarded a contract for a nationwide system of truck tolling to the consortium of Q-Free and Telekom Slovenije. Croatia, on the other hand, has been taken off positive watch because the privatisation of a major road construction and maintenance company has been delayed, while Poland and Kazakhstan have been removed because delays are affecting the implementation of public-private partnership projects. Lastly, there is one new addition to the watch list for the roads sector, albeit a negative one. In Ukraine, road funding switched in 2015-16 from a dedicated fund to the general state budget. However, a law on the establishment of a new road fund has not yet passed through parliament.

In the railways sector, Croatia and the Slovak Republic have been taken off positive watch, as opening these markets up to the private sector has had only a limited impact on the market structure in the two countries, with the private sector’s market share remaining relatively small. Similarly, last year’s IPO and SPO for freight operator PKP Cargo in Poland represented an important development, but it was not significant enough to lead to an upgrade, given the maturity of the market. Ukraine, on the other hand, is a new addition to the positive watch list on account of its efforts to commercialise and modernise the national railway operator, Ukrzaliznytsia. Positive steps include the corporatisation of the organisation (which was previously an integral part of the Ukrainian Ministry of Transport), the approval of a comprehensive restructuring plan including the separation of cargo and passenger transport, and the appointment of an independent CEO (who is a former head of Polish railway company PKP Cargo).

There have only been a few significant developments in the area of municipal infrastructure. In the urban transport sector, the two countries that were on last year’s positive watch list have been removed. In Hungary, the number of new routes being served by private bus operators has ended up being smaller than expected. In Russia, meanwhile, the introduction of a new parking system in Moscow has not proved significant enough to warrant an upgrade. There are no other new developments to report for this sector.

There is, however, a new entry on the positive watch list for the water and wastewater sector. The introduction in 2015 of a tariff calculation methodology for Kazakhstan’s utilities sector which includes an element of profit represents a positive development. As a result, a number of water companies have secured six-year tariffs with approved annual tariff increases that are expected to cover operating and capital costs. In addition, Armenia has been taken off negative watch, as the envisaged privatisation of the country’s operating lease is designed to partly offset the drawbacks of the recentralisation seen in the sector last year. However, it remains to be seen whether consolidating water assets under a single operator will achieve its stated objectives of imposing greater spending discipline and curbing corruption.

Energy

There have been lots of reforms in the energy sector in recent years, and there seems to be a continued appetite for change in a number of countries. In Bulgaria, for example, the government has introduced a plan to tackle losses in the energy system. Against the backdrop of policy dialogue efforts by the EBRD and other international financial institutions, the new plan aims to strengthen the financial stability of the sector. It includes the refinancing of existing losses, the renegotiation of expensive power purchase agreements and increased payments for electricity. Furthermore, ongoing capacity-building on the part of the regulator should help to improve the regulation of the network. Similarly, the Serbian government’s commitment to the reform of the power sector was demonstrated in the first phase of the corporate restructuring of state-owned public utility EPS in July 2015. In line with the reorganisation plan adopted in December 2014, EPS was separated into production, distribution and supply arms. The second phase involves transforming the firm into a joint-stock company. Following the restructuring of the company, the government intends to seek minority private equity participation in order to improve the sustainability of EPS operations and ensure professional management. In addition, the retail electricity market was fully opened up in January 2015, although households and smaller commercial consumers will retain the right to be supplied by EPS at regulated prices.

In the natural resources sector, one notable development in the last year is the strong start that the Ukrainian authorities have made with their tough reform programme, which includes measures to tackle inefficiencies in the governance of energy company Naftogaz. Furthermore, the Ukrainian Cabinet of Ministers approved Naftogaz’s unbundling plan in July 2016.

Sustainable resources

In the context of the EBRD’s Sustainable Resource Initiative, last year’s Transition Report presented two new indicators measuring progress relating to sustainable use of water and materials. Given their newness, no updates are included for these two areas this year. However, the third indicator in this category, sustainable energy, has been reviewed. As a result, three countries have been taken off positive watch and one has been taken off negative watch.

Despite progress with the transposition of EU directives, little progress has been made with the implementation of a new supporting framework for renewable energy in Poland. That framework would have facilitated a move away from a green certificate system towards an auction-based system, which would have been in line with EU recommendations on support for renewable energy. Its absence could mean a decline in new investment in 2016 and beyond. In parallel, an environmental law focusing on social and grid stability concerns has significantly restricted the growth of onshore wind technology by imposing minimum distance requirements that rule out the majority of potential locations for future windfarm projects. As a result, growth in the production of renewable electricity is expected to slow substantially, making it more difficult to achieve the country’s renewable energy target for 2020.

In Kazakhstan, significant amendments to the country’s Green Economy Law have failed to lead to increases in renewable energy and energy-efficiency projects owing to the persistence of other barriers (including low energy prices, which discourage investment in energy efficiency). Furthermore, this year the government has decided to suspend until 2018 the trading and penalties put in place under the Kazakhstan Emission Trading Scheme.

In FYR Macedonia, meanwhile, last year’s positive developments relating to the government’s new renewable energy strategy have not resulted in any significant structural changes. Despite the previous commitment shown by the country, its failure to adopt renewable action plans agreed with the Energy Community has resulted in it being taken off positive watch.

Albania, on the other hand, is no longer on negative watch, as some progress has been made with the approval and implementation of key legislation on renewable energy and energy efficiency.

The only country on the negative watch list in this area is Romania, where authorities have embarked on successive retrospective modifications to the support mechanisms for operational renewable energy installations, increasing uncertainty for many owners of renewable energy assets and potential investors.

Corporate sectors

Developments in corporate sectors have been mixed over the last year. In Albania, a moratorium on the issuance of building permits has created difficulties in the construction sector, resulting in the country being removed from the positive watch list for general industry. Egypt, meanwhile, has been taken off positive watch and put on negative watch owing to reductions in its openness to trade. To ease pressure on the currency, the government has rationed access to foreign exchange and restricted imports. In this context, tariffs have been increased for a range of products, and import barriers have been put in place. Likewise, the business environment in Tajikistan is also becoming increasingly difficult. Driven by mismatches between tax revenues and budgetary needs in a weak macroeconomic environment, the tax administration has become increasingly aggressive towards private sector companies. These challenges are being exacerbated by macroeconomic policies such as currency controls, which may weigh on new investment. Slovenia, on the other hand, has been put on positive watch in light of a new privatisation strategy approved in mid-2015. Under that new strategy, progress has been made with the privatisation of several companies, including Paloma, Unior, Cimos, Mariborska livarna Maribor and a number of other smaller companies. Kazakhstan, meanwhile, has been put on positive watch in the agribusiness sector. Kazakhstan officially joined the World Trade Organization in 2015, and its most-favoured-nation tariffs for agricultural products have decreased on average since 2014. This is evidence of greater liberalisation in terms of prices and trade. The country has also seen improvements in agricultural productivity and hygiene standards.

In the ICT sector, the Slovak Republic, which was put on positive watch last year, has been upgraded from 4- to 4. The completion of the privatisation of Slovak Telekom addressed one of the key remaining transition challenges in this sector. Meanwhile, spectrum liberalisation in Albania has resulted in that country being put on positive watch. AKEP, which regulates the sector, has allocated spectrum licences to several companies for the provision of 2G, 3G and 4G services and lifted existing restrictions on the use of certain bandwidths.

