Draft Final Programme ument EDSP by alicejenny

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									The Royal Danish Ministry of Foreign Affairs
The Neighbourhood Programme




              Programme Document

Economic Development Support Programme
  in Kaliningrad and Pskov Oblasts, Russia
               2005 – 2010




                    December 2005
            EDSP - Final Programme Document                                                     i


            Cover Page
Country:          The Russian Federation
Title:            Economic Development Support Programme
Sector:           Economic Development

Partners:         Kaliningrad                                  Pskov
                  Government of Kaliningrad Region             Regional Administration
                  Municipal authorities                        Federal Employment Service
                  Regional Chamber of Commerce and             Municipal authorities
                  Industry                                     Regional Chamber of Commerce and
                  Programme sector business associations       Industry
                  Employers associations                       Programme sector business
                  Federation Trade Unions                      associations
                  Representative of financial institutions     Employers associations
                                                               Federation of Trade Unions
                                                               Representative of financial institutions
Duration:         Five Years
Starting Date:    November 2005
MFA Budget:       DKK 110 million from the Neighbourhood Programme
Russian           To be established during implementation
Budgets

Objectives. The overall objective of the programme is that the living conditions of the populations in
the Kaliningrad and Pskov regions are improved as a result of business development and job creation.
This is to be achieved through increased competitiveness and market access of the SMEs in a limited
number of economic programme sectors (industries) of the two regions, the development of the
regional labour market systems and enhanced technical skills of the workers demanded by the
businesses.
Components and subcomponents. The programme includes two components with three and two
subcomponents respectively. One component addresses SME development while the other is targeted
at the labour market and skills development:
1. SME development
     Development of SME policy dialogue, advocacy capacity of business associations and reduction
      of administrative barriers;
     Facilitation of BDS market development;
     Provision of financial services.
2. Labour Market and Skills Development
     Strengthening the tripartite labour market system
     Restructuring the vocational education and training (VET) system.

Signatures:
                                        ……………………………………………….…….
                                        For the Government of Kaliningrad Region


……………………………………                          …………………………………………
For the Neighbourhood Programme         For the Regional Administration of Pskov



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Table of Contents
Cover Page ...................................................................................................................... i
Table of Contents ...........................................................................................................ii
Maps of Kaliningrad and Pskov.................................................................................... iv
List of Abbreviations ..................................................................................................... v
Executive Summary ...................................................................................................... vi
Part 1: Background and Context ................................................................................... 1
1        Introduction ..................................................................................................... 1
2        Regional Development Framework ................................................................ 2
    2.1 Economic Development in Russia and the Kaliningrad and Pskov Regions.. 2
         2.1.1 Economic Development and Reform in Russia and the Regions ....... 2
         2.1.2 SME Development in the Kaliningrad and Pskov Regions ................ 5
    2.2 Labour Market and Skills Development ....................................................... 20
         2.2.1 Labour Market .................................................................................. 20
         2.2.2 Skills Development ........................................................................... 26
         2.2.3 Corporate Social Responsibility ....................................................... 29
3        Denmark’s Policies and Assistance, and Other Donor Support ................... 32
    3.1 Denmark’s Policies ....................................................................................... 32
    3.2 Danish and Other Donor Support to Russia, Kaliningrad and Pskov ........... 32
Part 2: The Economic Development Programme in the Kaliningrad and Pskov
Regions ....................................................................................................................... 34
4        Programme Framework ................................................................................ 34
    4.1 Introduction and Summary ........................................................................... 34
    4.2 Programme Objectives .................................................................................. 35
    4.3 Strategic and Methodological Approach ...................................................... 36
         4.3.1 Interaction between the State, Market and Civil Society .................. 36
         4.3.2 Sector Approach................................................................................ 37
    4.4 Programme Components and Subcomponents ............................................. 38
    4.5 Overview of Programme and Component Objectives .................................. 39
    4.6 Economic Programme Sectors in the Kaliningrad and Pskov Regions ........ 40
         4.6.1 Kaliningrad Region ........................................................................... 40
         4.6.2 Pskov Region .................................................................................... 44
    4.7 Consistency between EDSP and Existing Programmes and Strategies ........ 47
         4.7.1 Kaliningrad Region ........................................................................... 47
         4.7.2 Pskov Region .................................................................................... 47
5        Component Outlines ..................................................................................... 48
    5.1 Component 1: SME Development ................................................................ 48
         5.1.1 Component Objective ....................................................................... 48
         5.1.2 Subcomponent 1.1: Development of SME Policy Dialogue and
         Capacity of SME Associations ..................................................................... 48
         5.1.3 Subcomponent 1.2: Facilitation of BDS Market Development ........ 53
         5.1.4 Subcomponents 1.3: Provision of Financial Services ....................... 60
    5.2 Component 2: Labour Market and Skills Development ............................... 65
         5.2.1 Component Objectives ...................................................................... 65
         5.2.2 Subcomponent 2.1: Strengthening the Tripartite Labour Market
         System .......................................................................................................... 65




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           5.2.3 Subcomponent 2.2: Restructuring the Vocational Education and
           Training (VET) System................................................................................. 72
     5.3   Cross-cutting Issues ...................................................................................... 78
           5.3.1 Gender Equality ................................................................................ 78
           5.3.2 Good Governance ............................................................................. 78
           5.3.3 Environment ...................................................................................... 79
6          Budget ........................................................................................................... 80
7          Management and Organisation ..................................................................... 82
     7.1   Management Structures for Programme and Components ........................... 82
           7.1.1 Overall Structure ............................................................................... 82
           7.1.2 Steering and Management Bodies .................................................... 83
           7.1.3 Mandates of Steering and Management Bodies................................ 84
     7.2   Financial Management .................................................................................. 85
           7.2.1 Financial Procedures Manual ............................................................ 86
           7.2.2 Budgeting Procedure ......................................................................... 86
           7.2.3 Funds Management ........................................................................... 87
           7.2.4 Accounting Principles and Financial Reporting ............................... 88
           7.2.5 Auditing Procedures.......................................................................... 88
8          Monitoring, Reporting, Reviews and Evaluations ........................................ 89
     8.1   Indicators....................................................................................................... 89
     8.2   Reporting....................................................................................................... 91
     8.3   Monitoring .................................................................................................... 92
     8.4   Reviews and Evaluations .............................................................................. 93
9          Assumptions and Risks ................................................................................. 94
     9.1   Assumptions.................................................................................................. 94
     9.2   Risks.............................................................................................................. 95
10         Implementation Plan ..................................................................................... 96


Annex 1: Types of Business Development Services ............................................... 97
Annex 2: Budget Framework for the EDSP ............................................................ 98
Annex 4: List of Implementation Procedures, Agreements and Contracts .......... 101
Annex 4: List of Implementation Procedures, Agreements and Contracts .......... 102
Annex 5: TOR for Detailed Design of Sub-Component 1.1 ................................. 105
Annex 6: TOR for Detailed Design of Sub-Component 1.2 ................................. 119
Annex 7: TOR for Detailed Design of Sub-Component 1.3 ................................. 131
Annex 8: TOR for Detailed Design of Subcomponent 2.1 .................................... 141
Annex 9: TOR for Detailed Design of Subcomponent 2.2 .................................... 153
Annex 10: Financial approval of the Economic Development Support Programme 164




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EDSP - Final Programme Document                   iv


Maps of Kaliningrad and Pskov




            Kaliningrad Region
            Source: Baltic University Programme




                  Pskov Region




December 2005
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List of Abbreviations
AIDS               Acquired Immune Deficiency Syndrome
AMG                Aid Management Guidelines
BAS                Business Advisory Services
BDS                Business Development Service
CBC                City Business Centre
CSO                Civil Society Organisation
CSR                Corporate Social Responsibility
CSSE               Centre for Support of Small Enterprises
CVT                Continuous Vocational Training
Danida             Danish International Development Assistance
DKK                Danish Krone
EBRD               European Bank for Reconstruction and Development
EDSP               Economic Development Support Programme
EMAS               Eco-Management and Audit Scheme
EU                 European Union
EUR                Euro
FDI                Foreign Direct Investments
FSSE               Fund for Support of Small Entrepreneurs in the Kaliningrad
HIV                Human Immunodeficiency Virus
ICT                Information and Communications Technologies
IE                 Individual Entrepreneurs
ILO                International Labour Organization
ISO                International Organization for Standardization
IVT                Initial Vocational Training
IWWRLEs            Individuals Working Without Registered as Legal Entity
GKR                Government of the Kaliningrad Region
LMI                Labour Market Information
MEDT               Ministry for Economic Development and Trade
MFA                (Danish) Ministry of Foreign Affairs
MLI                Micro-lending Institution
NGO                Non-governmental Organisation
PHARE              Poland and Hungary Assistance with Reconstruction
PC                 Programme Committee
PO                 Programme Office
PPP                Public-Private-Partnerships
PRA                Pskov Regional Administration
RUB                Roubles
SA                 Social Accountability
SE                 Small Enterprise
SME                Micro, Small and Medium-scale Enterprises
SSE                Small-scale Entrepreneur
TACIS              Technical Assistance for the Cities of the Independent States
VET                Vocational Education and Training

Exchange Rates
RUB = Russian Rouble, USD = US Dollar, EUR = European Euro and
DKK = Danish Krone. Rates on 30 November 2005:

1 EUR = 33.73 RUB            1 USD = 28.78 RUB             1 DKK = 4.56 RUB


December 2005
EDSP - Final Programme Document                                                       vi


Executive Summary
Introduction
This programme document for integrated ‘Economic Development Support
Programme (EDSP) in Kaliningrad and Pskov Oblasts, 2005-2010’ has been
developed by the Neighbourhood Programme of Danish Ministry of Foreign Affairs
together with its Russian partners in the two regions. The overall objective of the
programme is that the living conditions of the populations in the Kaliningrad and
Pskov regions are improved as a result of business development and job creation. This
is to be achieved through increased competitiveness and market access of the SMEs,
development of the labour market systems, and enhanced technical skills of the labour
force. This is also expected to promote the further stabilisation and integration of the
regions into the Baltic Sea region.

The Kaliningrad and Pskov regions are two of the closest regions of the Russian
Federation to the Baltic Sea and Denmark. Denmark has had extensive cooperation
with both these regions along with the Leningrad region since the early 1990s. As the
regions are geographically separated the programme will have two distinct parts, but
there is scope for sharing of experience and joint participation in programme activities
in the two regions.

Economic and Business Development
The Russian economy has performed well in recent years. The financial recovery
since the economic crisis in 1998 has been impressive. However, sustainable broad-
based growth can be generated only by increased investment in non-commodity
sectors and an increase in the share of non-petroleum start-ups, particularly micro,
small and medium-scale enterprises (referred to as SMEs).

The overall framework for economic development in Russia is the federal
government’s ‘Medium Term Programme of Social and Economic Development for
2002-2004’. The programme focuses on five structural reform priorities, which in turn
have been driving the legislative agenda. A large number of economic acts and
regulations have been enacted since 2000 and analysis of the programmes suggests
that the business environment had generally improved since 1999.

The Kaliningrad region is the western-most region of the Russian Federation. It is an
enclave, separated completely from the rest of the Russian territory. The population
size is 955,000. Of these 77% live in urban areas. The Kaliningrad region has
experienced high GRP growth rates in recent years, higher than the Russian
Federation average. Per capita income has gone up accordingly but still lags
considerably behind the Russian average (about 60% of Russian per capita income in
2003). The region has the status of a Special Economic Zone (SEZ), which has
created favourable conditions for industrial companies that import a significant
amount of foreign raw materials and components to produce goods for the Russian
market.

Economic development in the region is supported through the ‘Strategy of the Social
and Economic Development of the Kaliningrad Region up to 2010’ that sets the
framework for the development of the region in the medium to long-term perspective.
This strategy is recently supplemented by the ‘Comprehensive Plan of Actions for


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2005-2007 for Realisation of the Strategy on Social and Economic Development of
the Kaliningrad Areas as a Region of Co-operation for the Period till 2010’ that
includes a series of 3-year action plans for economic and social development areas,
including business development.

The Pskov region is located in the northwest of the Russian Federation with a
population of 761,000 two thirds of which live in urban areas. A comparatively low
level of economic development and limited economic growth has characterised the
region in recent years. The per capita income is considerably lower than the Russian
average. Following the economic upswing in Russia in 1999 the industrial production
in the Pskov region began to increase and 1999-2002 industrial growth rates were
slightly higher than the Russian average, but has levelled off since then. The main
overall strategy basis is the ‘Concept of Social and Economic Development of the
Pskov Oblast on long-term prospects’.

Programme Rationale
SME development. The Russian government considers promotion of SMEs to be the
basis for stable economic and political development. Despite significant efforts to
support SME development, however, the situation for small enterprises in Russia
remains problematic. According to the government, the solution to the problems
include improved legislation, access to finance, increased effectiveness of regional
programmes for SMEs, deregulation of the economy, elimination of administrative
barriers and anti-corruption measures. These conclusions wholly reflect the measures
needed in the Kaliningrad and Pskov regions to enhance SME growth. The EDSP is
fully consistent with these findings.

Policy dialogue, administrative barriers and business support. One of the main
preconditions for sound private sector development is that policies, strategies and
programmes for SME development are formulated and implemented. This should to
the largest possible extent be done in dialogue and partnerships between the regional
authorities and the private sector. Key to success in this area is the establishment of
mechanisms for effective dialogue between the partners. While the regional
authorities have taken steps to involve the private sector in dialogue in the past, the
business associations and other organisations representing the business community
find that their influence has been inadequate. Furthermore, the dialogue between the
regional and municipal authorities to improve the enabling environment for business
development in an integrated manner has been limited. As a result there is a lot of
scope for reducing administrative barriers, both at the regional level but not least at
the municipal level, and for improving public support to business development in the
municipalities.

BDS market. Well-targeted business development services (BDSs) are an integral part
of an environment conducive to growth and effective performance of SMEs. While
the supply of BDSs in Kaliningrad is relatively broad and expanding, there are very
few BDS providers in Pskov. An EDSP programming survey shows, however, that
although there are many organisations providing such services in Kaliningrad, the
types and quality of the services offered are inadequate. The situation is similar in
Pskov. In general, entrepreneurs find BDSs expensive. Experience from similar areas
shows, however, that the main reasons for this are that the services rendered are often



December 2005
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too general, of insufficient quality and too expensive compared to their value, which
has resulted in low demand.

SME financing. Restricted access to finance is stated as one of the main obstacles to
SME development in the two regions. There is a great need to improve the financial
conditions of SMEs. The regional SME Funds have very limited credit capacity
because of undercapitalisation, the KMB bank catering to SMEs has only started
operation in Kaliningrad a few years ago and is considered expensive, and the
commercial banks put many demands on SME loan applicants, of which the need to
come up with collateral is often the most difficult one to meet. Further, processing of
loan applications by commercial banks is complex and time-consuming. Experience
from Russia shows SME lending is generally quite profitable for commercial banks if
properly managed. There is a need to overcome some of the banks’ barriers for
lending to SMEs.