Financial sectors

Many countries’ financial sectors are still feeling the impact of the various crises that have hit the region in recent years. Efforts to clean up banking systems and increase resilience to future shocks are under way in many countries, but some countries are continuing to struggle with the effects of currency depreciation, non-performing loans and solvency issues.

Given the extent of the 2014 banking scandal in Moldova – which saw US$ 1 billion in assets (around 13 per cent of the country’s GDP) disappear from the banking system, reflecting low levels of corporate governance and transparency – and the fact that there have been limited signs of improvement, the country’s banking sector, which was put on negative watch last year, has been downgraded from 2+ to 2. Given that these negative developments reach beyond the banking sector, the score for insurance and other financial services has also been downgraded from 2+ to 2.

Azerbaijan, meanwhile, is being put on negative watch in light of an increase in financial sector vulnerabilities. Two-step devaluations in 2015 led to balance sheet pressure in the banking sector and to increased dollarisation. Azerbaijan’s Financial Markets Supervisory Authority, which was established in February 2016 to replace the central bank as the sector’s regulator, has taken an active stance on restructuring in the banking sector. By mid-September 2016, 10 out of 43 banks had been closed and a number of remaining banks had been required to present recapitalisation or restructuring plans.

In Croatia, new legislation forcing banks to convert Swiss franc-denominated loans, which has resulted in large losses for banks and dented their willingness to lend, has led to the country being placed on negative watch.

Negative developments have also been seen in Poland, where regulatory and legal changes (including the introduction of a levy of 0.44 per cent, annualised, on banks’ assets that coincided with a major programme of social spending) are threatening to reduce investors’ desire to acquire senior and subordinated bonds, which could result in funding pressures. Nevertheless, the introduction of a new law on covered bonds is a positive step, as it should improve access to long-term funding for mortgage banks.

In Greece, the fact that the country’s four main banks completed a market-led recapitalisation process in December 2015 was a positive development. However, levels of NPLs remain significant (accounting for around 35 per cent of all loans at end-2015), which continues to represent a major challenge. All banks are making efforts to address this issue, with the aid of internal and external initiatives, and supported by a new legal framework for non-performing loans.

The resolution of NPLs is also a challenge in Cyprus. However, the country’s banking sector has shown positive momentum in other restructuring efforts, including the repayment of significant parts of the Emergency Liquidity Assistance (ELA) funding extended to the largest bank in Cyprus. This has led to an upgrade in the banking sector score from 3- to 3.

Georgia, meanwhile, has been taken off negative watch, as the implementation of its law on banking supervision was suspended in October 2015 by the country’s constitutional court. The Georgian government has now decided not to proceed with these legislative changes, so the National Bank of Georgia will retain its supervisory function.

Developments in the private equity and capital markets sectors have been mostly positive in the last year. In Belarus, the country’s first institutional-quality private equity fund, Zubr Capital I, was launched in June 2016, with a fund size of US$ 50 million. Increased access to equity funding and management expertise is particularly welcome in Belarus, given its relatively small private sector. In Serbia, meanwhile, government bonds are now listed on the stock exchange, providing institutional investors with an observable pricing benchmark. A master repurchase agreement for government bonds has been implemented, and the first interbank transactions have been carried out. In addition, the Belgrade Stock Exchange and the Zagreb Stock Exchange have both joined the SEE Link platform, allowing improved access to Serbian and Croatian equity markets. This should broaden the countries’ investor bases and improve the availability of funding. In Poland, on the other hand, the capital markets sector has been placed on negative watch. Covered bond issuance has increased, but senior bond issuance has declined for banks and other corporations. In particular, medium-sized and large bond issues still remain difficult to place. Furthermore, there is continued uncertainty surrounding the future of the Polish pension system, and this is affecting Poland’s capital markets.

Financing and development of SMEs: a new approach to measurement

SMEs are important contributors to a dynamic and well-functioning market economy. They provide a significant number of jobs and can be more flexible than larger firms in responding to demand for specialist products and services. The legacy of planned economies, which emphasised the development of large state-owned enterprises and conglomerates, makes fostering a dynamic SME sector a key issue for transition countries. In addition, a small or unproductive SME population in a country can point to broader deficiencies within the structure and institutions of an economy. Given that they are smaller and have more limited reach and access than large companies, SMEs are more strongly affected by a difficult business environment, as they have fewer channels through which to circumvent or address existing problems. In order to better respond to the needs of the region’s SMEs, the EBRD has recently launched its new Small Business Initiative. In the context of that initiative, the existing SME finance indicator has been reviewed and expanded in order to adopt a more holistic approach to SMEs’ development. Rather than focusing exclusively on the supply side, the assessment has been broadened to encompass demand-side and structural factors. As a result, that assessment now covers the following aspects: bank financing, the legal framework for bank lending, non-bank financing, business skills and standards, and the overall business environment.

Bank financing is the most important source of external finance for SMEs. It used to be covered by the old SME finance indicator and remains an important element of the new assessment. Similarly, the methodology used to assess the legal framework for bank lending has remained largely the same. Non-bank financing instruments, on the other hand, feature more prominently in the new assessment. Non-bank financing can be an important source of funding for SMEs. Leasing and factoring, in particular, can help SMEs to overcome constraints in terms of capital expenditure and working capital. In more advanced markets, bonds or equity investments can provide additional financing or development opportunities.

Finally, two new components have been added: business skills and standards, and the business environment. Skills are very important on both the demand side and the supply side, in order to enable SMEs to access financing. While banks’ skills in providing finance to SMEs were captured well under the old assessment, SMEs’ skills were not taken into account, despite financial literacy and business planning being crucial in order to present bankable projects or grow a business. Furthermore, improvements in standards can help SMEs to access new markets, attract outside investors and become more efficient. SMEs also suffer disproportionately from red tape and excessive regulation, as well as low levels of competition and transparency. The new assessment tries to capture this by using selected key measures which exemplify the barriers that SMEs face. A more detailed list of components and indicators can be found in the methodological notes in the online version of this Transition Report (tr-ebrd.com).

The results of this new assessment are presented in Table S.2. The picture is similar to those observed in other sectors, with central Europe and the Baltic states showing the highest levels of progress (with gaps generally small, and occasionally medium-sized). In contrast, many countries in eastern Europe, the Caucasus, Central Asia and the southern and eastern Mediterranean have large gaps.

It is noticeable that non-bank financing options are hugely underdeveloped across the EBRD region, with the exception of EU countries, Morocco, Russia, Tunisia and Turkey. This is partly due to the limited development of private equity and capital markets, which are difficult to access even for larger companies. Leasing and factoring are better developed, but uptake remains limited nevertheless. This is often due to legal frameworks failing to contain specific rules reducing uncertainty surrounding leasing or factoring transactions.

There are also a great many countries with large gaps when it comes to business skills and standards. These reflect relatively low levels of financial literacy, which we use as a proxy for the financial management skills of small firms, but also a lack of certification and limited desire to innovate, particularly in eastern Europe, the Caucasus, Central Asia and some parts of the Western Balkans.