Tripartite system. Skilled labour is strongly needed in the Kaliningrad and Pskov
regions’ emerging economic sectors, but it has proven difficult to increase the
employment generation by applying existing labour market instruments. In principle,
the legal framework and formal tripartite institutions are in place, but in effect the
tripartite systems are weak and not properly institutionalised. This is partly due to the
limited capacity of the organisations involved. There is no tradition for tripartite
dialogue, and especially employers are reluctant to participate in existing formal
tripartite institutions. Generally, the labour market also suffers from the lack of
transparency. There is a need for a new type of service system that is based on social
dialogue and collaboration between different organisations involved in supply,
demand and labour policy formulation through an improved regional tripartite system.

Skills Development. If the Kaliningrad and Pskov regions are to compete successfully
in an era of rapid economic and technological change the productivity must be
improved. This requires not only capital investment, but also a work force that has the
flexibility to acquire new skills for new jobs as the structures of economies and
occupations change. The transitional nature of the economy makes new demands on
the employees’ qualifications, competences and motivation. Although the ongoing
decentralisation process is creating new opportunities for the vocational education
system to become more responsive to local needs, it places new financial and
administrative burdens on the local authorities. While the employers demand
experienced and skilled labour, they are reluctant to put their production facilities at
the disposal in the training process. The limited capacity and motivation among
teachers and administrators is also a challenge to implementing changes.

Programme Objectives and Components
The programme addresses these challenges through two closely interlinked and
mutually supportive components. One component addresses SME development while
the other is targeted at the labour market and skills development.

The overall objective of the programme is that the living conditions of the populations
in the Kaliningrad and Pskov regions are improved as a result of business
development and job creation. The intermediate objectives are that new SMEs are
established and effective operations of existing SMEs are achieved in order to
increase value-added and create jobs. The immediate objectives of the programme are


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that the competitiveness and market access of the SMEs in the economic programme
sectors are increased; and that the labour market systems are developed and the
technical skills of the required workers in the regions are enhanced.

The programmatic approach is one that seeks to augment interaction and cooperation
between the state, the private sector and civil society. It is based on close interaction
between programme elements to support business activities of the SMEs on the one
hand, and measures to enhance the availability of skilled labour with the
qualifications, competences and motivation on the other.

   Regional economies
                          COMPONENT 1                          COMPONENT 2

                          1.1 SME policy
                          dialogue and advocacy                2.1 Strengthening the
                          capacity of business                 tripartite labour market
     Selected             associations                         system
     economic
     programme            1.2 Facilitation of
     sectors              business development                 2.2 Restructuring the
                          services (BDS) market                vocational education
                          development                          and training (VET)
                                                               system
                          1.3 Provision of
                          financial services




The programme focuses on two economic sectors or industries in each region in order
to take full advantage of the synergies between the programme subcomponents with a
view to maximising impact. These sectors should have a strong potential for growth in
business activities, value-added and employment. The component interventions below
will specifically target these sectors. The programme will cover the following
economic sectors: the Kaliningrad region (furniture industry and food processing
industry) and the Pskov region (food processing industry and tourism).

Component 1: SME Development. The immediate objective of this component is that
the SMEs in the economic programme sectors will increase their competitiveness and
access to local, Russian and export markets. This is to be achieved through the
development or enhancement of SME policy dialogue and advocacy capacity of
business associations. The aim is to develop effective and consistent policies,
strategies and programmes to support SME development as well as to improve the
enabling environment for business development at municipal level in particular. It
further facilitates the development of markets for BDSs by developing the supply
range and coverage of quality services and promoting SMEs’ demand for the services.
Finally it provides financial services to improve the access of SMEs to financial
resources in order to support the start and development of their businesses.

Component 2: Labour Market and Skills Development. The immediate objective of
this component is that a labour market system is developed that responds effectively
and timely to the demand for skilled labour of the business sectors, especially SMEs,


December 2005
EDSP - Final Programme Document                                                      x


in the economic programme sectors in the two regions. This is to be achieved through
strengthening of the tripartite labour market systems in the regions with the intention
of creating an effective and efficient tripartite dialogue. Further, the component will
assist in restructuring of the vocational education and training (VET) that will
contribute to meeting labour market requirements.

Budget
The total budget for the three-year EDSP is DKK 110 million, corresponding to about
RUB 502 million. The two programme components and their respective
subcomponents have separate indicative budgets. It is anticipated that the budget
resources will be distributed more or less evenly between the Kaliningrad and Pskov
regions, depending on their absorptive capacity.

Programme Implementation Arrangements
Overall programme management and coordination rests with two regional Steering
Committees (SCs) that will function as central decision-making agencies and also be
responsible for EDSP-related donor coordination. Regional Programme Committees
consisting of the main cooperation partners will guide the SCs. The activities of the
programme subcomponents will be managed by Programme Managers (consultancy
firms contracted by MFA) in close partnerships with the private and the public sector
recipient institutions in the programme regions.

A Programme Office (PO) consisting of an international Programme Adviser and
local staff will be established in both the Kaliningrad and Pskov regions. Together
with the programme managers the POs shall support the SCs and PCs with regards to
all operational and executive matters, including organising semi-annual PC sessions,
preparing progress reports and minutes from the PC sessions etc.

Budgets shall be prepared on a yearly basis and revised quarterly taking into account
the expenditure position at the end of each quarter and projections for the future.
Funds for financing programme activities are transferred quarterly from MFA to the
programme accounts of each Programme Manager to cover activities under their
subcomponent(s). Funds for financing Programme Office activities are channelled
biannually from MFA to the Programme Advisers in the Programme Offices.
Financial reporting will take place quarterly to MFA from Programme Managers and
POs.

Monitoring on the basis of well-defined indicators will provide the SCs, PCs and POs
with information required for measuring progress and effectiveness of activities and
possible adjustment of strategies, procedures, institutional arrangements and
allocation of resources. Monitoring data will also be an essential basis for assessing
programme effectiveness, efficiency and impact as well as for reporting to the
Government of the Russian Federation, the Neighbourhood Programme, and other
interested organisations.

The EDSP will be subject to annual reviews undertaken jointly by the Neighbourhood
Programme and the Russian partners. In addition to annual reviews, MFA may decide
in collaboration with the management of the partner organisations to undertake
technical assessments on specific issues at any time during the component period.



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The EDSP will commence in December 2005 and end in December 2010. The
programme will start with a mobilisation phase of three months followed by an
inception phase of three months. The first review of the EDSP shall be conducted
after the completion of the inception phase. The first year of programme
implementation will start in June 2006.




December 2005
EDSP - Final Programme Document



Part 1: Background and Context

1      Introduction
For more than a decade Denmark has assisted Russia in its transformation from a
planned economy to a market economy through assistance to formulation of policies,
strategies and plans as well as support for enhancing effective public administration
and carrying out concrete implementation activities in a number of sectors. The
assistance so far has largely been in the form of projects at both the federal and
regional levels. In order to increase the effect of the assistance, Denmark would now
like to move from a project to a programme based approach.

To this end the Neighbourhood Programme of Danish Ministry of Foreign Affairs has
developed a framework programme document for an integrated ‘Economic
Development Support Programme (EDSP) in Kaliningrad and Pskov Oblasts, 2005-
2010’ together with its Russian partners in the regions. The aim is to start programme
implementation mid-2006.

In August/September 2004 representatives of the Neighbourhood Programme assisted
by consultants visited the Kaliningrad and Pskov regions to identify relevant areas of
cooperation and assistance. The resulting programme identification report described
potential Danish assistance in a number of areas such as assistance to economic
development including agriculture, social sector development including education and
training, and implementation of the administrative reform.

These possible areas of assistance were discussed during follow-up visits in late
November early December 2004 in order to agree on the overall content and direction
of the programme. It was agreed that the main thrust of the programme should be on
business - particularly SME – development, supported by assistance in the fields of
labour market and training.

Seminars were held in the two regions in March 2005 to discuss and agree in more
detail on the interventions of the programme based on a series of options for
assistance in the areas of SME development, labour market and training. The
participants in the seminars were the main Russian stakeholders and the Danish
partners. Following the conclusions of the seminars and based on additional data
collection this EDSP framework programme document was prepared.

The description of the programme subcomponents is not at this stage the result of
detailed feasibility studies in the Kaliningrad and Pskov regions. Given the framework
nature of the programme it is based on information collected during three 3-4 day
visits to each region, documentation subsequently provided in a study ‘Study on
Economic, Labour Market and Training Issues in Kaliningrad and Pskov Oblasts,
Russia’ commissioned by the Danish Ministry of Foreign Affairs and undertaken by a
team of specialist from the two regions. This has been supplemented by information
on the regions generally available.

The document incorporates or addresses the views of the stakeholders received on
preliminary drafts communicated to them in summary form.




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2       Regional Development Framework
2.1     Economic Development in Russia and the Kaliningrad and Pskov Regions

2.1.1 Economic Development and Reform in Russia and the Regions
Russian Federation
The Russian economy has performed well in recent years. The financial recovery
since the economic crisis in 1998 has been impressive. Thus, the cumulative growth
rate for the period 1999-2003 was 37.5%, or 8.3% on average. The growth rate for
2004 is expected to have reached 4-5%. Further, inflation dropped from 84% in 1998
to around 12% in 2003. As to public finances Russia enjoyed a surplus in both the
budget and current accounts in the period 2000-2003, with a federal budget surplus of
1.6% in 2003, and a projected surplus of 0.5% in 2004. The high growth rates can
mainly be attributed to a very low capacity utilisation characterising the period after
the crisis and a dramatic reduction in the relative costs of production, and to very
favourable external factors such as the increase in oil prices.

While this economic upswing has generally been of a universal character, the pre-
crisis ‘losers’, i.e. agriculture, industry and construction, have enjoyed the highest
growth rates. Agriculture has benefited from record crops for a number of years and
import substitution triggered by the rouble devaluation in 1998. Construction has been
booming, primarily because of the demand from the non-residential sector. Growth
rates have varied within industry. Export industries have performed better than those
targeting the domestic market in recent years.

The natural resource-based sectors started to outperform domestic manufacturing in
2002 for the first time since the early 1990s and although the manufacturing sectors
have since started to improve, they have not yet managed to reverse the trend.
Russia’s growth is dependent on favourable external factors also in the years to come,
including high oil prices. Sustainable broad-based growth can be generated only by
increased investment in non-commodity sectors and an increase in the share of non-
petroleum start-ups, particularly SMEs.1

The overall framework for economic development in Russia is the federal
government’s ‘Medium Term Programme of Social and Economic Development for
2002-2004’. The programme focuses on five structural reform priorities, which in turn
have been driving the legislative agenda.2 A large number of economic acts and
regulations have been enacted since 2000, including a tax code, budget code, customs
code, land code, labour code, law on public social assistance, pension reform package,
deregulation package, deregulation package, law on the principles of technical
regulations, and a strategy on reforming the national power company. Analysis of the
programmes suggests that the business environment had generally improved between
1999 and 2002.3


1
  World Bank (2004), Russian Federation. Poverty Assessment and World Bank (2004), Russian
Economic Report, November 2004.
2
  World Bank (2004), The Government’s economic reform program. Moscow.
3
  Business Environment and Enterprise Performance Surveys (BEEPS) conducted by the EBRD and
the World Bank in 1999 and 2002.


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EDSP - Final Programme Document


Kaliningrad
The Kaliningrad region is the western-most region of the Russian Federation. It is an
enclave, separated completely from the rest of the Russian territory. It borders on
Lithuania in the northeast, Poland in the south and by the Baltic Sea in the west and
northwest. The size of the region is 15,100 km2, which makes it the one of the
smallest regions in the Russian Federation. The region is divided into 18 districts,
including 5 city districts. Today there are 22 cities, 5 towns and 1,096 villages in the
region. Pskov is the closest Russian regional centre 800 km away, and the distance to
Moscow is 1,290 km. Kaliningrad has the only ice-free Baltic seaport.

The population of Kaliningrad region is 955,000. Of these, 77% live in urban areas
and the remainder 23% in rural settings. Women make up 52% of the population.
According to statistics the people of working age make up 61% of the population,
while those below account for 19% and the elderly 20%. Of those employed, 30%
work in industry and construction, 11% in agriculture and in forestry, 8% in transport
and communication, and 21% in the social sectors.4

The Kaliningrad region has developed the ‘Strategy of the Social and Economic
Development of the Kaliningrad Region up to 2010’. It sets the framework for the
development of the region in the medium to long-term perspective. Recently the
‘Comprehensive Plan of Actions for 2005-2007 for Realisation of the Strategy on
Social and Economic Development of the Kaliningrad Areas as a Region of Co-
operation for the Period till 2010’ was prepared by the regional administration. It
contains a series of 3-year action plans for economic and social development areas,
including business development.

The Kaliningrad region has experienced high growth rates in GRP in recent years,
higher than in the Russian Federation. Growth continued in 2004 where the economy
developed into a real boom. Per capita income has gone up accordingly but still lags
behind the Russian average. Also growth in industrial production was high and above
the Russian average.

Table 2.1 Indicators of Kaliningrad and Russian GDP
                                                        2000   2001    2002        2003
    Kaliningrad: GRP in current prices (RUB billion)    24.6   34.0    41.1        51.1
    Kaliningrad: Changes in real GRP (%)                15.2   3.4     9.5         9.0
    Russia: Changes in real GDP (%)                     10.0   5.1     4.7         7.3
    Kaliningrad: GRP per capita (RUB thousand)          25.9   35.1    43.6        54.5
    Russia: GDP per capita (RUB thousand)               50.2   62.4    75.2        91.8
    Kaliningrad: changes in industrial production (%)   32.4   12.5    8.5         14.5
 Russia: changes in industrial production (%)      11.9        4.9         3.7     7.0
Source: Goskomstat (2004), Kaliningrad Oblkomstat (2004) in Kaliningrad Regional Development
Agency: Biannual monitoring review, Kaliningrad Province in 2003 May 2004.




4
    Kaliningrad administration.


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The high growth rates have been based on import substitution – or import processing
production, rooted in the federal law on the Special Economic Zone (SEZ), which has
created favourable conditions for industrial companies that import a significant
amount of foreign raw materials and components to produce goods for the Russian
market.

The zone is regulated by a series of legal acts, exempting all goods produced in the
SEZ and exported to other countries from customs duties and other duties,5 all goods
imported from other countries to the SEZ from import duties and other duties, and all
goods produced in the SEZ and ‘exported’ to other parts of the Russian Federation
from import duties and other duties. These exemptions reduce production costs as
much as 35% compared to other Russian regions. Foreign investors operating in the
SEZ have the right to transfer profits abroad in foreign currency. While there has been
a period of significant economic growth in the Kaliningrad region since 1999, there is
little agreement among analysts with regard to the detailed role and the impact of the
SEZ on economic development.6

Pskov
The Pskov region is located in the northwest of the Russian Federation with a territory
of 55,400 km2 spanning over 380 km from the South to the North and over 260 km
from the East to the West. To the west it shares borders with Estonia (270 km), Latvia
(214 km) and Belarus (305 km). Within Russia the region borders on the oblasts of
Leningrad, Novgorod, Tver and Smolensk. The distance from Pskov to Moscow is
690 km, and to St. Petersburg 280 km.