In comparison, gaps are mostly small or medium-sized when it comes to the business environment, which may be surprising given the continued prevalence of informality and corruption, as well as the mixed track record in terms of the enforcement of competition policy. That relatively good performance may be a result of governments focusing more on streamlining administrative processes, for example with the help of one-stop shops or e-government measures, as well as efforts to improve headline indicators in the World Bank’s Doing Business report.

Table S.2

SME finance and development gaps in 2016
Bank financing Legal framework (bank lending) Non-bank financing Business skills and standard Business environment
Central Europe and the Baltic states
Croatia Medium Medium Medium Small Medium
Estonia Small Small Small Small Small
Hungary Small Small Small Small Small
Latvia Medium Small Medium Medium Small
Lithuania Small Medium Small Medium Medium
Poland Small Small Small Small Small
Slovak Republic Small Small Medium Small Small
Slovenia Small Medium Medium Small Small
South-eastern Europe
Albania Medium Medium Large Large Medium
Bosnia and Herzegovina Medium Medium Large Large Medium
Bulgaria Small Small Medium Medium Medium
Cyprus Small Medium Small Medium Small
FYR Macedonia Medium Medium Large Large Medium
Greece Small Small Small Small Small
Kosovo Large Medium Large Medium Medium
Montenegro Medium Medium Large Medium Medium
Romania Medium Small Medium Medium Medium
Serbia Medium Medium Large Small Medium
Turkey Small Small Medium Small Medium
Eastern Europe and the Caucasus
Armenia Medium Medium Large Large Medium
Azerbaijan Large Large Large Large Small
Belarus Large Medium Large Medium Medium
Georgia Medium Small Large Large Medium
Moldova Medium Large Large Large Medium
Ukraine Large Medium Large Large Medium
Russia Medium Medium Medium Medium Medium
Central Asia
Kazakhstan Medium Medium Large Large Medium
Kyrgyz Republic Large Medium Large Large Large
Mongolia Medium Large Large Medium Small
Tajikistan Medium Medium Large Large Medium
Turkmenistan Large Large Large Large Large
Uzbekistan Medium Large Large Large Medium
Southern and eastern Mediterranean
Egypt Large Medium Large Large Large
Jordan Medium Large Large Large Medium
Morocco Medium Large Small Medium Large
Tunisia Medium Large Medium Medium Medium

SOURCE: EBRD.

NOTE: For details of components and indicators, please refer to the methodological notes in this section of the Transition Report.

Regional inclusion gaps

Following major updates to the EBRD’s youth and gender inclusion gaps last year, this year’s report focuses on regional inclusion gaps, using newly available data from the third round of the Life in Transition Survey, which was conducted in late 2015 and the first half of 2016. Updates were also conducted for the youth and gender inclusion gaps, but they revealed no substantial changes.

Regional inclusion gaps are clearly a major issue, given that, as discussed in the Transition Report 2013 and Chapter 3 of this report, an individual’s place of birth is a major driver of inequality of economic opportunity. The EBRD’s analysis of regional inclusion gaps, which is based primarily on LiTS III data, aims to capture the extent to which institutions shape differences in economic opportunities across different regions within a country. The methodology compares mean performance levels across regions in four categories: the quality of local institutions; access to services (such as utilities or health care); labour markets; and education.

The assessment of regional inclusion gaps has been expanded this year to integrate new information, and its geographical coverage has been increased to include Greece. Indicators have been added in order to look in greater detail at regional disparities in labour markets, education and access to services.

The resulting regional inclusion gaps are shown in Table S.3. The most pronounced gaps can be observed in south-eastern Europe and Central Asia. Regional gaps in terms of the quality of local institutions remain large across most of south-eastern Europe, particularly in Albania, Bosnia and Herzegovina, Bulgaria, Kosovo and Romania. Belarus, Moldova and Turkey also display large regional gaps in this area.

Significant regional gaps in terms of access to services can be observed across all Central Asian countries, highlighting the challenges that these countries face – particularly as regards access to water and IT infrastructure. Medium-sized gaps can be seen in most of eastern and south-eastern Europe and the Caucasus, driven primarily by access to heating and gas. Gaps are small across most of central Europe and the Baltic states (with the exception of Croatia and the Slovak Republic, where they are medium-sized).

A similar picture emerges for labour markets, with Azerbaijan, the Kyrgyz Republic, Russia, the Slovak Republic, Tajikistan and Turkey displaying the largest regional disparities in terms of employment opportunities. This measure also takes account of informality and the extent of underemployment. For most of these countries, school-to-work transition is weak and vocational education and training do not provide adequate skills, which is one of the main barriers to regional development. Turkey has the highest regional variation in unemployment rates of all countries covered by Eurostat.

The most pronounced regional gaps in terms of education can be observed in the southern and eastern Mediterranean and in eastern and south-eastern Europe. These gaps measure differences in the number of years of education, the availability of training and the perceived quality of education (at both household and firm level).

Table S.3

Regional inclusion gaps in 2016
Quality of institutions Access to services Labour markets Education
Central Europe and the Baltic states
Croatia Medium Medium Small Medium
Estonia Negligible Small Small Small
Hungary Medium Small Medium Small
Latvia Negligible Small Negligible Medium
Lithuania Negligible Small Small Small
Poland Medium Small Small Negligible
Slovak Republic Small Medium Large Small
Slovenia Small Small Small Small
South-eastern Europe
Albania Large Medium Medium Small
Bosnia and Herzegovina Large Medium Medium Small
Bulgaria Large Medium Small Medium
Cyprus Small Negligible Small Large
FYR Macedonia Medium Medium Medium Medium
Greece Medium Medium Small Medium
Kosovo Large Medium Medium Medium
Montenegro Small Medium Small Negligible
Romania Large Large Medium Medium
Serbia Medium Medium Medium Medium
Turkey Large Medium Large Medium
Eastern Europe and the Caucasus
Armenia Small Small Medium Medium
Azerbaijan Medium Medium Large Small
Belarus Large Medium Small Small
Georgia Medium Medium Medium Small
Moldova Large Medium Medium Medium
Ukraine Medium Medium Medium Medium
Russia Small Medium Large Large
Central Asia
Kazakhstan Large Large Small Medium
Kyrgyz Republic Medium Large Large Small
Mongolia Small Large Medium Large
Tajikistan Medium Large Large Small
Turkmenistan Not available Not available Not available Not available
Uzbekistan Small Large Small Medium
Southern and eastern Mediterranean
Egypt Not available Not available Not available Large
Jordan Not available Not available Not available Small
Morocco Not available Not available Not available Large
Tunisia Not available Not available Not available Not available

SOURCE: EBRD.

NOTE: Methodological changes have been made for access to services, labour markets and education. Please refer to the methodological notes below for more details.

Methodological notes

Sector-level transition indicators

(See Table S.1)
The sector-level transition indicators reflect the judgement of the EBRD’s Office of the Chief Economist about progress in transition by sector and the size of the remaining transition “gap” or challenges ahead. The scores range from 1 to 4+ and are based on an assessment of the size of the challenges in two components: market structure and market-supporting institutions and policies. The scoring for the components is based on either publicly available data or observable characteristics of market structure and institutions. Based on the results of this scoring exercise, remaining transition gaps for market structure and institutions were classified as either “negligible”, “small”, “medium” or “large”. The final numerical score is based on these gap ratings as well as the underlying information. Table N.1.1.1 serves as a guide, defining the ranges for those cases where the two component assessments are the same, however exceptions can be made to this rule.

Table N.1.1.1

Transition cut-off points
Cut-off points
Transition gaps (MS/MI) Potential scores
Large/Large from 1 to 2+
Medium/Medium from 2+ to 3+
Small/Small from 3+ to 4
Negligible/Negligible 4+

The following tables show, for each sector, the weighting attached to the two components (market structure and market-supporting institutions and policies), the criteria used in each case (and the associated weights), and the indicators and data sources that fed into the final assessments. For the corporate and financial sectors as well as the inclusion assessment, the exact sources are listed in the tables. The assessment of remaining transition challenges in the energy sectors is based on cross-country factual data and information on the energy sector (oil, gas, mining, electric power), including from external agencies (International Energy Agency, European Commission progress reports on accession countries, Business Monitor International sector reports, Energy Regulators Regional Association, and so on). The assessment for the natural resources sector has been done by subcomponent (oil and gas and mining), which were then aggregated with a weight reflecting the importance of subcomponents for a country’s economy. For infrastructure sectors, the assessment relied both on quantitative indicators (for example, cost recovery tariffs based on information from EBRD projects) and qualitative assessments of the less quantifiable measures, such as the relations between municipalities and their utilities. Sources encompassed in-house information from investment projects and cross-country data and assessments from several external agencies (including the World Bank, the European Commission and the OECD).

Corporates

Table N.1.2.1

Rating transition challenges in the agribusiness sector
Components Criteria Indicators
Market structure [50%] Liberalisation of prices and trade [15%] Wheat: producer price to world price ratio (FAO GIEWS and PriceSTAT, latest available)
Simple average MFN applied tariff for agricultural products (WTO, 2013)
NRA to agriculture, average 2009-11 (World Bank Distortions to Agricultural Incentives, 2013)
WTO membership (WTO)
Development of private and competitive agribusiness [40%] Wheat: yields per ha, average 2010-12 (FAO ProdSTAT, 2014)
Wheat: average change in yields per ha in the period 2007-12 (FAO ProdSTAT, 2014)
Mass grocery retail sales in per cent of total grocery retail (BMI, latest available data)
Processing mark-up in agriculture (EBRD calculation based on UNIDO, 2013)
Development of related infrastructure [25%] EBRD railways infrastructure (EBRD Transition Report, 2013)
EBRD road infrastructure (EBRD Transition Report, 2013)
Tractors per 100 ha arable land (World Bank World Development Indicators (WDI), 2014)
Pump price for gasoline (World Bank WDI, 2014)
Development of skills [20%] Ratio of a percentage of tertiary graduates in agriculture over a percentage of agricultural share in GDP (EBRD calculations based on UNESCO and CEIC, 2014)
Value-added per worker in agriculture (World Bank WDI, 2014)
Market-supporting institutions and policies [50%] Legal framework for land ownership, exchanges and pledges [40%] Tradeability of land (EBRD Transition Report, 2009, updated in 2014)
Warehouse Receipt Programmes (FAO Investment Centre Working Paper, 2009)
Building a warehouse: dealing with construction permits (World Bank Doing Business, 2014)
Registering property (World Bank Doing Business, 2014)
Enforcement of traceability of produce [40%] Quality control and hygiene standards [40%] Overall TC 34 (ISO, 2014)
Hygiene standard implementation (EBRD assessment, latest available)
Creation of functioning rural financing systems [20%] Ratio of percentage of lending to agriculture relative to percentage of agricultural share in GDP (EBRD calculations, latest available)

Table N.1.2.2

Rating transition challenges in the general industry sector
Components Criteria Indicators
Market structure [60%] Market determined prices [20%] Subsidies in % of GDP (CEIC, latest available data)
Energy intensity (World Bank WDI, 2013)
Competitive business environment [40%] MFN applied tariff, simple average, non-agricultural products (WTO, 2014)
Lerner index (EBRD calculation based on UNIDO, 2010)
Large-scale privatisation (EBRD Transition Report, 2013)
Productivity and efficiency [40%] Expenditures on R&D in % of GDP (UNESCO, 2014)
R&D effectiveness (EBRD calculation based on WIPO and UNESCO, 2014)
Value-added, manufacturing, per employee (UNIDO, 2010)
Knowledge Index (World Bank, 2012)
Market-supporting institutions and policies [40%] Facilitation of market entry and exit [40%] Starting a business (World Bank Doing Business, 2014)
Resolving insolvency (World Bank Doing Business, 2014)
Per cent of firms identifying business licensing and permits and as a major constraint (EBRD and World Bank, 2013)
Enforcement of competition policy [30%] Competition policy indicator (EBRD Transition Report, 2013)
Corporate governance and business standards [30%] Composite country law index (EBRD Legal Transition Team, 2014)
ISO certification (EBRD calculation based on ISO and World Bank data, 2014)
Protecting investors (World Bank Doing Business, 2013)
Corruption Perceptions Index (Transparency International, 2013)

Table N.1.2.3

Rating transition challenges in the real estate sector
Components Criteria Indicators
Market structure [40%] Sufficient supply of quality assets in all subsegments (warehouse/office/retail/hotels) [60%] Class A industry supply per capita (Colliers, DTZ, King Sturge, CB Richard Ellis, Jones Lang LaSalle)
Modern office space per capita (Colliers, DTZ, King Sturge, CB Richard Ellis, Jones Lang LaSalle)
Prime retail space per capita (Colliers, DTZ, King Sturge, CB Richard Ellis, Jones Lang LaSalle)
Hotel room supply per capita (WEF Travel & Tourism Competitiveness Index, 2013)
Market saturation and penetration of innovative construction technologies [40%] Market saturation index (EBRD, 2012)
Index on penetration of innovative construction technologies (EBRD, 2012)
Market-supporting institutions and policies [60%] Tradeability and accessibility of land [20%] Accessing industrial land: lease rights (World Bank, 2010)
Accessing industrial land: ownership rights (World Bank, 2010)
Access to land (BEEPS V, 2012)
Development of an adequate legal framework for property development [30%] Quality of primary legislation in the property sector (EBRD, 2012)
Quality of secondary legislation in the property sector (EBRD, 2012)
Mortgage market legal efficiency indicators (EBRD, 2014)
Presence and effectiveness of energy efficiency support mechanisms [10%] Sustainability of government support mechanisms (EBRD, 2012)
Adequacy of property-related business environment [40%] Registering property (World Bank Doing Business, 2014)
Dealing with construction permits (World Bank Doing Business, 2014)
Property rights (WEF Travel & Tourism Competitiveness Index, 2013)
Level of corruption for construction-related permits (BEEPS V, 2012)