The region is divided into 24 districts and 14 cities, two of which are comparatively
large commercial centres: Pskov (201,000 people) and Velikiye Luki (104,000
people). The size of the population is 761,000 with two thirds living in urban areas
and only one third in the rural areas. About 95% of the population are Russians. The
distribution between the male and female population is 46% and 54% respectively.
The average age is 38.8 years.7 A comparatively low level of economic development
and limited economic growth has characterised the Pskov region in recent years.

The main overall strategy basis for social and economic development in the Pskov
region is the so-called ‘Concept of Social and Economic Development of the Pskov
Oblast on long-term prospects’. The overall objective of the Concept is improvement
of the quality of a life of the population in the region. To this end the Concept states
the basic long-term vision for social and economic development as a basis for
strategic considerations and further efforts towards social and economic development
in the region. It identifies a number of areas as priorities for further development of

5
  The goods are considered to be produced locally if the value of the additional cost of their processing
is minimum 30%, and for some electronics and sophisticated consumer appliances only 15%.
6
  Some maintain that the SEZ has contributed to the industrial and agricultural decline in Kaliningrad
Oblast, because it allowed import of goods at fairly low prices. Industrial enterprises and farms in
Kaliningrad Oblast were unable to compete. The SEZ has turned Kaliningrad Oblast into a customs
loophole thereby promoting the emergence of a strong, widespread shadow economy. Source: TSEBA
(2003), Kaliningrad Province in the first half of 2003, biannual monitoring review, Turku School of
Economics and Business Administration (TSEBA), Kaliningrad Regional Development Agency,
October 2003. See also: Klemeshev, A. et al (2003), The Special Region of Russia. Kaliningrad State
University Publishing House.
7
  www.pskov.ru and www.invest.pskov.ru.


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the region and proposes possible ways of addressing identified challenges and
pursuing opportunities.

Table 2.2 Indicators of Pskov, Kaliningrad and Russian GDP
                                                 2000     2001         2002        2003
    Pskov: GRP in current prices (RUB billion)   -        -            22.9        24.2
    Pskov: GRP per capita (RUB thousand)         -        -            27.7        29.2
    Russia: GDP per capita (RUB thousand)        50.2     62.4         75.2        91.8
Source: Pskov Regional Administration.

The Pskov region is characterized by a comparatively low level of economic
development and limited economic growth in recent years. In 2003, the value of
industrial production per capita was RUB 22,300 compared to a Russian average of
RUB 59,000. The share of industry in GRP is 21%, which is the lowest in the North-
west of Russia. In the beginning of the 1990s industrial production dropped sharply.
Following the economic upswing in Russia in 1999 the industrial production in the
Pskov region began to increase as well. In 1999-2002 the industrial growth rates were
slightly higher than the Russian average, but in 2003 the increase was only 3.9%
against a Russian average of 7% and 14.5% in Kaliningrad.

2.1.2 SME Development in the Kaliningrad and Pskov Regions
The SME Sector in the Kaliningrad and Pskov Regions
OECD has prepared a policy guideline document for business development in Russia
through a process of dialogue between business development officials from OECD
member countries and partners, including business representative, from Russia. In the
document the Russian minister responsible for entrepreneurship development
underlines that the Russian government considers promotion of SMEs as a basis for
stable economic and political development.8

Despite efforts such as the Federal Program of State Support for Small Enterprises in
the Russian Federation, several bills and advanced proposals for the Government of
the Russian Federation concerning amendments of the law and creation of
institutional frameworks for SME promotion, ‘the situation for small enterprises in the
Russian Federation still remains problematical. The solution to these problems will be
found in gradual work focused on: improving the legislation, ensuring access to
finance, increasing effectiveness of regional programmes for SMEs, deregulation of
the economy, elimination of administrative obstacles and anti-corruption measures’.
The EDSP is fully consistent with these findings.

The definition and delimitation of SMEs normally depends on the size and structure
of the business sector in a country and varies from country to country. A distinction
can be made between self-employment, micro, small and medium sized




8
 OECD (2000), Forum on Entrepreneurship and Enterprise Development (FEED) for the Russian
Federation. Policy Guidelines and Recommendations. OECD and UNIDO.


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businesses. The EU uses the following conventions: self-employed (0 employees),
micro businesses (2-9 employees), small businesses (10-49 employees) and medium-
size businesses (50-249 employees).9

A concept similar to SME is not used in Russia. The concept of small-scale
entrepreneur (SSE) may be considered equivalent to SMEs. SSEs include ‘Small
enterprises’ (SEs), ‘Individuals Working Without Registered as Legal Entity
(IWWRLEs) – also referred to as ‘individual entrepreneurs’ (IEs) as well as farms.
The concept of SSE has among other things been defined within the framework of the
state policy on small enterprise support to establish, which companies are eligible for
support and privileges. According to the law10 SSEs include commercial entities of
which the capital share of the Russian Federation, non-governmental organisations,
religious organisations, charity or other foundations does not exceed 25%, and for
which the capital share belonging to one or two legal entities does not exceed 25%.

The number of employed workers should not exceed the following ceilings:

      Manufacturing, construction and transport: 100 employees
      Agriculture and science: 60 employees
      Wholesale trade: 50 employees
      Retail trade and services 30 employees
      Other areas not mentioned: 50 employees.

Using this definition of small-scale entrepreneurs it is estimated that the SSEs make
up 70-80% of the economic business units in the regions. Individual entrepreneurs are
by far the biggest group.

Table 2.3 Share of SSEs in Total Number of Economic Units in 2002 (%)
                                   SSE
    Regions                                                                           Total
                                   SE               IE               Farms
    Russia                         10.3             55.1             3.1              68.5
    North West Federal district    13.9             50.1             1.9              65.9
    Kaliningrad region             5.8              61.0             6.5              73.3
    Pskov region                   8.0              66.9             3.4              78.3
Source: Russian Center for International Projects, 2003.

Policies, Strategies and Programmes for SME Development
Both the Kaliningrad and Pskov regional administrations have developed and
implemented policies/strategies, plans and programmes for SME development in the
past and new programme are underway. Also the Kaliningrad municipality is
implementing support programmes. However, it would appear that the developers of
these policies and programmes have not had at their disposal very detailed
information on the complex dynamics of small business development and the
obstacles faced by the entrepreneurs in developing their businesses. Furthermore,

9
  UNIDO and OECD (2004), Effective Policies for Small Business. A Guide for the Review Process
and Strategic Plans for Micro, Small and Medium Enterprise Development.
10
   Federal law # 88-F3 from1995 ‘On the federal support of small business in the Russian Federation’.



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programme funds have been limited, which has limited the impact of the
interventions.
Kaliningrad Region
In recent years the regional administration of Kaliningrad has taken a number of steps
to support the development of small businesses. This includes programmes for SME
support, setting up a state fund for SME support, as well as developing a network of
business information centres throughout the region.

Kaliningrad region’s ‘Programme of State Support to Small Business for 2003-2004’
has now been succeeded by a programme for 2005-2007 included in the
‘Comprehensive Plan of Actions for 2005-2007 for Realisation of the Strategy on
Social and Economic Development of the Kaliningrad Areas as a Region of Co-
operation for the Period till 2010’ prepared by the regional administration. The
programme includes (i) targeted financial and credit support for small businesses, (ii)
information, legal and consultancy support of small businesses, and (iii) development
and improvement of small business support infrastructure. The 3-year budget for these
interventions is RUB 44 million, of which RUB 26 million (DKK 5.6 million) are to
be allocated from the regional budget and RUB 18 million are to come from the Fund
for Support of Small Entrepreneurs in the Kaliningrad (FSSE) in terms of repayable
loans (circulating assets).

The action plan includes interventions with the objective of assisting small and
medium businesses through a focus on innovation. This is to be achieved through
improvement of laws regulating support in the field of R&D, development of the
conditions for innovative business start-ups whose core element is a programme for
support of small entrepreneurship in the region, development of the infrastructure for
innovative businesses through provision of relevant information on R&D, provision
of expertise on R&D support and development programmes. Finally, it includes the
creation of special financial institutions to support innovative businesses.

While also the Kaliningrad Municipality has developed its own strategies, plans and
programmes for SME support, this does not seem to be the case in other
municipalities in the region. There is limited coordination between the regional and
municipal levels as to SME development. There are no mechanisms to allow for full
implementation of the power of the local authorities that will ensure continuity and
coordination of regional and municipal policies.11

Today economic development in the region is very skewed with the large majority of
business activities taking place in Kaliningrad City followed by a few of the larger
municipalities. This contributes to an uneven distribution of income with many rural
areas loosing out in the economic development process. To counteract this trend and
use the potential for economic development, the regional authorities have identified
5-6 municipalities with particular economic growth perspectives.




11
  The distribution of power between regional and municipal authorities is based on Federal Law # 131
‘On the general principles of municipal organization in Russian Federation’.


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Pskov Region
The regional administration has developed a regional target programme for SMEs:
‘State Support and Development of Small-scale Business for 2002-2006’. The
ambitious programme includes:

   Establishment of the legal basis for support and development of small-scale
    business;
   Financial, credit and investment support to small-scale businesses;
   Establishment and improvement of the infrastructure of support and development
    of small-scale business;
   Information support;
   Training and seminars targeted at the SME sector and distribution of information;
   Industrial support to small-scale enterprises. Establishment of new jobs;
   Organisational, material and technical support of small-scale business;
   Development of international and inter-regional connections;
   Establishment of positive public opinion on business activities.

The total budget is about RUB 100 million. Of this amount the regional budget would
contribute RUB 68 million (DKK 14.6 million) and the ‘Federal fund of support to
small-scale business’ would cover RUB 30 million. It has not been established to
which extent commitments of the concerned authorities to provide such financing has
been made.

It is also noted that the ‘Concept of Social and Economic Development of the Pskov
Oblast on Long Term Prospects’ includes proposals for SME development to the
effect that a policy for the development of SMEs in the region should be developed
with three objectives. It should (i) contribute to the establishment of a more
competitive environment, (ii) help solve the problem of unemployment and thereby
promote an increase in the standard of living and the quality of a manpower, and (iii)
be formulated so as to provide a basis for development of important projects.

As in Kaliningrad the economic development in the Pskov region is also characterised
by a few growth centres, namely Pskov City and Velikiye Luki. However, if the
region follows the recommendations of the federal government, efforts should be
made to distribute economic activity more evenly by focusing on municipalities with
particular economic growth potentials.
Challenges and opportunities
One of the main preconditions for sound private sector development in the
Kaliningrad and Pskov regions is that policies, strategies and programmes for SME
development are formulated and implemented. The state, i.e. the public authorities,
has an important role to play in fostering entrepreneurship by developing a strategy
for (i) removing obstacles to the creation of enterprise, (ii) establishing a facilitating
environment for private sector development, and (iii) contributing to the development
of appropriate market institutions.

In addition to elaborating appropriate support programmes, the region also has a
responsibility to develop appropriate institutions and instruments for the
implementation of these strategies. The creation of an environment conducive to SME
business development requires the effective participation of representatives of


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entrepreneurs and small business owners in a dialogue with the regional
administrations and municipalities on policy and strategy formulation,
implementation, monitoring and evaluation. Furthermore, mechanisms for assessing
conditions for SME business development and for measuring the impact of different
policy tools should be created and effectively implemented.

This calls for effective coordination and communication between the public sector
institutions, principally the bodies in the regional and municipal administrations
responsible for SME support, and the private sector enterprises represented by
business or industry associations as well as the enterprises themselves. In order to
achieve this, mechanisms for dialogue between the partners should be developed, the
public authorities should demonstrate a capacity and willingness to enter into dialogue
with the private sector entrepreneurs and the SMEs and business associations should
develop capacity to undertake advocacy and participate in the dialogue.

Furthermore, it is necessary to integrate the activities of municipal/local authorities
and their possible economic development plans with regional business development
strategies and initiatives. One of the ways to reach this goal is to develop a generic
model for municipal SME support that would function as an integral part of the
regional initiatives in this area. Further, municipal/local government authorities,
business leaders and possibly civic leaders could be brought together to forge and
pursue a shared vision of the community’s economic development potential and how
to exploit it. A plan for economic and business development could be prepared in this
process.

To implement the plans the municipal/local authorities could establish entities with
the responsibility for overseeing the implementation of the plan, including how to
improve the enabling environment for business development. This could be in the
form of establishing municipal/local economic development offices, which would
typically be departments or divisions within departments of the municipal/local
government administration.

Such initiatives should be in agreement with the mechanism of SEZ, which makes up
a major part of the foundation for SME development in Kaliningrad region.

Furthermore there is a need to integrate the activities of local authorities and
municipal development plans with regional development strategies and projects. One
way to reach this aim is to develop a model for how to integrate municipal SME
support into overall regional efforts in this field.

International experience and practice from other parts of Russia show that such a
dialogue-based policy, strategy and programme development and implementation
approach yields the best results. The approach could be piloted in detail through the
economic sector approach adopted in the Danish programme.

Administrative Barriers
Investors and entrepreneurs invest considerable time and incur substantial expenses
when applying for permits, licences and approvals to be issued by the regional and
local authorities. A survey of 500 companies in Kaliningrad concludes that interaction
with authorities related to business start-up and operation consumes about 25% of the


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managers’ time.12 No specific survey has been undertaken in the Pskov region.
Business interaction is separated into three main processes, (i) business start-up, (ii)
locating procedures including purchase of land and construction permits, and (iii)
operating procedures including tax administration and company inspections.

The study concludes that land acquisition, construction permits and tax services are
the most cumbersome areas of interaction. Also inspections are seen as a drain on the
companies’ resources as are irregular practices related to temporary permission
practices, etc. As an example, permits for building on a new plot take up to three
years to obtain and involves more than 30 different land use authorities.

The regional and not least municipal/local authorities have introduced administrative
procedures that amount to administrative barriers in the view of business associations
and firms. Examples include the numerous registrations, approvals, permits, licences
etc. it takes to start new business activities (as example above), long time periods to
process applications and requests, legal and administrative inconsistencies facing
firms that may result in the need for continuous approvals, as well as additional rules
and regulations not required by law.

There is ample scope for initiatives at regional but not least municipal level to reduce
administrative barriers. Introducing one-stop-shops for business registration and
permitting, possibly in conjunction with establishing the above-mentioned
municipal/local economic development offices could for examples do this.

Advocacy Capacity and Services of SME Associations
One of the limitations in the institutional arrangements for the development and
implementation of SME-related business policies, strategies and programmes that
affects SME development in the regions is the lack of an effective dialogue between
the public authorities and institutions on the one hand, and entrepreneurs and their
representatives, on the other. A reason is that the entrepreneurs are not very well
organised in business or industry associations and that those associations that do exist
are weak, have a limited membership base, lack funds and therefore have a limited
capacity to undertake advocacy on behalf of their members and provide services to
the members.
Association in the Kaliningrad and Pskov regions
There are a number of business sector organisations in the regions involved in SME
development. Chief among these are the Kaliningrad Chamber of Commerce and
Industry (KCCI) with over 170 members located in the Kaliningrad region. The
general tasks of the KCCI are: advocacy of the business interests of companies,
promotion of business initiatives, assistance to the cooperation of business with
government and social institutions, information services, export support and
settlement of business conflicts.