Table N.1.2.4

Rating transition challenges in the telecommunications sector
Components Criteria Indicators
Market structure [50%] Competition and private sector involvement: mobile telephony [40%] Expansion of services to rural areas, proxied by % of population covered by mobile signal (World Bank, 2014)
Mobile penetration rate (International Telecommunication Union, 2014)
Percentage of private ownership in the incumbent mobile operator (Global Insight, BuddeComm)
Market share of the largest mobile operator (Business Monitor International, Global Insight, BuddeComm)
Mobile number portability (Business Monitor International, Global Insight, BuddeComm)
Level of competition for mobile telephone services (World Bank, 2014)
Competition and private sector involvement: fixed telephony [20%] Fixed-line teledensity (International Telecommunication Union, 2014)
Percentage of private ownership in fixed telephony incumbent (Business Monitor International, Global Insight)
Market share of the largest fixed telephony provider (Global Insight, BuddeComm)
Fixed number portability (Business Monitor International, Global Insight)
Level of competition for international long-distance services (World Bank, 2014)
Mobile and fixed-line subscribers per employee (World Bank, 2009)
IT and high-tech markets [40%] Internet users penetration rate (International Telecommunication Union, 2014)
Broadband subscribers penetration rate (International Telecommunication Union, 2014)
International internet bandwidth (World Bank, 2014)
Level of competition for internet services (World Bank, 2014)
Piracy rates (Business Software Alliance, 2011)
Market-supporting institutions and policies [50%] Regulatory framework assessment [70%] Market liberalisation (EBRD, 2012)
Sector organisation and governance (EBRD, 2012)
Market entry for wired networks and services (EBRD, 2012)
Market entry for wireless networks and services (EBRD, 2012)
Fees and taxation on electronic communication services (EBRD, 2012)
Progress towards implementation of information society (EBRD, 2012)
Preparedness of the country to develop a knowledge economy [25%] Knowledge Economy Index: Economic Incentives (World Bank, 2012)
Knowledge Economy Index: Innovation (World Bank, 2012)
Knowledge Economy Index: Education (World Bank, 2012)
Freedom of media [5%] Freedom of press (Reporters Without Borders and Freedom House, 2014)

Energy

Table N.1.3.1

Rating transition challenges in the electric power sector
Components Criteria Indicators
Market structure [40%] Restructuring through institutional separation, unbundling and corporatisation [33%] Extent of corporatisation (setting up of joint-stock companies, improved operational and financial performance)
Extent of legal unbundling of generation, transmission, distribution and supply/retail
Extent of financial unbundling of generation, transmission, distribution and supply/retail
Extent of operational unbundling of generation, transmission, distribution and supply/retail
Private sector participation [33%] Degree of private sector participation in generation and/or distribution
Competition and liberalisation [33%] Degree of liberalisation of the sector (third-party access to network on transparent and non-discriminatory grounds)
Ability of end-consumers to freely choose their provider
Degree of effective competition in generation and distribution
Market-supporting institutions and policies [60%] Tariff reform [40%] Presence of cost-reflective domestic tariffs
Existence of cross-subsidisation among consumers
Degree of payment discipline as measured by collection rates and payment arrears
Development of an adequate legal framework [20%] Energy law in place to support full-scale restructuring of the sector and setting up of a regulator
Quality of taxation and licensing regime
Existence and relative strength of the regulatory framework for renewables
Establishment of an independent energy regulator [40%] Degree of financial and operational independence of the regulator
Level of standards of accountability and transparency

Table N.1.3.2.1

Natural resources subcomponent: oil and gas sector
Components Criteria Indicators
Market structure [40%] Restructuring through institutional separation and corporatisation [40%] Degree of unbundling of different business lines into separate legal entities (joint-stock companies)
Existence of separate financial accounts for different lines of businesses
Extent of unbundling of different business lines into separate legal entities
Extent of measures adopted to improve operational and financial performance
Private sector participation [20%] Degree of private sector participation in upstream and downstream/supply
Competition and liberalisation [40%] Degree of liberalisation of the sector (third-party access to network)
Ability of end-consumers to freely choose their provider
Degree of effective competition in upstream/extraction, supply and retail
Market-supporting institutions and policies [60%] Tariff reform and price liberalisation [40%] Presence of cost-reflective tariffs
Existence of cross-subsidisation among consumers
Degree of payment discipline as measured by collection rates and payment arrears
Development of an adequate legal framework [40%] Energy law in place to support full-scale restructuring of the sector and setting up of a regulator
Quality of taxation and licensing regime
Extent of transparency and accountability on revenues from extractive industries (e.g. EITI/PWYP compliance)
Regulatory structure [20%] Degree of financial and operational independence of the regulator
Level of standards of accountability and transparency

Table N.1.3.2.2

Natural resources sub-component: mining sector
Components Criteria Indicators
Market structure [50%] Private sector participation [40%] Degree of private sector participation in direct mining and processing activities
Diversification of supply chain
Price liberalisation, market access and competition [20%] Extent of commodities price liberalisation
Extent of free market access and free trade
Degree of effective competition in the sector
Development of related infrastructure [20%] Availability and quality of rail/road/port infrastructure
Development of processing facilities
Knowledge and technology [20%] Distance from the technology frontier
Availability of skilled labour
Extent of foreign participation (technology transfer)
Level of EHS&S technology in use in the sector relative to Best Available Technologies
Relative carbon intensity of the sector
Market-supporting institutions and policies [50%] Institutional framework [40%] Independent mining regulation agency
Independence of judicial bodies
Clarity and stability of licensing and tax regimes including royalties
Independent environmental/social regulatory agency
Development of adequate legal and regulatory framework [40%] Mining law/code: adequacy/quality of legislation/regulation
Adequacy/quality of licensing and tax regimes
Adequacy of corporate governance and reporting requirements and implementation
Status of disclosure/reporting transparency and of accountability on revenues (e.g. EITI/PWYP compliance)
Corruption index
EHS&S legislative and regulatory framework [20%] Extent and quality of specific EHS&S legislation for mining sector
Adequacy of environmental legislation/regulations (including tailings/rock management, water management, emissions controls) and effectiveness of enforcement
Adequacy of public information and public participation requirements and effectiveness of enforcement
Adequacy of public health and safety standards and effectiveness of enforcement
Voluntary market incentives: presence and adoption of international standards and market-based mechanisms for EHS&S, cyanide and so on

Sustainable resources

Table N.1.4.1

Rating transition challenges in the sustainable energy sector: energy efficiency (EE), renewable energy (RE) and climate change (CC)
Components Criteria Indicators
Market structure [67%] Market determined prices [50%] Quality of energy pricing: end-user cost-reflective electricity tariffs
Level of enforcement of pricing policies: collection rates and electricity bills
Amount of wastage: transmission and distribution losses
Quality of tariff support mechanisms for renewables (tradeable green certificate schemes/feed-in tariffs/no support)
Presence of carbon taxes or emissions trading mechanisms
Outcomes [50%] Level of energy intensity
Level of carbon intensity
Share of electricity generated from renewable sources
Market-supporting institutions and policies [33%] Laws [25%] Index on laws on the books related to EE and RE (such as those that support renewable technologies, compel minimum standards in various areas of energy use, provide guidance for sectoral targets in terms of energy savings and provide incentives and penalties for achieving desirable targets)
Stage of institutional development in implementing the Kyoto Protocol
Agencies [25%] Existence of EE agencies or RE associations (autonomous/departments within government)
Index on employment, budget and project implementation capacity of agencies
Index on functions of agencies: adviser to government, policy drafting, policy implementation and funding for projects
Policies [25%] Sustainable energy (SE) index: existence, comprehensiveness and specific targets of policies on SE
Renewable energy index: existence of specific sectoral regulations for RE (renewables obligation, licensing for green generators, priority access to the grid)
Climate change index: existence of policies (emissions targets and allocation plans)
Projects [25%] Index on project implementation capacity in EE, RE and CC
Number of projects in EE, RE and CC
Expenditure data on projects in EE, RE and CC

Table N.1.4.2

Rating transition challenges in the sustainable material resources sector
Components Indicators
Market structure [35%] Landfilling fees and taxes [50%]
Extended producer responsibility (EPR) [50%]
Market-supporting institutions and policies [50%] Legal and policy framework [33%]
Responsible institutions [33%]
Sector targets [33%]
Market performance [15%] Material productivity of the industrial and agricultural sector [75%]
Material productivity trend [25%]

Table N.1.4.3

Rating transition challenges in the sustainable water resources sector
Components Indicators
Market structure [35%] Pricing and metering of supplied water and directly abstracted water [50%]
Pricing and monitoring of sewerage and effluent discharges [50%]
Market-supporting institutions and policies [50%] Legal and policy framework [33%]
Responsible institutions [33%]
Targets and standards [33%]
Market performance [15%] Water productivity [75%]
Water productivity trend [25%]

Infrastructure

Table N.1.5.1

Rating transition challenges in the railways sector
Components Criteria Indicators
Market structure [60%] Restructuring through institutional separation and unbundling [33%] Extent of corporatisation of railways
Extent of unbundling of different business lines (freight and passenger operations)
Extent of divestment of ancillary activities
Private sector participation [33%] Number of new private operators
Extent of privatisation of freight operations and ancillary services
Competition and liberalisation of network access [17%] Extent of liberalisation of network access according to non-discriminatory principles
Number of awards of licences to the private sector to operate services
Institutional development [17%] Extent of introducing good corporate conducts (for example, business plans, IFRS, MIS and so on)
Extent of introducing good corporate governance standards
Extent of introducing best practice energy and/or energy efficiency accounting and management
Market-supporting institutions and policies [40%] Tariff reform [50%] Extent of freight tariff liberalisation
Extent of introduction of public service obligations (PSOs)
Extent of cost recovery tariffs
Extent of elimination of cross-subsidies
Development of an adequate legal framework [25%] Presence of railways strategy and railways act
Development of the regulatory framework [25%] Establishment of a railway regulator to regulate the network access according to non-discriminatory principles
Degree of independence of the regulator and level of accountability and transparency standards
Level of technical capacity of the regulator to set retail tariffs and regulate access to the track

Table N.1.5.2

Rating transition challenges in the roads sector
Components Criteria Indicators
Market structure [60%] Restructuring through institutional separation and unbundling [33%] Degree of independence of road management entities
Extent of divestment of construction from road maintenance, engineering and design activities
Private sector participation [33%] Extent of private sector companies in construction and maintenance (BOT-type concessions, management or service contracts, other types of PPPs)
Degree of decentralisation of local roads responsibility
Competition [17%] Index on rules for open tendering of construction and maintenance contracts
Index on practices for open tendering of construction and maintenance contracts
Degree of privatisation of road construction and maintenance units
Institutional development [17%] Extent of introducing good corporate conducts (for example, business plans, IFRS, MIS and so on)
Extent of introducing good corporate governance standards
Extent of introducing best practice energy and/or energy efficiency accounting and management
Market-supporting institutions and policies [40%] Tariff reform [50%] Level of road maintenance expenditures (that is, it should be sufficient to maintain the quality of state roads and motorways)
Introduction of road user charges based on vehicles and fuel taxes
Level of road user charges (that is, it should be sufficient to cover both operational and capital costs in full)
Comprehensiveness index of road user charges (extent of accordance with road use, extent of incorporation of negative externalities and so on)
Development of an adequate legal framework [25%] Existence and quality of road act and other road-related legislation
Extent and quality of PPP legislation
Development of the regulatory framework [25%] Extent to which the regulatory and policy-making functions are separate from the road administration functions
Degree of regulatory capacity on road safety, environmental aspects, pricing and competition for road construction and maintenance, and so on

Table N.1.5.3

Rating transition challenges in the urban transport sector
Components Criteria Indicators
Market structure [50%] Decentralisation and corporatisation [33%] Extent of decentralisation (that is, transfer of control from the national to the municipal or regional level)
Degree of corporatisation of local utilities to ensure financial discipline and improve service levels, including in smaller municipalities
Commercialisation [33%] Level of financial performance (no concern for financials/a few financially sound utilities in the country/solid financial performance is widespread)
Level of commercial investment financing (only through grants/selective access to commercial finance/widespread access to commercial finance)
Level of operational performance: progress in tackling cost control (labour restructuring, energy cost control, reduction of network losses), demand-side measures (metering and meter-based billing, e-ticketing), focus on quality of service
Private sector participation and competition [33%] Extent of legal framework and institutional capacity for PPPs and competition
Extent and form of private sector participation
Market-supporting institutions and policies [50%] Tariff reform [50%] Degree of tariff levels and setting (cost recovery, tariff methodologies)
Existence of cross-subsidisation among consumers
Contractual, institutional and regulatory development [50%] Quality of the contractual relations between municipalities and utility operators
Degree of regulatory authority capacity and risks of political interference in tariff setting

Table N.1.5.4

Rating transition challenges in the water and wastewater sector
Components Criteria Indicators
Market structure [50%] Decentralisation and corporatisation [33%] Extent of decentralisation (that is, transfer of control from the national to the municipal or regional level)
Degree of corporatisation of local utilities to ensure financial discipline and improve service levels, including in smaller municipalities
Commercialisation [33%] Level of financial performance (no concern for financials/a few financially sound utilities in the country/solid financial performance is widespread)
Level of commercial investment financing (only through grants/selective access to commercial finance/widespread access to commercial finance)
Level of operational performance: progress in tackling cost control (labour restructuring, energy cost control, reduction of network losses), demand-side measures (metering and meter-based billing, e-ticketing), focus on quality of service
Private sector participation and competition [33%] Extent of legal framework and institutional capacity for PPPs and competition
Extent and form of private sector participation
Market-supporting institutions and policies [50%] Tariff reform [50%] Degree of tariff levels and setting (cost recovery, tariff methodologies)
Existence of cross-subsidisation among consumers
Contractual, institutional and regulatory development [50%] Quality of the contractual relations between municipalities and utility operators
Degree of regulatory authority capacity and risks of political interference in tariff setting