The Baltic Business Club (BBC) has more than 100 members that are well-known and
mostly successful firms and policy-makers of the region. The main objective of the
club is to organise communication between its members and dissemination of best

12
  Foreign Investment Advisory Service (FIAS), 2001: Russian Federation. Administrative Barriers to
Investment within Subjects of the Russian Federation. Washington: FIAS.


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practices. The BBC communicates to the public consolidated statements and positions
concerning critical problems faced by the business community that need urgent
resolution. The BBC organises training for its members and arranges other practical
events from time to time.

Other examples are the Manufacturers’ and Businessmen’s Union, the Kaliningrad
Businessmen’s Union, Fish Businessmen’s Union of the West, the Builders Union,
the Association of Industrialists in Kaliningrad and the Kaliningrad Region, the
Association of Kaliningrad Furniture Producers, the Association of Tourist Agencies,
the Association of Light Industry Companies, the Regional Representation of
Association of International Carriers of Russia (ACMAP), and the Association of
Meat Processing Industries. There is no separate SME association. Only some of the
above associations are very active.

In Pskov the main association is the Chamber of Commerce and Industry of the Pskov
Region, which has more than 180 members. It also provides business development
services as described in a subsequent section. Besides that there are very few
examples of formal business or industry associations active in Pskov according to the
information obtained. At present the SME business community has very limited
access to influencing legislative initiatives and can therefore not easily lobby for their
interests in order to create a favourable environment for business development. One
of the first initiatives to improve the situation has been the recent establishment of the
Congress of Entrepreneurs of the Pskov Region. A so-called Public Council of
Entrepreneurs has also been established.

Many entrepreneurs are quite sceptical of participating in business associations or
clubs. Many SMEs do not see the practical use of such associations and may not be
able to express their expectations of them. Most of the associations do not have a
website. This may be seen as an indication of poor efforts of providing information
and creating transparency.

Other organisations, however, are considered more important by the SMEs such as
those that have legitimate functions like certification or determination of country-of-
origin which goes beyond organisation of exhibitions or mere club functions that are
typical for regional associations. Examples of such important organisations are the
chambers of commerce and specialised institutions.
Challenges and opportunities
The strength of associations and the quality of their staff are major factors
contributing to the effectiveness of developing SME policy and undertaking
private/public partnership initiatives. The regional and municipal/local authorities in
Kaliningrad and Pskov need strong and coherent associations as partners for these
purposes. Common to most of the above business associations that are active is that
they are working hard to develop legitimacy, attract members, define clear visions and
objectives of their organisations and develop a financial basis to sustain their
operations. These challenges limit their capacity to play a clear and effective
advocacy role vis-à-vis the regional and municipal authorities and other public
institutions, including taking part in the dialogue in connection with SME policy,
strategy and programme development and implementation.



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There is an opportunity to build on the apparent inclination among the public
authorities in the two regions to involve the business community more in a dialogue
on these subjects, including initiating legislative initiatives to improved the business
environment for SME. One of the possible directions for support could be technical
assistance in the creation of new and strengthening of existing business associations,
as well as support in development of cross-business associations, especially those
uniting the SMEs. Assistance is also required as to the broadening of the functions
(types of activity) of those associations. The experience gained in regions – or
countries – similar to Kaliningrad and Pskov should be taken into account.

Business Development Services for SMEs
Availability of a support infrastructure consisting of business advisory, information
and other support services – also referred to as ‘Business Development Services‘
(BDS) – are important for the sustainable development of the SME sector in the two
regions. The services assist entrepreneurs in establishing, developing and making the
operations of their businesses effective. The investigations made in preparation of the
programme clearly indicate that although there are a number of service providers in
Kaliningrad, there is a need for a wider range of quality services in both regions.

The general picture for Russia as a whole is that the market for business services is
not yet sufficiently developed. A survey estimates that only 10-15% of small
businesses in Russia use BDSs and that an estimated 60-65% of the potential BDS
needs of the SMEs are not converted into an effective demand. The Russian BDS
market suffers from clear supply-side defects. It is characterised by instability with an
emphasis on short-term returns rather than long-term development.13
Kaliningrad
Kaliningrad region’s ‘Programme of State Support to Small Business for 2003-2004’
terminated in 2004 and a new programme for 2005-2007 has been approved. The
main contents of the 2003-2004 programme were (i) development and improvement
of the small business support infrastructure and provision of information in the field
of small business and (ii) financial and credit support for small business (the latter is
dealt with in another section below.

Based on these programmes the regional administration is in the process of
developing and/or improving the small business support infrastructure through a
network of Centres for Support of Small Enterprises (CSSEs) in the municipalities
throughout the region. There are presently 12 such centres in operation: Svetlogorsk,
Svetliy, Baltiysk, Polessk and Kaliningrad in the west; Sovetsk and Neman in the
north; Chernyakhovsk, Gusev, Gvardeisk in the central part; Pravdinsk and Ozersk in
the south. The activities of the centres are financed from the regional budget through
regional programmes for SMEs support, from international sources (grants) and user
payments. It is understood that the centre programme is facing some problems in
reaching its targeted activity level.

The total amount allocated to the centres has not been singled out but the anticipated
total budget from GKR for 2005-2007 is RUB 26 million that also includes financing

13
  OECD (2000), Forum on Entrepreneurship and Enterprise Development (FEED) for the Russian
Federation. Policy Guidelines and Recommendations. OECD and UNIDO.


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of the Fund for Support of Small Entrepreneurs in the Kaliningrad (FSSE). Assuming,
for example, that half of the funds is allocated for providing SME support services, a
yearly average budget for such services would be in the magnitude of RUB 4.3
million (DKK 920,000). This corresponds to a modest yearly average of RUB
360,000 (DKK 77,000) per centre.

The centres provide advice on how to organise and conduct business in a number of
areas starting from general regulations on setting up businesses and ending with
recommendation on how to conduct business in practical terms.

Table 2.4    Services Provided by the Centres for Support of Small Enterprises
     Initial consultancy (free or at lower cost);
     Preparation of application documents for credits and micro-credits (credit
      provided on preferential terms);
     Assistance in search for partners and investors;
     Assistance in business planning;
     Evaluation of business plans;
     Evaluation of business and property;
     Development of constituent document and registration of new SEE ( SME)
      entities;
     Legal services, including defence of SMEs interests in courts (as experts and
      empowered person);
     Assistance in completion of tax declarations and accounting forms, including e-
      forms;
     Submission of tax declarations to the offices of Federal Tax Service;
     Assistance in the filling of payment documents;
     Provision of back-office and related services;
     Access to internet (access to the FSSE web-page is free of charge);
     Education and training for entrepreneurs, arrangement of thematic seminars
      and workshops;
     Development of tutorials and guidelines for SMEs;
     Studies and inquiries (marketing, business climate, etc.).
Source: Government of the Kaliningrad Region (website of Regional Fund for SMEs
Support).

It is understood that most of the above-mentioned service are planned but that the
majority of them not yet offered by the centres.

A City Business Centre (CBC) was established in 2003 by the Kaliningrad City Hall
to support SME development, which is one of the main priorities of the city. The
centre was originally financed by TACIS.14 During 2004-2005 the CBC is partially
financed by the municipal budget. The centre offers services similar to those (to be)
offered by the regional centres listed in the table above. As to training it organises
seminars and workshops in the following fields: marketing and sales, administration
and management, business planning, accounting and finance. For the moment the
14
 Financed under the now completed TACIS project ‘Support for the Kaliningrad Authorities in SME
Development, Including the Strengthening of the Kaliningrad Business Centre’.


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main task undertaken by the CBC is the development of a strategic plan for
Kaliningrad City.

In 2003 the EBRD started a Business Advisory Services (BAS) Programme in
Kaliningrad as part of a drive to develop the economy of the region by stimulating the
growth of local SMEs.15 The size of the 3-year programme is EUR 500,000. The
objective of the programme is twofold: (i) to assist private enterprises in the
Kaliningrad region in using the services of highly qualified Russian and international
business consultants, partially through subsidisation, and (ii) to assist in the
development of the consultancy market in the Kaliningrad region and increase their
competitiveness. Up to now more than 60 companies have received subsidies.

A number of business associations, unions and clubs also offer support to business
development in their respective areas. The most important is the Kaliningrad Chamber
of Commerce and Industry (KCCI).16 In addition to the above centres and institutions
there are a fair number of commercial consulting firms in the Kaliningrad region
providing a series of different business services.

Finally, the ‘Kaliningrad Regional Development Agency’ (KRDA) is non-commercial
entity established in 1999. The founders of the KRDA are GKR and the Russian
research institute of international economic affairs and trade at MEDT. The objective
of KEDA is to support the development of the Kaliningrad region as a region of
Russian-European economic integration and to develop partnership principles. Until
now the activities of the agency have largely been within research for governing
bodies. It has so far not provided business-related services.
Pskov
The regional target programme for SMEs ‘State Support and Development of Small-
scale Business for 2002-2006’ includes the establishment and improvement of the
infrastructure of support and development of small-scale business as well as
informational support.

The Pskov Enterprise Support Centre (PESC) was established in 1998 under the
TACIS project ‘Enterprise Support Centres (ESC)’. Since the financial support came
to an end a few years ago the centre has managed to sustain operations on the basis of
its own income-generating activities. The centre assists not only SMEs but also
enterprises in general throughout the region. The services offered are directed at the
improvement of management systems, marketing, investment policy development,
development of legal and related services, human resource development. More
specifically the services offered include:




15
  The BAS Programme is supported by Sweden, Finland and Luxemburg together with the EBRD.
16
  A description of KCCI and an overview of other business associations is provided in Section
‘Advocacy Capacity and Services of SME Associations’ above.



December 2005                                                                                   14
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Table 2.5 Services Provided by the Pskov Enterprise Support Centre
   Development of enterprise strategies;
   Multi-purpose business-planning;
   Preparation of enterprises for certification of quality systems (based on ISO 9000
    standards);
   Identification and discussion of problems;
   Psychological support for managers and entrepreneurs;
   Training of employees through seminars;
   Search for partners and guidance for investment projects.
 PESC may further assist in the following on the basis of outsourcing:
   Organisation of audit and providing consultancy for accountants;
   Provision of legal services;
   Development of PR campaigns.

The Chamber of Commerce and Industry of the Pskov Region was established in June
1993 on the initiative of the business community of the region. It has more than 180
members and is an important element of the SME support infrastructure. It has a vast
database of producers of goods and services from many countries of the world;
business information about the Russian, CIS and export markets; business contacts
with other regional chambers of commerce, embassies, consulates and trade
representatives. Of particular relevance is that it cooperates with more than 40 experts
in various areas of expertise. While activities have been focusing on supporting large
and medium-sized enterprises in the past, small enterprises have been given more
attention as of late.
Challenges and Opportunities
There is a need for well-targeted business development services (BDSs) as an integral
part of an environment conducive to the growth and effective performance of SMEs.
The enterprises’ needs for BDSs vary widely in relation to their development stage,
sector, size, etc. Furthermore, the needs of businesses during the pre-start-up and
start-up phases differ from those of more established small businesses.

Kaliningrad. In the Kaliningrad region there are quite a number of institutions
offering BDSs to SMEs, chiefly the 12 CSSEs, the Kaliningrad City Business Centre,
the BAS programme and services offered by business associations. While the supply
of such services would therefore seem sufficient, the survey undertaken17 concludes
that although there are many organisations providing such services in the region, the
types and quality of the services offered are inadequate.

Further, the service providers tend to be oriented towards servicing large-scale
businesses. There is especially a need for better services for what is termed more
advanced services such as assistance for strategic planning, market research and
development of marketing strategies, ISO certification etc. However, the market for
such services is often not of such magnitude and stability to make provision of the
services financially sustainable for the service providers since most SMEs find it
difficult to afford such services, given the present conditions of payment up front. The

17
  Danish Neighbourhood Programme (2004): Study on Economic, Labour Market and Training Issues
in Kaliningrad and Pskov Oblasts, Russia. Danish Ministry of Foreign Affairs.



December 2005                                                                              15
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more stable market areas for business advisory services include, auditing, accounting,
tax optimisation schemes.

The existing level of SMEs’ access to information sources is unsatisfactory. There is a
need to make it easier for the SMEs to obtain information on administrative
procedures governing certain aspects of business activity, on the conditions prevailing
at local, federal and export markets, and on potential partners and promising
directions of business development. For the moment there are no other sources of
information on these issues of SMEs development than the website of the Regional
Fund for SMEs Support leaving a need for an information facility, preferably Internet-
based, that would provide comprehensive information on conditions and possibilities
of the small-scale entrepreneurship in the region.18

Pskov. In the Pskov region the provision of BDSs is much more limited than in the
Kaliningrad region. The services sector is largely limited to the Pskov Enterprise
Support Centre, the Chamber of Commerce and Industry of the Pskov Region and a
limited number of other service providers. The principal types of BDSs demanded by
SMEs are related to legal advice, accounting, auditing and finance, followed by
business promotion and marketing and business planning.

While no detailed information on the needs of the SMEs in Pskov is presently
available they are believed to be similar to those identified in the Kaliningrad region,
but with a thrust on the more standard and fundamental services related to start-up and
consolidation of SMEs given the development level of SMEs in the Pskov region is
lagging somewhat behind that of the level in Kaliningrad.

In general entrepreneurs find BDSs expensive and would – not surprisingly – prefer to
have free or cheap access to such services. Some enterprises are willing to and can
afford to buy the more ‘advanced services’ such as assistance in market research,
strategic planning, ISO certification, but they are often larger enterprises. However,
the market for even these services has been limited since the economic crisis in 1998.

It is believed that one of the reasons for this position is that the services rendered have
often been of such relevance and quality that their value as perceived by the
entrepreneurs has not matched the price paid. Even though many SMEs are not able to
recognise complex constraints facing their businesses, experience shows that when
they get access to services that meet articulated needs and are able to help solve the
business problems, they begin to see the value of the services and subsequently often
wish to address other problems through purchase of BDSs.

Technology Support and Innovation
The main element of the SME-related innovation infrastructure in the Kaliningrad
region is the Kaliningrad Innovative Technological Centre (KITC), which has been
established by leading regional institutes, research organisations and the regional
administration. KITC has organised innovation-related network activities in the form
of cooperative meetings with German innovation centres and German businessmen.



18
     Study on Economic, Labour Market and Training Issues in Kaliningrad and Pskov Oblasts, Russia.


December 2005                                                                                     16
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According to KITC, there is an agreement with a local enterprise about the creation of
some kind of incubator for innovative production. It is also understood that the
regional administration has considered the development of a kind of ‘One-stop shop’
facility for the support of small business. So far the idea only exists in the form of a
project proposal.