Financial institutions

Table N.1.6.1

Rating transition challenges in the banking sector
Components Criteria Indicators
Market structure [35%] Degree of competition [43%] Asset share of five largest banks (EBRD Banking Survey, 2014; Raiffeisen Research and Bankscope, latest available)
Net interest margin (EBRD Banking Survey, 2014; Bankscope and official statistical sources, latest available)
Overhead cost to assets (EBRD Banking Survey, 2014; Bankscope and official statistical sources, latest available)
Ownership [29%] Asset share of private banks (EBRD Banking Survey, 2014; Raiffeisen Research, Bankscope and official statistical sources, latest available)
Asset share of foreign banks (subjective discount relative to home/host coordination) (EBRD Banking Survey, 2014; EBRD assessment, latest available)
Market penetration [14%] Assets/GDP (EBRD Banking Survey, 2014; Raiffeisen Research, Bankscope and official statistical sources, latest available)
Resource mobilisation [14%] Domestic credit to private sector/total banking system’s assets ( EBRD Banking Survey, 2014; national statistical sources, latest available)
Market-supporting institutions and policies [65%] Development of adequate legal and regulatory framework [40%] Existence of entry and exit restrictions (EBRD assessment, latest estimates)
Adequate liquidity requirements (EBRD assessment, latest estimates)
Other macroprudential measures (EBRD assessment, latest estimates)
Supervisory coordination (home/host country) (EBRD assessment, latest estimates)
Dynamic counter-cyclical provisioning (EBRD assessment, latest estimates)
Deposit insurance scheme with elements of private funding (EBRD assessment based on official sources, latest estimates)
Enforcement of regulatory measures [50%] Compliance with Basel Core principles (EBRD assessment, latest estimates)
Unhedged foreign exchange lending to the private sector/total lending to the private sector (EBRD Banking Survey, 2014; national statistical sources, latest available)
Banking strength: total regulatory capital to risk-weighted assets (IMF and national statistical sources, latest available)
Sophistication of banking activities and instruments (EBRD assessment, latest estimates)
Private sector deposits to GDP (EBRD Banking Survey, 2014; IMF and national statistical sources, latest available)
Non-performing loans (EBRD Banking Survey, 2014; IMF and national statistical sources, latest available)
Corporate governance and business standards [10%] Proportion of banks which have good corporate governance practices (EBRD assessment, latest estimates)

Table N.1.6.2

Rating transition challenges in the insurance and other financial services sector
Components Criteria Indicators
Market structure [45%] Market penetration [60%] Insurance premia (% of GDP) (UBS, World Bank, EBRD, AXCO and national insurance associations, latest available)
Life insurance premia (% of GDP) (UBS, World Bank, EBRD, AXCO and national insurance associations, latest available)
Non-life insurance premia (% of GDP) (UBS, World Bank, EBRD, AXCO and national insurance associations, latest available)
Leasing portfolio (% of GDP) (Leaseurope and national statistical sources, latest available)
Availability of insurance products (AXCO and EBRD assessments, latest estimates)
Mortgage debt/GDP (EBRD Banking Survey, 2014)
Type of pension system (Pillar I, II, III) (AXCO)
Pension fund assets/GDP (AXCO, Renaissance Capital and other official sources, latest available)
Competition [10%] Market share of top three insurance companies (AXCO and EBRD, latest available)
Private sector involvement [10%] Share of private insurance funds in total insurance premia (UBS, EBRD and national authorities, latest available)
Development of skills [20%] Skills in the insurance industry (UBS and EBRD assessments, latest estimates)
Market-supporting institutions and policies [55%] Development of adequate legal and regulatory framework [88%] Existence of private pension funds (ISSA)
Pillar II legislation OECD, World Bank, EBRD and national official sources, latest available)
Quality of insurance supervision assessment (UBS and EBRD, latest estimates)
Legislation leasing (IFC, EBRD and national authorities, latest available)
Business standards [12%] IAIS member (IAIS)

Table N.1.6.3

Rating transition challenges in the capital markets sector
Components Criteria Indicators
Market structure [60%] Market penetration [50%] Stock market capitalisation/GDP (World Bank, FESE, FEAS and national stock exchanges, 2013)
Number of listed companies (World Bank, FESE, FEAS and official statistical sources, 2013)
Securities (bonds and stocks) traded as % of GDP (World Bank, FEAS, ASEA and official statistical sources, 2013)
Market infrastructure and liquidity [50%] Money Market Index (EBRD assessment, 2014)
Government Bond Index (EBRD assessment, 2014)
Corporate Bond Index (EBRD assessment, 2014)
Turnover ratio (World Bank, FEAS and FESE, 2014)
Market-supporting institutions and policies [40%] Development of adequate legal and regulatory framework [100%] Quality of securities market legislation (EBRD Legal Transition Survey, 2007; EBRD assessment, 2014)
Effectiveness of securities market legislation (EBRD Legal Transition Survey, 2007; EBRD assessment, 2014)

Table N.1.6.4

Rating transition challenges in the private equity (PE) sector
Components Criteria Indicators
Market structure [50%] Competition [35%] Effective number of fund managers per thousand companies (Preqin, EMPEA and company websites, latest available)
Market penetration [65%] Scope of fund type/strategy (EMPEA, Preqin, Zawya, S&P Capital IQ, Thomson Reuters, Mergermarket, EVCA and EBRD estimates, latest available)
Active PE capital as % of GDP (EMPEA, Preqin, Zawya, S&P Capital IQ, Thomson Reuters, World Bank, Mergermarket, EVCA, EBRD estimates, latest available)
PE capital available for investment as % of GDP (EMPEA, Preqin, Zawya, S&P Capital IQ, Thomson Reuters, World Bank, Mergermarket, EVCA and EBRD estimates, latest available)
Market-supporting institutions and policies [50%] Development of adequate legal and regulatory framework [70%] Barriers to institutional investor participation (EBRD, latest estimates)
Quality of securities market legislation (EBRD Legal Transition Survey, 2007)
Effectiveness of securities market legislation (EBRD Legal Transition Survey, 2007)
Corporate governance [30%] Effective framework (EBRD Corporate Governance Legislation Assessment, 2007)
Rights and roles of shareholders (EBRD Corporate Governance Legislation Assessment, 2007)
Equitable treatment of shareholders (EBRD Corporate Governance Legislation Assessment, 2007)
Responsibilities of board (EBRD Corporate Governance Legislation Assessment, 2007)
Disclosure and transparency (EBRD Corporate Governance Legislation Assessment, 2007)