According to the information gathered there does not seem to be any facility in the
Pskov region that resembles the concept of a technology centre.
Challenges and opportunities
Although KITC has been in operation since 2001 it is too early to determine if it has
had any appreciable influence on innovative activity. While an environment
conducive to innovation is officially supported, a full understanding of the innovation
processes in a market economy with state involvement may not exist. A major
challenge consists of getting an insight into the dynamics and interlinkages between
state driven research, access to technology, the firms’ own R&D and the resulting
innovation and potentials for business development.

Financial Services for SME Development
Kaliningrad
The ability to mobilise sufficient financial resources is one of the key requirements
for the successful development of small businesses, be it start-ups or existing SMEs.
According to the SMEs and their representative associations in the Kaliningrad and
Pskov regions, most enterprises suffer from access to and the high cost of capital. The
shortage of capital available to SMEs mainly reflects defects in the supply of finance
available to them on the market and in the methods of financing used.

The availability of capital specifically for SME development is limited to regional
funds, a few branches of development banks catering especially to the SME sector,
and leasing companies. Given the inadequate resources available from these sources
to finance both investment and working capital needs, most companies have to turn to
commercial banks that are characterised by strict guarantee and other requirements
and unfavourable lending conditions. Financing options for SMEs that cannot meet
these requirements may be limited to informal resources from friends and relatives.

Regional Fund. The ‘Fund for Support of Small Entrepreneurs in the Kaliningrad
Region’ (FSSE) established by the regional administration provides financial support
for small business in the forms of micro credits (up to RUB100,000),
soft/concessional loans on a competitive basis (above RUB 100,000), credit
guarantees, and indemnification of a part of the interest rate of bank credits extended
to businesses (up to one half of the official central bank rate). Loan terms are
generally quite favourable with annual interest rates of 9-14% in nominal terms
compared to inflation that has been running at 12-14% in recent years. Repayment
periods extend up to 1½ years.

The impact of the Fund on SME development in Kaliningrad is limited, however. In
2004 the Fund extended soft loans and micro credits totalling RUB 5.2 million, which
were received by 31 small businesses (equivalent to about 0.5% of the total number of
SMEs in Kaliningrad). Total lending for the period 2003-2004 amounted to


December 2005                                                                        17
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RUB 8.8 million (approximately DKK 1.7 million). This is estimated to correspond to
1-2% of total investments undertaken by SMEs during the period in question, i.e.
quite a negligible contribution to meeting the capital needs of SMEs.19

KMB Bank. The KMB Bank, which established a branch in Kaliningrad in 2002, is
the only foreign bank in Russia created specifically to serve the needs of and promote
micro, small and medium-sized business. EBRD and SEDF are the principal
shareholders accounting for about 37% of the capital each. In Kaliningrad, loan
applicants must have an ongoing business, i.e. have been operating for at least 3
months. Loans are not given to start-ups. The main customers are from commerce
(75%) and services (10%). Interest rates are in the order of 12-14% for foreign
exchange loans and 20-30% for local currency loans depending on the type. Loans
based on collateral to micro, small and medium sized enterprises typically carry an
interest rate of 22-25%. The small business community in Kaliningrad considers the
interest rates of the bank high and the total amount of credit extended so far is
understood to be relatively small.

Commercial Banks. In 2004 the commercial banking system in Kaliningrad was made
up of 12 regional banks and 30 bank branches, including branches of non-regional
banks and the Sberbank of Russia. The volume of credits per one customer of a
typical small bank in Kaliningrad does not exceed RUB 20,000 on average. The
regional banking structure is characterised by an uneven distribution of the banking
institutions. More than 75% of the banks, operational offices and branches are located
in Kaliningrad and neighbouring municipalities. While most regional banks claim that
they wish to serve the interests of SMEs, analyses of the banks’ lending indicate that
almost none of them actually do. Estimates as of December 2004 put the banks’
volume of credits to SMEs at RUB 550-650 million out of a total of RUB 14 billion.
At present the average level of interest rates is about 17% for credits in roubles and
about 14% for credits granted in foreign currency. This level is higher than for the
average of the Russian Federation.
Pskov
Regional Fund. The ‘Pskov Region’s Fund for Support of Small Enterprises’ is a
financial intermediary that assists SMEs in obtaining loans with a focus on commerce
and services. The Fund offers micro credits with an average of RUB 41,000
(approximately DKK 8,800) per loan during operations up to 2005. Most loans are
short term ranging from 2 –12 months. During the years 1998 – 2004 the fund has
extended loans totalling RUB 28.5 million, i.e. a yearly average of RUB 4 million.
The Fund finances its lending activities on the basis of capital contributions from the
regional administration (RUB 1.8 million over the seven years the Fund has existed)
and funds from the Federal Small Enterprise Support Foundation carrying an interest
rate of 18-20% based on a guarantee from the regional administration. The interest
rate on the loans extended is in the order of 36%. As in Kaliningrad the Fund can only
cover a small share of the total capital needs of the SME sector in the region. Only 10-
15% of the loan applications are honoured. The Fund also facilitates the drawing up
of leasing contracts between SMEs and leasing firms outside the region.


19
  Danish Neighbourhood Programme (2004): Study on Economic, Labour Market and Training Issues
in Kaliningrad and Pskov Oblasts, Russia. Danish Ministry of Foreign Affairs.


December 2005                                                                              18
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FORA. The Fund for Support of Micro-entrepreneurship, FORA, has been working in
Pskov since 2000. It has a staff of four and deals with individual and group lending.
Loans range from RUB 10,000 – 500,000. For group loans (3-9 persons) no collateral
is required, but a vehicle can facilitate the process. Joint liability agreements of the
borrowers are required. As to individual loans collateral in the form of a vehicles or
equipment is required. The value of the collateral should be up to 30% more than the
loan amount.

Commercial banks. The commercial banking system in Pskov includes four regional
banks and (Vakabank, Velikiye Luki Bank, Pskovbank, Russian Regional Bank) and
11 branches of credit institutions from other regions (among them the branches of The
Bank of Industry and Construction, Russian Capital Bank, Baltic Bank, InkasBank,
Promsvjazbank, Rosbank, Eksibank and four branches of the Savings Bank of Russia.
Nearly all banks and most of the branches are situated in the two major cities of the
region, i.e. Pskov and Velikiye Luki.

Generally, the banking institutions of the Pskov region do not give SMEs preferential
treatment, e.g. the requirements and conditions for receiving loans do not take into
account the special difficulties facing most SMEs in meeting these requirements. As
bank statistics do not singe out credits to SMEs it is not been possible to estimate the
actual amount of bank credits extended to the SME sector in the Pskov region.
Common to the Two Regions
A factor that greatly contributes to restricting the access to finance by SMEs are the
long and complex procedures of considering loan applications as evidenced in the
table      below        based        on        experience        from      Kaliningrad.

Table 2.6        Typical Requirements and Conditions of Credits to SMEs by
                 Financial Institutions in the Kaliningrad Region
 Criterion               Banking institutions                            Leasing companies
 Financial               Should have no losses, debts to other banks or considerable payable bills.
 performance
                         Should have operated on the market for at Should have operated on the market
                         least 1-2 years; and should have a for at least 1 year.
 Credit history          settlement account in the bank (the account
                         turnover or income statement determines
                         the amount and conditions of the credit).
 Loan                    Deposit property, guarantees, and other Leasing       equipment,    additional
 guarantee/collateral    persons’ guarantees.                        property.
                         Documents confirming the legal capacity of the borrower; financial documents;
 Provided document       documents on the technical and economic assessment of the loan repayment;
                         documents on the provided guarantees.
 Time              for   At least 1 month, usually 2-3 months.       From 1 week to 1 month.
 processing        the
 applications
 Credit period        Not more than 3 years, usually up to 1 year. Not more than 3 years.
                      The credit amount is determined by the First deposit – 10-40% of the leasing
                      credit need confirmed by business plan or equipment; limit of the minimal cost
 Other requirements feasibility study, taking into account the of the leasing equipment, deposit
                      credit capacity of the borrower and deposit property insurance.
                      property insurance.
Source: Study on Economic, Labour Market and Training Issues in Kaliningrad and Pskov Oblasts.



December 2005                                                                                         19
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Sberbank (Savings Bank of the Russian Federation) operates branches in both the
Kaliningrad and Pskov regions. The bank is controlled by the state and receives
around 80% of all private deposits in Russia. Since 1994 the bank has extended small
credits of up to USD 150,000 that are generally provided to existing business firms.
Under the support of the Russian Small Business Fund (RSBF) a micro credit
department has been set up and bank staff trained in assessing businesses not on the
basis of written materials, but on the basis of the businesses’ perspective.

The bank estimates that its market share of SME loans is in the order of 90% in the
Pskov region. The share for Kaliningrad has not been established. Experience shows,
however, that most potential small borrowers (90%) have difficulty in meeting the
collateral requirement of the bank. To overcome this problem, the Sberbank either
lowers the requested amount or disburses in two tranches to allow borrowers to use
the equipment bought with the first tranche as collateral for the second trench.
Collateral offered by a third party is also accepted. Default rates are comparatively
low under the bank’s SME credit activities.
Challenges and Opportunities
Restricted access to finance is often stated as one of the main obstacles to SME
development in the two regions. Thus, there is a great need to improve the financial
conditions of SMEs. The regional SME Funds have very limited credit capacity
because of undercapitalisation, the KMB bank has only started operation in
Kaliningrad a few years ago and is still considered expensive, and the commercial
banks put many demands on SME loan applicants, of which the need to come up with
collateral is often the most difficult one to meet. Furthermore, processing of loan
applications by commercial banks is complex and time-consuming.

This requires actions on two fronts. Firstly, by designing measures/instruments to
directly improve the supply of capital available to SMEs. Secondly, by taking steps to
improve the management capacities and competencies of small business owners and
managers, focusing specifically on their financial management skills and increasing
their knowledge of alternative methods of financing. Experience shows that providing
finance to the SME sector is generally quite profitable for commercial banks if
properly managed. There is a need, however, to overcome some of the banks’ barriers
for lending to SMEs. This includes the development of financial products for which
the banks’ requirements of the SMEs are realistic to the SMEs and that satisfy internal
bank policies on risk and profitability at the same time.


2.2    Labour Market and Skills Development
2.2.1 Labour Market
One of the major current challenges in the Kaliningrad and Pskov regions for
economic growth and sustainable development is to ensure a highly skilled and
adaptable workforce. In the last decade, employment structure and labour
requirements have undergone considerable changes, and today skills shortages and
labour mismatch are becoming an increasing problem.




December 2005                                                                       20
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There are a discrepancy between the official and unofficial unemployment figures for
the Kaliningrad and Pskov Regions. Moreover, the figures vary according to the
source. According to Russian consultants the total level of unemployment in the
Kaliningrad region by 1 February 2005, is 6.2% (according to the classification of
ILO)20 while the registered unemployment is only 1.8% of the total economically
active population. The same Russian consultants state, that in the Pskov region the
total level of unemployment is 8.3% (according to the classification of ILO) while the
registered unemployment is only 3%.

The Pskov region has since 1990 experienced a substantial decrease in employment
opportunities in important sectors such as agriculture and forestry, industry and
transport. The region’s unemployment is growing and the pressure on the labour
market is simultaneously increasing. At the same time, the Pskov region also
experiences substantial shortages of skilled labour and experts to the private and
public sector.

Even though the Kaliningrad region also suffers from an increasing unemployment
rate, the region has, however, experienced an improvement and growth in the
industrial sector.21 Since 1990 the share of those employed in industry, agriculture,
construction, housing and communal services, and social sectors decreased, whereas
the share of those employed in commerce increased. After 2000 the situation changed,
and the share of those employed in industry, transport, communications and the social
sector increased, while the share of those engaged in commerce decreased.

The industry of Kaliningrad region appears to be relatively diversified. Four sectors
exceed 10% of the general industrial production: ‘Food industry’ (39%), ‘Fuel
industry’ (17%), ‘Machine building’ (16%) and ‘Forestry, cellulose and paper
industry’ (12%) and ‘Power industry’ (9%). However, as illustrated by the figure
below, there are some structural changes in the relative importance of the industries.22




20
   The unemployment classification according to International Labour Organisation (ILO) includes the
able-bodied population at an able-bodied age (men 16-59, women of 16-54), not having a permanent
job, wishing to work and looking for work actively.
21
   TACIS (2002a)
22
   TACIS (2002b)


December 2005                                                                                    21
EDSP - Final Programme Document




                             Industrial production volume, percentage       Power industry

               45,0                                                         Fuel industry

                                                                            Ferrous metallurgy
               40,0
                                                                            Chemical and petrochemical industry
               35,0
                                                                            Machine building
               30,0
                                                                            Forestry, cellulose and paper industry
  Percentage




               25,0
                                                                            Construction materials
               20,0                                                         Light industry

               15,0                                                         Food industry

               10,0                                                         Flour-and cereal industry

                                                                            Printing industry
                5,0
                                                                            Other sectors
                0,0
                      1996      1997     1998          1999   2000   2001
                                                Year


Figure 2.1 Industrial production volume, Kaliningrad region, cf. TACIS 2002b.

The dramatic changes in the relative importance of the industries demand a high
degree of responsiveness and adaptability of the labour market. If the labour market
cannot adjust timely to the changes, structural unemployment may occur, as it is
already the case in both the targeted regions. In order to meet such problems there is
an increasing need for effective and efficient tripartite dialogue between public
authorities and social partners.

With this in mind, however, despite increasing opportunities of employment
generation in the targeted regions in recent years, there is still a long way to reach a
situation where labour supply equals the demand. A principal cause for this is the
changing labour market requirements due to the structural changes in the economic
sectors as well as the increasing shortage of qualified skilled labour. The present
situation greatly reduces the potential for positive impact of policies aimed at
sustainable economic development.

Difficulties related to the availability of labour may accelerate the shift of corporate
investments to regions with plentiful and cheaper skilled labour. For instance, the
Pskov region is already a donor of labour and intellectual resources to Russia as well
as the former republics of the Soviet Union. At the same time, Pskov has found it
difficult to attract a new skilled workforce.

At the same time, the regional economies continue to massively generate low-cost
working places. In this respect, more than 65% of vacancies in the Kaliningrad region
offer half of the minimum wage.

As the population’s age structure is gradually changing, the targeted regions’ present
problems may grow and accelerate in the nearest future if relevant policy measures
are not initiated and implemented as internal labour force resources are diminishing.
Within five years the labour force from own sources will generally decrease in
Kaliningrad and Pskov regions and in the case of a reduction in the labour force, the
Kaliningrad region in particular needs a migration inflow of skilled labour as its


December 2005                                                                                                   22
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economy is increasingly demanding and dependent on labour resources. However, the
lack of reliable information on regional economies and future development trends
makes planning in the field of employment generation and elaboration of a manpower
development strategy extremely difficult.

Legislative Framework and Formal Tripartite Institutions
Today, a comprehensive but not always coherent legislative framework is regulating
the labour market. Article 37 of the Constitution of the Russian Federation
enumerates basic labour rights. These labour rights include: free choice of type of
activity and profession, prohibition of forced labour, working conditions which meet
safety and hygiene requirements, remuneration without any discrimination, minimum
wage established by federal law, protection against unemployment, right to individual
and collective labour disputes, right to strike, guaranteed statutory duration of work
time, days off and holidays, and paid annual vacation. Article 30 of the Constitution
envisages that everyone shall have the right to association, including the right to
create trade unions in order to protect one's interests. The current Labour Code of the
Russian Federation of 30th of December 2001 is in force from 1st February 2002.

Bipartite or tripartite agreements at federal, industrial, regional or territorial level as
well as enterprise level collective agreements play an important role in relation to
general labour regulation. Federal level ‘general accords’ were introduced by the
Presidential Decree on Social Partnership and Disputes Settlement of 15 November
1991 as a new instrument of labour policy. They are concluded on a tripartite and
yearly basis between the Federal Government and the most representative
organisations of employers and workers with a view to outline the duties of the parties
involved in such areas as employment, welfare levels, wage levels, etc. Together with
one federal general accord, 61 federal industrial level accords, 77 regional level
accords, 2293 regional industry level accords, and 161,700 enterprise level collective
agreements were concluded in the Russian Federation in 2000.23

At the federal level, the Russian National Tripartite Committee functions as a formal
tripartite institution. In Kaliningrad region, the formal tripartite institution is
established on the basis of the Law of the Kaliningrad region from the 4th of July in
2002 N 160 ‘About activity of the Kaliningrad regional tripartite commission on
regulation of socio-labour relations’. The Department of Labour and Social
Development of the regional administration is functioning as secretariat of the
regional tripartite commission, whose purpose is:

     Regulation of socio-labour relations;
     Conducting collective negotiations;
     Preparation of the regional tripartite agreement on regulation of socio-labour;
      relations between territorial associations of trade unions, associations of
      employers and the regional administration in Kaliningrad;
     Control the performance of the regional Agreement at all levels.

On the 23 July in 2004, in Pskov region a similar regional agreement between the
regional administration, the Pskov associations of trade unions, and regional
association of employers was signed. In comparison with Kaliningrad region, the

23
     www.ilo.org, National Labour Law Profile Russian Federation


December 2005                                                                           23
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tripartite dialogue in Pskov region seems more under the overall control of the
regional administration.

Key Sector Institutions and their Core Mandates
The key institutions regarding the important tripartite dialogue are the public
authorities, the trade unions and the employers’ associations. These institutions,
however, are at present facing great organisational difficulties, which constitute a
general risk to the regional tripartite dialogue as indicated in the figure below.

                      Limited capacity to implement regional tripartite
                      agreement and facilitating tripartite dialogue

                                        Public
                                      Authorities


                                      Tripartite
                                      Dialogue


                                                      Employers
                        Trade Unions
                                                      Associations

     - Weak organisational capacity                        - Limited support from individual employers
     - Limited support from members and other              - Weak organisational capacity
     stakeholders


Figure 2.2 Tripartite Partners

In Kaliningrad, the regional administration body responsible for employment issues,
is the Central Administrative Board of Labour and Social Development, and in Pskov
the Labour Board. These bodies function to promote the organisation of new
workplaces and reduce unemployment, as well as in relation to interaction with the
social partners. The institutions, however, are not adequately experienced in
facilitating tripartite dialogue, and have only limited capacity to implement their
formal mandates.

In both regions the workers are represented by regional organisations of trade unions,
sector associations, and trade unions of separate enterprises. Nonetheless, the trade
unions’ capacity to represent the workers is in general rather limited, and so is the
support to the trade unions from members and workers and other stakeholders.

In Kaliningrad the employers are represented in the formal tripartite institution by the
regional branch of the Russian Union of Industrialists and Businessmen. This
particular union counts 60 members, including businessmen representing branch
associations. Other employers associations are the Baltic Business Club, the Union of
Businessmen (uniting a number of small businesses), and about 20 branch
associations.

Though the Russian Union of Industrialists and Businessmen has a branch in Pskov, it
is the ‘Club of employers of the Pskov region’ that represents the employers in the
formal tripartite institution. This club includes more than 300 enterprises, and has 15


December 2005                                                                         24
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branches in the region’s towns and districts. Commercial and Industrial Chambers are
also established in both regions.

There is a range of different associations and clubs in Kaliningrad and Pskov regions.
However, whom they actually represent is questionable. Many entrepreneurs are quite
sceptical towards these self-governing associations and clubs, as they cannot see their
relevance. The role of business- and sector associations is not always clear, and most
of them have a weak organisational structure and also lack information transparency.
Most SMEs feel that there is no need for such institutions, and therefore also have
difficulties formulating their requirements to them.

Other important institutions are the services of labour and employment. Their
activities are regulated by the law ‘about employment of the population in the Russian
Federation’ (with the subsequent amendments) accepted on the 19th of April in 1991.
There are 18 centres of employment service in Kaliningrad region, and 26 centres in
Pskov region. Moreover, in Kaliningrad region there are about 10 private employment
agencies and 38 firms with license to arrange employment opportunities for citizens
abroad. A non-commercial partnership ‘Kaliningrad regional public reception on
affairs of refugees and migrants’ assists immigrants arriving to the region. The
information flow and collaboration between public and commercial employment
services are, however, rather limited.

The present organisation of the labour market system makes it much difficult to attain
the labour market objectives. Practically all stakeholders met during the programming
period agreed that labour market changes that will increase the supply of skilled
workers are urgently required in order to avoid a general slowdown of the economic
development. There is hence a great need for implementing initiatives stimulating
cross-sector cooperation between the employers, the trade unions and the regional
authorities. Moreover, the stakeholders call for technical assistance addressing the
discrepancies between the regional policy formulation and the local
interpretations/practises guiding the actual policy implementation.
Opportunities
In order to meet current shortages of skilled labour, and forecast and plan for future
labour market requirements improved labour market monitoring and coordination are
necessary and greatly needed. These needs are recognised by all major stakeholders in
both Kaliningrad and Pskov regions and the legal framework in form of regional
tripartite agreements is already in place in both regions. This provides an excellent
opportunity to revise the current tripartite system and strengthen the capacity for
labour market monitoring through strengthened tripartite co-operation.

To formulate policies and make decisions on labour market issues, the tripartite
partners need timely, reliable and relevant information on the needs, wishes and
expectations of both employers and employees. The European TACIS Programme is
to support the targeted regions develop a more comprehensive labour market
information (LMI) system.24 However, to apply the data from such a system requires

24
  A LMI system can be defined as a set of procedures and mechanisms to obtain reliable data for
analysis and decision-making in the sphere of the labour market. For more information, see e.g. ILO
(2001), Manual on Evaluation of Labour Market Policies in Transition Economies.


December 2005                                                                                   25
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adequate capacity as well as the necessary know-how to use such information as a
strategic tool to fight structural unemployment. Furthermore, to supplement the LMI
system, regional sector analyses should be conducted, as such analyses will ensure
consensus among stakeholders regarding the specific sector requirements.

In this respect, the federal employment services in both Kaliningrad and Pskov have
valuable information on the labour supply side, and have a great potential for
providing reliable and specific data for the tripartite partners regarding needs and
competence gaps within specific sectors. Furthermore, there could be a great potential
for information sharing and collaboration between the public and the commercial
employment services, as they both aim to facilitate employment generation.

Challenges
In principle, the legal framework and formal tripartite institutions are in place, but de
facto the tripartite systems in the Kaliningrad and Pskov regions are weak and not
properly institutionalised. This is partly due to the limited capacity of the
organisations involved. Moreover, there is no tradition for tripartite dialogue and
especially employers are reluctant to participate in existing formal tripartite
institutions. Generally, the labour market also suffers from the lack of transparency.

2.2.2 Skills Development
Russian education has a fine tradition. Most school-age children have access to
schools, and 29% of the employed population in Kaliningrad region and 25% in
Pskov region have a secondary vocational training. The old centralised Soviet
educational system, however, operated without incentives to be efficient and with
inadequate accountability. Despite several reform attempts this legacy still
characterises the educational system - especially the vocational education training
(VET) system. This system is neither well equipped to respond to market signals nor
able to reflect the rapidly changing conditions in today’s Russia. VET institutions in
the Kaliningrad and Pskov regions have difficulties in adapting to the changing social
and economic environment, and many are still not oriented towards current labour
market trends and needs, as well as to perform according to the labour market’s
general demands for labour supply.

The management of education and professional training is regulated at three levels: at
federal, regional and municipal level. The financing and management of VET is
traditionally the responsibility of the Federal Government, and secondary and higher
VET institutions are still the responsibility of the Federal Education Agency under the
Ministry of Education and Science. A number of other ministries continue to
supervise high and secondary institutions. The VET institutions possess a high degree
of autonomy in operative management.

Fiscal difficulties, however, have resulted in reduced Federal Government financing
of professional education. From 1 January 2005, the Federal Government transferred
management and financial responsibility for the initial vocational training (IVT) level
to the regional governments. At the regional level the administration is conducted by
the Department of Education and Science in the Kaliningrad region, and the Central
Administrative Board of the General and Vocational Training in the Pskov region.
The majority of the schools of general education are the responsibility of the
municipal level (primary schools, children's preschool establishments).


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Steps have been taken to reform the VET system. National educational standards for
113 of the 257 professions have been approved and implemented. New legislation to
define the framework and content of IVT and secondary vocational education is in the
process of being adopted and implemented, including provision for regional and local
elements of the curriculum to bring these in line with local labour market conditions.

In both regions the institutional VET structures are in place. In Kaliningrad region
there exist 17 primary vocational training institutions, and 31 organisations offer
secondary vocational training services. The professional specialisations offered vary.
In primary vocational training 78 different specialisations (227 curricula) are offered,
while in secondary vocational training 73 specialisations (191 curricula) are offered.
In primary VET institutions, specialisations such as bakery and cooking (19
curricula), computer operations (13 curricula), as well as welding operations and
motor mechanics (11 curricula for each specialisation) are offered. The curricula
offered at the Continuous Vocational Training (CVT) institutions concern
management related studies (19 curricula), followed by economics and business
accounting (16 curricula) and jurisprudence (14 curricula).25 Compared to Kaliningrad
region, the VET structures in the Pskov region are neither that developed nor that
advanced.

Despite the reform efforts, the VET institutions still train their students for specific
jobs rather than teaching them a set of skills that could be utilised in a variety of
occupations across a number of fields. In connection with an active development of
small and average businesses in the regional economy, there is an increased demand
for integrated professions with skills that can be utilised in a variety of occupations,
such as ‘PC operator and technician’ or ‘a seller with knowledge of accounting
computer programs’.

Employers in the targeted regions seem to face substantial difficulties in finding and
attracting qualified middle-level managers and skilled workers in industrial and
construction specialisations, various machine operators and qualified accountants.
These difficulties are mainly due to lack of skills and vocational qualifications, but
also lack of employees’ working experience, combined with a general labour supply
shortage and the deficiencies f the vocational education offered in the regions. For
both regions there is an explicit need for revising the relevance and the quality of the
curricula offered in the various VET and CVT institutions to match the labour market
requirements as well as its trends and needs.

The VET systems are suffering from insufficient resources. At the institutional level
there is a persistent lack of access to new teaching materials, equipment, and
information about new teaching methodologies. For vocational education, which
seriously needs new materials to reflect the market needs, such shortages have fatal
impact on the quality of the general educational outcome. Furthermore, neither the
curricula nor the teachers’ qualifications seem to respond adequately to the labour
market requirements of today. Possibilities of professional retraining for teachers are


25
   TACIS: Gap analysis between supply and demand for labour force in Kaliningrad Region and
recommendation to decrease the gap. DRAFT. Support for the Regional Development of Kaliningrad
Region, EuropeAid/114287/C/SV/RU, p. 9.


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limited, and the low salary and delay in payment of teachers and administrators result
in limited motivation to learn and apply new pedagogical or management skills.

The Kaliningrad and Pskov regions are not only facing a severe mismatch of labour
demand and supply. SMEs, the VET institutions and the regional authorities also lack
sufficient capacity to identify current problems, and to plan and respond effectively
and efficiently to the future educational needs. Furthermore, the regional
administration, which formally provides the linkage between the VET institutions and
the private sector, do not in reality ensure adequate information and feed back
regarding the changes in labour skill demands and supply. Moreover, collaboration
between the private sector and VET institutions are rare and random.

The lack of dialogue between the VET institutions and the private sector contributes
to the missing market linkage between the educational content and the actual demand
for skilled labour. Institutionalisation of such information flow is important for the
VET systems to adapt to the new labour market requirements and plan curriculum and
training according to the private sector’s needs.

In response to the lack of qualified workers and specialists, and the present
shortcomings of the vocational educational system in general, private enterprises now
spend time and resources on internal upgrading of staff. However, in respect to the
high labour turnover, such investments may not provide the expected end result. Most
enterprises only have limited experiences in strategic educational planning. Most
SMEs are small units, which do not see the relevance of strategic planning, and many
enterprises also find it easier to recruit qualified specialist from others Russian
regions, or from other countries (e.g., Ukraine and Kazakhstan), than upgrading their
own staff or recruiting staff locally.

Such business behaviour may relieve immediate labour shortage, but it does not bring
the enterprises ahead of development. By not applying strategic planning regarding
future needs of knowledge and skills, the private sector risk facing competence gaps
and labour shortage in the near future. In that respect, the lack of strategic education
planning at VET institutional level and at enterprise level constitutes a major and
explicit risk to the regions’ sustainable economic development.

Opportunities
The lack of a qualified work force in the formal as well as in the informal economy is
a great problem that is widely recognised among all major stakeholders in Kaliningrad
and Pskov regions, and skill development therefore is a high political priority of the
regional authorities. Such a situation provides an excellent opportunity to rectify the
imbalance concerning labour demand and supply through an improved and
modernised VET.

The context analyses also expose great potentials for improving the mechanisms that
ensure feed back from private sector to the VET system. For the VET institutions to
meet the labour market requirements, the local VET institutions need relevant
information on the private sector’s skills and competence needs. Properly
institutionalised linkages between the VET institutions and the private sector in the
selected two-three sectors of the economy would improve the VET system’s ability to
adapt curriculum to local labour markets’ trends and needs.


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As mentioned, the capacity for strategic education planning is limited within most
SMEs in the targeted regions, why also enterprises could benefit from collaboration
with the VET system. The VET system’s analyses of the private sector’s present
knowledge and skills needs would expose the private sector’s current and future
competence gaps; and such data could be used not only by the VET institutions, but
also by the individual enterprises for them to develop strategic educational plans for
the future.

There are also great potentials for strengthening the general linkage between the
tripartite institutions and the VET institutions - especially the local authorities.
Though the VET institutions formally are referring to the regional and federal
authorities, the VET institutions do possess a high degree of autonomy. As the
tripartite institutions hold important information about the development and needs of
the specific relevant sectors, linkages should be institutionalised for the VET system
to respond adequately to the specific branches’ labour requirements.

Moreover, the regional administrations could improve the use of limited resources by
introducing more effective monitoring and evaluation systems, which would also give
the VET institutions incentives to provide VET that is in demand by the labour
market.