Table N.1.6.5

Rating transition challenges in the MSME finance and development sector
Components Criteria Indicators
Bank financing Competition in the banking sector Asset share of five largest banks (EBRD Banking Survey, 2015)
Net interest margin (EBRD Banking Survey, 2015)
Overhead/assets (EBRD Banking Survey, 2015)
Difference in interest margin between bank lending to SMEs and large corporates (short-term and long-term) (EBRD assessment, 2015)
Access to finance Share of SME lending in total lending (National central bank statistics, own calculations, 2015)
Outreach of commercial banks (branches per 100,000 adults) (IMF, 2014)
Collateral requirements (EBRD and World Bank BEEPS V, 2015)
Skills in banks Existence of specialised SME department in banks (EBRD assessment, 2015)
Extent of use of SME lending methodologies (EBRD assessment, 2015)
Presence of trained loan officers in SME lending (EBRD assessment, 2015)
Legal framework for bank lending Creditor rights (legal framework for secured transactions) Strength of legal rights for secured creditors (World Bank Doing Business, 2015)
Ability to offer and take security over immovable assets (cadastre) (EBRD assessment, 2015)
Registration system for movable assets: ability to offer and take non-possessory security over movable assets (EBRD assessment, 2015)
Effective implementation of legal framework for taking security over movable assets (BEPS II, 2013)
Enforcing secured creditor rights (EBRD assessment, 2014)
Recovery rate (cents on the dollar) (World Bank Doing Business, 2015)
Credit information services Depth of credit information services (World Bank Doing Business, 2015)
Coverage of population (%) (World Bank Doing Business, 2015)
Quality and effectiveness of credit information (EBRD assessment, 2015)
Collateral and provisioning requirements Collateral and provisioning requirements (EBRD assessment, 2015)
Level of banks’ acceptance of movable collateral (BEPS II, 2013)
Non-bank financing Capital markets Level of capital market development (Capital markets ATC, 2015)
Existence of SME-specific capital market opportunities (EBRD assessment, 2015)
Private equity Level of private equity market development (Private equity ATC, 2015)
Leasing Leasing penetration (% of GDP) (National statistical offices, leasing associations, EBRD estimates)
Leasing legal framework (EBRD assessment, 2015)
Factoring Factoring penetration (% of GDP) (Factor Chain International, 2015)
Business skills and standards Financial literacy Financial literacy assessment (Standard & Poor’s, 2015)
Business skills and standards Level of international certification (EBRD and World Bank BEEPS V, 2015 and ISO, 2015)
Use of consultancy services (EBRD and World Bank BEEPS V, 2015)
Level of innovation (EBRD and World Bank BEEPS V, 2015)
General business environment disproportionately affecting SMEs Barriers to entry Level of competition policy (Transition Report competition policy score, 2014)
Level of informality in the economy (EBRD and World Bank BEEPS V, 2015 and Schneider, 2007)
Doing Business Overall Doing Business rank (World Bank Doing Business, 2015)
Ease of starting a business (World Bank Doing Business, 2015)
Resolving insolvency (World Bank Doing Business, 2015)
Level of corruption (EBRD and World Bank BEEPS V, 2015 and CPI, 2015)
Labour regulations (EBRD and World Bank BEEPS V, 2015)

Inclusion

Table N.1.7.1

Inclusion gaps for gender
Components Indicators Sources
Legal regulations and social norms Addressing violence against women The Economist Intelligence Unit – Women’s Economic Opportunity (EIU-WEO), 2012
Property CEDAW ratification
Sex at birth: f/m ratio CIA, 2013
Early marriage UN World Marriage, 2012
Women’s political rights CRI, 2011
Secure access to land Social Institutions and Gender Index, 2014
Secure access to non-land assets
Inheritance laws in favour of male heirs OECD Social Institutions and Gender Index, 2009
Access to health services Maternal mortality ratio (maternal deaths per 100,000 live births) World Bank WDI, 2013
Contraceptive prevalence (percentage of women aged 15-49)
Adolescent birth rate
Births attended by skilled health staff (percentage of total) World Bank WDI, 2005
Education and training Literacy rate: f/m ratio UN Social Indicators, latest available
Primary school completion rate: f/m ratio World Bank WDI, 2013
Gender parity index (GPI) for net enrolment rate in secondary education EPDC and World Bank Education Statistics, 2013
GPI for gross enrolment in tertiary education
Female graduates in engineering UNESCO, 2012
Female graduates in technology
Labour policy Equal pay policy EIU-WEO, 2012
Non-discrimination policy
Policy on maternity and paternity leave and its provision
Policy on legal restrictions on job types for women
Differential retirement age policy
CEDAW ratification
Labour practices

 

Equal pay practice EIU-WEO, 2012
Non-discrimination practice
Access to childcare
Gender pay gap UNECE, 2013
Employment and business Female ownership BEEPS V, 2012
Share of women in non-agricultural employment World Bank WDI, latest available
Labour force participation rate: f/m ratio (age 15+)
Unemployment rate: f/m ratio
Employers: f/m ratio
Female legislators, senior officials and managers
Employment rate of tertiary educated individuals: f/m ratio International Labour Organization, 2013
Access to finance Account at a formal financial institution: f/m ratio (age 15+) Global Financial Inclusion (Global Findex) Database, 2014 or latest available
Credit card: f/m ratio (age 15+)
Mobile phone used to receive money: f/m ratio (age 15+)
Mobile phone used to send money: f/m ratio (age 15+)
The percentage borrowing from formal financial institutions, out of total borrowers: f/m ratio (age 15+)
The percentage saving at formal financial institution, out of total savers: f/m ratio (age 15+)
Borrowed to start, operate, or expand a farm or business, as a share of borrowings: f/m ratio (age 15+)
Loans rejected for firms with female versus male top management BEEPS V, 2012
Percentage of firms identifying access to finance as a major constraint: f/m top management ratio

Table N.1.7.2

Inclusion gaps for youth
Components Indicators Sources
Labour market structure

 

Hiring and firing flexibility Global Competitiveness Index, WEF, 2013-14

 

Redundancy costs
Wage-setting flexibility
Labour regulations as a major constraint BEEPS and World Bank Enterprise Survey, 2012
Labour tax and contributions World Bank Doing Business, 2014-15

 

Ease of starting a business
Youth employment

 

Difference in unemployment rate from youth (age 15-24) to adult (age 25-65) World Bank and ILO, 2013 or latest available
The share of youth not in education, employment or training (NEET) Eurostat, 2013; World Bank WDI and ILO, 2013
Vulnerable employment rate World Bank WDI, 2013
Youth (15-24) in long-term unemployment: more than 12 months International Labour Organization, 2013

 

The percentage of unemployed persons seeking their first job
Quantity of education

 

Average years of education for people aged 25-29 Barro-Lee, 2010 (updated 2015 version); Human Development Index, 2014

 

Percentage of youth (age 15-24) with no schooling
Gross graduation ratio tertiary education UNESCO, 2013
Quality of education

 

PISA test score performance PISA, 2012; supplemented by TIMSS, 2011
Employers’ perception of the quality of the education system WEF, 2013-14
Households’ perception of the quality of the education system LITS, 2010
Top university ranking ARWU QS Top University Ranking, 2014
Skills mismatch

 

Skills gap between labour supply and demand (age 15-29) ILO-KILM, 2012

 

Percentage of over-educated youth (15-29)
Percentage of under-educated youth (15-29)
Academic unemployment (age 15-29 by “advanced” educational level) ILOSTAT, 2014
Employers’ perception of skills shortage BEEPS V and World Bank Enterprise Surveys, 2012-14
Financial inclusion

 

Difference between youth (age 15-24) with bank account compared with adults (age 25+) Global Findex Database, 2011 (updated 2014 version)

 

Difference between youth (age 15-24) with debit card compared with adults (age 25+)
Difference between youth (age 15-24) with bank account used for business purposes compared with adults (age 25+)
Percentage of youth saving in a formal financial institution, out of the total number of youth saving

Table N.1.7.3

Inclusion gaps for regions
Components Indicators Sources
Institutions Corruption in administrative, health and education systems LITS, 2016
Quality of government services
Trust in local government
Satisfaction with local government services
Access to services Access to water LITS, 2016
Access to heating
Access to gas
Access to computers
Access to internet
Household’s perception of service satisfaction (electricity and road)
Household’s perception of the quality of the healthcare system
Labour markets Labour market status (worked in the last 12 months) LITS, 2016
Informal employment (ILO definition)
Underemployment
Education Years of education Gennaioli et al. data set, Quarterly Journal of Economics, 2013
Completed education, in working age (25-65) LITS, 2016
Households’ perception of the quality of the education system
On the job training for permanent employees
Firms’ satisfaction with workforce education