Challenges
Even though the employers demand experienced and skilled labour, they are reluctant
to provide their production base for usage in the training process. Most of employers
are not ready to act as social partners (as the base enterprises or in the form of co-
financing), as there is neither legal base for such cooperation, nor taxation preferences
or specific economic interests. This situation creates a challenge regarding active
involvement of the private sector and employers in the process of improving the VET
system. General participation and an improved sense of ownership by all relevant
stakeholders are crucial elements to ensure the VET system’s sustainability
concerning curricula development, practical training, co-funding, etc.

Although the ongoing decentralisation process is creating new opportunities for the
vocational education system to become more responsive to local needs, this has
placed new financial and administrative burdens on the local authorities, and assigned
the administrators’ roles for which they are untrained.

Moreover, the limited capacity and motivation among teachers and administrators do
indeed constitute major challenges when implementing changes. For many years the
educational systems as well as the local authorities have operated without incentives
to be efficient, and with inadequate accountability. Today, especially irregular
payment of staff in the public sector is a major problem that has to be addressed, as
low salary and delay in payment of teachers and administrators may result in limited
motivation to attend re-training and learn and apply new pedagogical or management
skills.

2.2.3 Corporate Social Responsibility
Economic development does not necessarily imply sustainable economic
development. On the contrary, generally, economic development may have negative


December 2005                                                                         29
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impacts on the working environment and the external environment if there are no
incentive schemes or control mechanisms in place. Corporate Social Responsibility
(CSR) is defined as the commitment of the business to contribute to sustainable
economic development, working with employees, their families, the local community
and the society at large to improve their quality of life, in ways that are both good for
business and good for development.

For instance, the social and environmental problems in Kaliningrad and Pskov
Regions are great and well known. The two regions suffer from high rates of
unemployment, which increases the risk of social exclusion. Also, there is a high
unnatural death rate (especially among men) caused by different factors such as
employment injuries, home accidents, car accidents, alcohol poisoning and other
types of poisoning. Moreover, the HIV/AIDS pandemic is reported to grow at a
dramatic speed throughout Russia – not least in the Kaliningrad region. The
occurrence of HIV/AIDS in Kaliningrad is by Russian consultants estimated to be
more than three times greater than the average in Russia (Table 2.8.).

                                                                                          Kaliningrad region                    Russia

                                                        400

                                                        350

                                                        300
                               per 100 000 population




                                                        250

                                                        200

                                                        150

                                                        100

                                                         50

                                                          0
                                                              1988
                                                                     1989
                                                                            1990
                                                                                   1991
                                                                                           1992
                                                                                                  1993
                                                                                                         1994
                                                                                                                1995
                                                                                                                       1996
                                                                                                                              1997
                                                                                                                                     1998
                                                                                                                                            1999
                                                                                                                                                   2000
                                                                                                                                                          2001




                              Figure 2.3: The number of Cases of Aids
                              Figures obtained from Russian consultants.

By examining the private sector, many industries in the two regions and in Russia in
general are also characterised by poor working conditions and insufficient
environmental management systems. Also, inadequate legal framework and limited
human, technical and financial resources to enforce present legislation reduces the
public authorities’ ability to regulate the social and environmental consequences of
industrial production. The state of conditions regarding the working environment and
the external environment has widespread negative consequences. For instance, more
than half of the population in Russia does not have access to bacteriological safe
drinking water, 33% live in areas with high levels of air pollution, 12% of the soil in
the most industrialised cities is considered dangerously contaminated, and there are
only few adequate treatment facilities for industrial hazardous waste.26




26
  DANCEE (2002), The Danish Environmental Support to Russia 1992-2001, Danish Cooperation for
Environment in Eastern Europe (DANCEE)/Ministry of the Environment, Copenhagen.


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Opportunities
From an environmental perspective, increased international cooperation and signing
of various conventions and charters indicate willingness to address important
environmental concerns. Furthermore, it has the advantage that Russia, in order to live
up to agreed international standards, is required to put the environment on the
domestic agenda. All things being equal, the various multilateral and bilateral
agreements increase awareness of the environmental challenges and consequently all
influence the Russian decision-making process towards making more environmentally
sustainable priorities.27

Potentially, Foreign Direct Investments (FDI) and external international pressure may
also contribute positively to the social development in Kaliningrad and Pskov
Regions. With regards to the former, foreign companies are increasingly held
responsible for working conditions and environmental impacts throughout the supply
chain, whether or not they own or directly control the domestic production process.
Moreover, foreign companies often pay higher wages and are more likely to follow
local labour laws than domestic companies in the same sector.28 With regard to the
latter, social and environmental improvements may be necessary to meet the high
international standards in order to enter into a global market.

Challenges
Russia’s social and environmental regulatory framework is complex and at times
inconsistent. The regions may adopt their own legislation in areas of shared
competence and in areas unregulated by federal legislation - e.g., regional norms and
standards. Local administration may also lay down locally adaptive regulations in
addition to or elaborating on federal and regional requirements. As a result, the
present regulatory system is complicated and incoherent, and it has numerous and not
always compatible norms and standards and diverging permitted practices.

International financing institutes and donor organisations are important sources of
finance for social and environmental investments. However, given the sheer size of
the financing need, international financing alone cannot solve all the present
problems. In consequence, donor support for social and environmental improvements
have to work in orchestra with responsible foreign direct investments, public capacity
building, and local companies’ own commitment to social and environmental
development.




27
   DANCEE (2003), The Environmental Challenges for Northwest Russia, Danish Cooperation for
Environment in Eastern Europe (DANCEE)/Ministry of the Environment, Copenhagen
28
   Farrell,D. (2004), The Case for Globalization, The International Economy, Winter 2004.


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3      Denmark’s Policies and Assistance, and Other Donor Support

3.1    Denmark’s Policies
For more than a decade Denmark has given considerable support to Russia             and
countries in the CIS, Central and Eastern Europe aiming at contributing to          the
political and economic reform processes and building closer ties with               EU
neighbouring areas. The accession to the EU of ten new member states is             the
culmination of this effort.

In the light of this situation the Danish government has decided to focus its assistance
under a new Neighbourhood Programme (2004-2007), which in regard to Russia has a
more focussed and up-to-date approach aiming at the current challenges and new
opportunities.

The Neighbourhood Programme’s objective is to contribute to promoting open
democratic societies founded on the rule of law and based on stable political and
economic development in the EU’s neighbouring countries to the east and southeast,
with the aim of perpetuating the momentum in the continuing enlargement process
and avoiding unnecessary divisions in Europe.

The underlying principles of the Neighbourhood Programme are ownership and joint
responsibility, reciprocal commitment regarding cooperation and change and lastly,
dialogue and partnership. These apply in relation to the authorities, the business
community and to civil society.

Geographically, the Danish Neighbourhood initiative in Russia is focussed on the
Russian regions closest to the Baltic Sea, especially the Kaliningrad region, due to the
region’s special geographical position as a Russian enclave surrounded by EU
territory. Another region of interest is the Pskov region. This region is one of the
Russian regions close to the Baltic Sea and the economic differences in the new
border areas between the EU and Russia are particularly evident in that border area
between Estonia, Latvia and the Pskov region.


3.2    Danish and Other Donor Support to Russia, Kaliningrad and Pskov
The Neighbourhood Programme builds on the experience already acquired by
Denmark regarding assistance to Central and Eastern Europe, the Democracy Fund,
transitional support, as well as support for peace and stability initiatives in the
neighbouring areas. While the former assistance given to Russia was based on a large
number of smaller projects with a wide geographical dispersion, the new assistance
will focus on a few, larger programmes and with a clearer geographical focus on the
Kaliningrad and Pskov regions.

Former Danish support to Kaliningrad has mainly targeted projects within
environment, modernisation of the public sector, energy, education and the social
sector. The Danish assistance so far to the Pskov region is limited and has mainly
been targeting projects within sectors such as environment, agriculture and good




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governance. Various Danish institutions, organisations and NGO’s have participated
in the projects.29

A number of other donors have been involved in the development of especially the
Kaliningrad region30 due to its enclave status, whereas the Pskov region has found it
more difficult to attract multilateral and bilateral support.

Since 1991, the EU has made a large financial commitment to the Kaliningrad region.
It has been allocated about EUR 40 million in TACIS assistance, of which
EUR 25 million have already been spent. An additional EUR 15 million is in the
pipeline. In the National Indicative Programme for the Russian Federation 2004-2006,
special attention is given to the Kaliningrad region.31 The overall objective of this
programme is to develop the region’s administrative capacity with particular emphasis
on improving the overall conditions for business development, improving primary and
preventive health care services, promoting the region’s intellectual potential, and
inducing positive co-operation culture across the borders.

An important element of the coming TACIS support to Russia is the development of a
Labour Market Information (LMI) system. By providing timely, reliable, and relevant
data a LMI system will become a valuable strategic tool for policy makers in order to
plan and implement adequate labour market policies.

The Swedish International Development Agency (SIDA) and other Swedish
ministries have also been very active in assisting Kaliningrad in the reform process.
Focus is on transferring knowledge and know-how, developing institutions and
supporting investment projects. In 2002, SIDA was supporting some ten projects in
Kaliningrad in the fields of e.g. social development, private sector development, local
government and wastewater treatment.32 According to a list of ongoing SIDA-funded
projects in the Kaliningrad region of January 2003, most projects focus on improving
the social sector and on infrastructure development.33

There is limited information on ongoing projects in the Pskov region. However, EU,
SIDA and other donors have implemented a number of projects in the Pskov region.
This includes projects supporting:

    Legal, and administrative reforms;
    Education and training;
    Private sector development, SMEs, tourism etc.;
    Environmental protection;
    Improvement of energy technologies.34



29
   www.ceeassistance.dk.
30
   A donor database has been developed that offers an overview of the donor assistance in the
Kaliningrad region, link: http://utm.cowi.ru:90.
31
   EC (2003), National indicative Programme, Russian Federation 2004-2006. Adopted by the
European Commission on 21 May 2003.
32
   SIDA (2002), Development and Change: Swedish Cooperation with Eastern Europe and Central
Asia, Regeringskansliet/Ministry of Foreign Affairs, Stockholm.
33
   SIDA (2003), SIDA-funded Projects in Kaliningrad Region, Ongoing Projects January 2003.
34
   COWI (2003), Fact Finding Mission to the Pskov region, Russia.


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Part 2: The Economic Development Programme in the Kaliningrad
and Pskov Regions

4       Programme Framework

4.1     Introduction and Summary
Chapter 2 of this document describes a number of challenges faced by the two
programme regions and points to solutions that could enhance SME business
development and through this contribute to economic and social development. They
include a lack of adequate dialogue between the regional authorities and the business
sector in establishing an enabling environment for business development; problems
related to administrative barriers; a need for quality business development services to
assist entrepreneurs in establishing, developing and making the operations of their
businesses effective; lack of access to finance; and a labour market system that is
unable to provide skilled manpower for the business in sufficient quantity and with
the right qualifications. With regard to the improved enabling environment focus will
not least be directed at selected municipalities.

This chapter summarises the resulting programme framework and provides an
overview of the programme objectives, the strategic and methodological approach
used in the design of the programme, and an overview of the programme components
and subcomponents. Finally it illustrates the envisaged process for further
development and detailing of the programme. More detailed descriptions of the
programme components and subcomponents are given in Chapter 5.

The programme includes two components, each with three subcomponents. One
component addresses SME development while the other is targeted at the labour
market and skills development. The table below gives and overview of these
programme elements and where they are described in more detail in this document.

Table 4.1 Programme Components and Subcomponents of the Programme
 COMPONENT/SUBCOMPONENT                                                  DESCRIBED IN
 1. SME development
 1.1 Development of SME policy dialogue and advocacy capacity of Section 5.1.2
     business associations
 1.2 Facilitation of BDS market development                              Section 5.1.3
 1.3 Provision of financial services                                     Section 5.1.4
 2. Labour Market and Skills Development
 2.1 Strengthening the tripartite labour market system                   Section 5.2.2
 2.2 Restructuring the vocational education and training (VET) system;   Section 5.2.3


The programmatic approach is one that seeks to augment interaction and cooperation
between the state, the private sector and civil society. The programme further focuses
on two economic sectors or industries in each region in order to take full advantage of
the synergies between the programme subcomponents with a view to maximising
impact. These economic sectors are: the Kaliningrad region (furniture industry and


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food processing industry) and the Pskov region (food processing industry and
tourism).


4.2    Programme Objectives
The overall objective of the programme is that the living conditions of the populations
in the Kaliningrad and Pskov regions are improved as a result of business
development and job creation.

The intermediate objectives are that new SMEs are established and effective
operations of existing SMEs are achieved in order to increase value-added and create
jobs.

The immediate objectives of the programme are that the competitiveness and market
access of the SMEs in the economic programme sectors are increased; and that the
labour market systems are developed and the technical skills of the required workers
in the regions are enhanced.

Focus is on supporting the development of a strong enabling environment for private
sector led growth, utilising the large human resources available for economic
development and capitalising on the economic opportunities, including the proximity
to the EU. However, the aim of the EDSP is also to make a positive contribution to
social development in Kaliningrad and Pskov regions.

The EDSP therefore also addresses issues like social security, working conditions,
social dialogue, training and education. The ultimate goal is to increase the level of
socio-economic development and to ensure sustainability of economic development.
Only on this basis is it possible to improve the level and quality of life of the
population as well as contribute to social stability.

The EDSP is intended to create a framework and process for business development.
The programme will not only facilitate the development of a shared vision on how to
develop the selected economic sectors, but will also create a process to ensure that
actions are actually taken to build an enabling business environment.

This process is expected to bring about both practical and analytical results regarding
the opportunities and dynamics of the economic sectors, which will lead to a
constructive and realistic debate on challenges and opportunities as to development
potential and competitiveness, and provide the selected sectors with adequate inputs
for taking strategic action.

By generating critical or strategy information that will allow the public and private
sectors to adopt timely public policies and competitive business strategies, the
enterprises in the selected sectors of the economy will be able to improve their
relative competitive position.




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4.3      Strategic and Methodological Approach
The strategic and methodological approach of the programme includes the following
dimensions:

     promotion of enhanced interaction between the state, the market and the civil
      society;

     development of a series of interventions related to business and skills
      development;

     application of interaction approach and interventions in the selected promising
      economic sectors.

This approach is believed to maximise the success rate of the programme. The (i)
number and type of interventions and the (ii) number and size of the economic sectors
to be covered by the programme may be considered the two ‘handles’ that can turned
up or down to align the detailed programme contents with needs and programme
resources. In other words, the number of interventions may be reduced or increased in
size to fit the needs of the businesses, and the number of economic sectors to be
covered may be enlarged or reduced to ensure that there are enough programme funds
to secure impact.

4.3.1 Interaction between the State, Market and Civil Society
The point of departure for developing the EDSP in the Kaliningrad and Pskov regions
is the ‘state – market – civil society triangle’ presented below. The programme
approach is one that builds on the coordinated actions of these groups of stakeholders
to ensure a balanced and socially inclusive economic and social development.

The state includes both the regional government and public agencies that develop and
implement policies/strategies and produce public services. It also comprises the
municipal and local authorities in the regions.

The market consists of a wide range of                             Government
enterprises that differ in size, ownership,
organisation, culture, etc. They produce                            State
products and services for the local,
Russian and export markets, but also
provide inputs to other business
enterprises. While the state is dominated
by political concerns, the primary interest               Market                Civil
of the business enterprises is economic.                                        society
Trade associations, lobby organisations       Private                               Community based
etc. are also considered as part of the       companies                             Organisations (CBOs)
market.

The civil society is a heterogeneous group of voluntary organisations, grassroots,
community interest organisations, etc. The civil society may be seen as a residual
group between the market and the state because they are both non-governmental and
non-market. In the EDSP context the civil society primarily includes the trade unions.



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Ideally, at least in principle, civil society organisations are not in it for money or
political power, but based on shared values that create group identity and guide
behaviour.

In the Kaliningrad and Pskov regions there is a need to strengthen both the state
sector, the market and civil society and the interaction between these stakeholders. It
is of paramount importance that EDSP interventions enhances a balance between the
three sectors that are in line with key development issues in the region. In the present
situation, weak institutional structures, difficulties in regulating the ‘grey’ economy,
the vulnerability of the economy, and the widespread social problems create barriers
for the social, environmental and economic development.

4.3.2 Sector Approach
There are an estimated 7,500 SMEs in the Kaliningrad region and about 4,630 in the
Pskov region in 2003, covering industry (1,135), agriculture 355, transport and
communication (190), construction (550), trade and services (1,770), and other
branches and services (630).

Given these large numbers of small enterprises the programme will focus on two
economic sectors (industries) in each region. They include the furniture industry and
food processing industry in the Kaliningrad region and the food processing industry
and tourism in the Pskov region. By targeting a limited number of sectors, the
combined interventions in each of the sectors covered will be of such magnitude that a
‘critical mass’ of support can be obtained by taking full advantage of the intended
synergies between the programme subcomponents. This is necessary to meet the
programme objectives.35

At the sector level, tools and methodologies developed in the six subcomponents shall
be applied to identify limitations, challenges and opportunities for further business
development of the sector enterprises. Through needs analyses the EDSP will assess
the requirements for sector-related policy improvement, export development,
investment promotion, infrastructure enhancement, and human capital development.

The conditions and opportunities for business development change rapidly in the fast
moving global economy and the economy of the Russian Federation. This calls for an
ability of the business sector to respond quickly to these changes. The sector approach
provides for monitoring of new trends and opportunities in the programme sectors to
ensure fast and flexible responses to these developments and opportunities.

In May 2005 the Danish Neighbourhood Programme commissioned a ‘Study of
Economic Sectors in Kaliningrad and Pskov Oblasts’. The objective of the survey was
to identify the 2-3 most prospective economic sectors in each of the Kaliningrad and
Pskov regions to become the core economic sectors through which the EDSP is to be
implemented.
35
  The Kaliningrad regional administration has expressed the concern that the sector approach may
affect the sustainability of the interventions and preclude potentially relevant institutions from
participating in the programme. The view of the programming team is, however, that with no such
focus the effectiveness of the interventions will be diluted with the risk of limited demonstration effects
and impact.


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4.4       Programme Components and Subcomponents
In order to meet its objectives the programme is made up of two closely interlinked
components:

     Component 1: SME Development
      The immediate objective of this component is that SMEs in the economic
      programme sectors will increase their competitiveness and access to local, Russian
      and export markets;

     Component 2: Labour Market and Skills Development
      The immediate objective of this component is that a labour market system is
      developed that responds effectively and timely to the demand for skilled labour of
      the business sectors, especially SMEs, in the economic programme sectors in the
      two regions.

Each component contains three subcomponents as illustrated in the below figure.
Together they make up the ‘toolbox’ referred to above. The figure also illustrates the
programmes focus on a few programme sectors. The EDSP builds upon interventions
that are mutually enforcing and together contribute to meeting the economic and
social programme objectives.

      Regional economies
                            COMPONENT 1                         COMPONENT 2

                            1.1 SME policy
                            dialogue and advocacy               2.1 Strengthening the
                            capacity of business                tripartite labour market
       Selected             associations                        system
       economic
       programme            1.2 Facilitation of
       sectors              business development                2.2 Restructuring the
                            services (BDS) market               vocational education
                            development                         and training (VET)
                                                                system
                            1.3 Provision of
                            financial services




Figure 4.1 Programme Components and Economic Programme Sectors

The sector focus of the programme may be illustrated as follows. Once an economic
sector or industry in a region has been identified as particularly promising with regard
to potential for growth in business activities, value-added and employment, a detailed
analysis of the needs of the sector is undertaken. The needs analysis, which will be
undertaken during the inception phase of the programme, will address the sector
needs                                                                         regarding:

     developing the capacity of the sector-related branch or business association(s) to
      enter into policy dialogue with the public authorities concerned;




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     SME demand for business development services (BDSs) in term of types, volume,
      willingness-to-pay, affordability, awareness of potential BDSs, expected benefits
      from BDSs, etc.;

     SME credit needs and ability of the SMEs to repay under alternative conditions
      and repayment models;

     Strengthening of the tripartite labour market to provide for effective dialogue on
      the labour needs in the sector;

     Improved vocational and educational systems to ensure adequate supply of labour
      with the right qualifications.

4.5       Overview of Programme and Component Objectives
The overall objective and immediate objectives of the programme components and
subcomponents are summarised below.

Table 4.2 Objectives of Programme Components and Subcomponents
EDSP
Overall Objective
Improved living conditions of the populations in the Kaliningrad and Pskov regions resulting from
business development and job creation.
Intermediate Objectives
New SMEs are established and effective operations of existing SMEs are facilitated in order to increase
value-added and create jobs.
COMPONENT 1:                                          COMPONENT 2: LABOUR MARKET AND SKILLS
SME DEVELOPMENT                                       DEVELOPMENT
Immediate objective                                   Immediate objective
Increased competitiveness and market access of the    A labour market system that responds effectively
SMEs in the economic programme sectors in the         and timely to the demand for skilled labour of the
two regions.                                          business sectors, especially SMEs, in the economic
                                                      programme sectors in the two regions.
SUBCOMPONENT         Immediate objectives of          SUB-                 Immediate objectives of
                     subcomponent                     COMPONENT            subcomponent
1.1                  Enhanced dialogue and            2.1                  Effective and efficient tripartite
SME Policy           cooperation between the          Strengthening        dialogue in the programme
Dialogue and         regional authorities and the     the Tripartite       regions.
Advocacy             private business sector with a   Labour Market
Capacity of          view to developing effective     System
Business             and consistent policies,
Associations         strategies and programmes,
                     achieve reduced
                     administrative barriers to
                     support SME development.
1.2                  A market for BDSs is             2.2                  The vocational and educational
Facilitation of      developed in the economic        Restructuring        systems are improved in order
BDS Market           programme sectors by             the Vocational       to meet labour market
Development          developing the supply range      Education and        requirements in the economic
                     and coverage of quality          Training (VET)       programme sectors.
                     services and promoting           System
                     SMEs’ demand for the
                     services.




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1.3                 SMEs in the economic
Provision of        programme sectors have
Financial           improved access to financial
Services            resources in order to support
                    the start or development of
                    their businesses.



4.6      Economic Programme Sectors in the Kaliningrad and Pskov Regions
As described a ‘Study of Economic Sectors in Kaliningrad and Pskov Oblasts’ has
been undertaken to select the 2-3 most prospective economic sectors in each of the
two programme regions to become economic programme sectors. The economic
sectors should have a strong potential for growth in business activities, value-added
and employment. They should demonstrate a high degree of sector readiness, i.e. a
high level of interest as well as good organisational capacity, leadership and
dynamism, to be included in the EDSP.

Finally, together they should have the capacity to absorb the types of support offered
by the EDSP. Based on the results of the economic survey the programme will cover
the following economic sectors (or industries) in the programme regions:
Kaliningrad
     furniture industry;
     food processing industry.
Pskov
     food processing industry;
     tourism.

If it turns out, however, that the programme may cover more than the above sectors in
the regions, assistance could be extended to additional economic sectors during the
programme implementation period. These programme sectors are described in brief
below.

4.6.1 Kaliningrad Region
Furniture Industry
The furniture industry in the Kaliningrad region is a new sector in the regional
economy. According to official statistics there are about 150 furniture makers in the
region. Nearly all of them are SMEs, most of which with less than 100 employees.
The SMEs account for an estimated 30-70% of the total turnover of the furniture
companies in the region. The industry manufactures furniture for private homes, e.g.
tables, chairs, sofas and kitchens as well as furniture and fittings for offices, e.g. sales
and reception counters, shelves etc. The industry is part of a cluster with the wood
industry, textiles, and metal products as central upstream sectors, and wholesale and
retail distribution as important downstream linkages. Design enterprises are
considered to be an integral part of the furniture industry itself.

The industry has experienced very high growth rates in recent years, but compilation
of official statistics on the sector has only started in 2005. Therefore, there are no


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specific accounts of investments – including foreign investments in the sector. The
main markets are within Russia, primarily the other Russian regions. The local
(Kaliningrad) market accounts for 10-15% of total sales, the other Russian regions for
around 80%, and only 5-10% of the production are exported. About one third of the
exports goes to EU countries.

The enterprises produce mainly end-products. Cooperation between the enterprises is
not very developed and takes place mainly in the form of sub-contracting in case a
contractor cannot deliver on its own. Generally, enterprises have fairly close contacts
with the buyers, both wholesalers but especially retailers, but limited contacts with the
suppliers. Some of the enterprises have their own distribution networks, including
dealers and shops.

The industry has a fairly well-developed, service minded and representative business
organisation, the Kaliningrad Furniture Association, founded in 1997. Most
enterprises are also members of the Union of Industrialists and Entrepreneurs, the
Baltic Business Club and the Chamber of Commerce and Industry. The industry
works closely together with the public authorities, mainly the regional administration
and some training institutions.

The enterprises face no difficulties in obtaining required material production inputs.
The main suppliers of raw materials and components are foreign, mainly from
Germany, Italy and Poland. In dealing with these, the sector benefits from the location
of the region and also the import duty privileges of the SEZ. Local suppliers account
for only a limited part of the supply of raw materials and components.

The industry experiences severe difficulties in attracting and retaining employees with
the right skills, particularly skilled workers, engineers and designers. Most firms
complain about the conditions attached to commercial bank loans, especially high
interest rates, too short repayment periods too short and strict collateral requirements.

The main strengths of the industry are reflected by its economic growth and
investment activity, growing exports – both within and outside Russia. It has the
ability to apply new technologies, a competent and active business association, and it
is a priority sector within the regional economic development strategy. Against this
work underdeveloped design capabilities, insufficient access to business services, the
shortage of qualified specialists, a high dependency on imported inputs, and
difficulties in complying with EU standards.

The challenges and associated development potential include (a) enhancing of
craftsmanship among specialists resulting in a higher product quality and hence high
value furniture, for which there is believed to be a market, (b) broadening the
provision of services and expanding distribution networks resulting in more flexible,
customer-targeted production and sales, and (c) partnering with foreign furniture
producers - resulting in the introduction of improved technologies and development of
products more suitable for exports, and (d) compliance with EU standards resulting in
products suitable for exports.

The EDSP could – among others – contribute to overcoming these barriers by (a)
strengthening VET and other relevant education institutions enabling them to


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train/retrain workers to meet the qualification needs of the industry, (b) promoting use
of BDS for developing links within the furniture cluster in Kaliningrad, with local
input suppliers, wholesalers and retailers in order to be able to provide customer-
demanded or branded products, (c) using BDS and strengthening business
associations to interact with potential foreign cooperation partners, (d) improving the
availability and access to SME credit, and (e) providing Danish or other EU expertise
to develop guidelines suitable for the industry.

The furniture sector could benefit from cooperation with the rapidly growing ICT
(Information and Communications Technologies) sector in the Kaliningrad region.
The ICT firms typically produce end-products or services such as business systems
for the private sector, IT solutions for the public sector and computer games. The
majority of the firms cater to customers within the region. Cooperation may include
development and/or purchase of software solutions in the fields of business solutions.
This could include software for supply chain management, transportation and
logistics, project management, accounting, billing, payroll management, inventory
management, etc. Given the cultural and physical proximity of the local ICT sector,
solutions that are tailor-made to the needs of the furniture enterprises could well prove
considerably more valuable than solutions based on standard software.

Food Processing Industry
The food processing industry comprises the meat and fish processing industry, the
dairy sector, flourmills, bakeries, processing of fruits and vegetables, oil mills and
margarine production. Of these the biggest growth potentials are believed to be within
meat processing and the dairy sector while the fish processing industry is declining.
Nevertheless, the EDSP will cover the whole food processing industry. The meat
processing industry exemplifies the characteristics of the industry below.

The meat processing industry in the Kaliningrad region consists of 155-180
enterprises of which 130-155 are small enterprises. The industry employs about 5,000
people of whom 2,500 work in small enterprises. The industry processes beef, pork,
and poultry. Part of the processing is simple cutting. Some enterprises produce canned
meat or processes the meat into sausages and other products.

The industry is part of a cluster with cattle breeding being the important upstream
sector and meat packaging, wholesale and retail trade being central downstream
sectors. The meat processing industry is the cornerstone of the food processing
industry in the region. About 20% of all Russian manufactured canned meat stem
from the region. The industry is one of the priority sectors in the economic strategy of
the regional government. The EDSP would address the whole cluster including both
upstream and downstream economic players of the cluster.

Only about 15% of the production is sold in the region with the remaining 85% going
to other Russian regions. There is almost no export. Most enterprises produce end-
products that do not need any additional processing. However, many companies plan
to diversify production further in order to better target the new middle class that
demands high quality meat products. Today, the demand of this segment is to a large
extent met through import. Competition among enterprises is considered fairly strong.
The forthcoming reform of the SEZ may step up this competition.



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The formal business association of the sector is the ‘Association of Meat Processing
Enterprises of Kaliningrad Oblast’ with about 40 members. The association finds that
that there is a need to improve its services to the members. Most enterprises are
members of the Union of Industrialists and Entrepreneurs and the Baltic Business
Club, and nearly all medium-sized enterprises are members of the Chamber of
Commerce and Industry. The industry is heavily involved in a dialogue with public
authorities that focuses on the SEZ and its importance to the sector.

The enterprises experience difficulties with regard to supply of meat. Presently there
is an import limit under the SEZ of 56,000 tons annually while the industry demands
180,000-200,000 tons annually. If the industry would have to pay import duty, it
would become much less competitive on the Russian market, which is the main
market. In the near future this difficulty may diminish since various foreign investors,
including Danish, have approved investment plans to establish live-stock farms in the
region.

The enterprises have difficulties in attracting workers with the right skills, and
particular difficulties in attracting and retaining engineers. Most medium-sized
enterprises have therefore developed special training and educations programmes for
their employees, which are conducted in-house. Companies are facing difficulties in
obtaining finance, both existing companies and start-ups. They find loan conditions of
commercial banks too hard, mainly the high interest rates and collateral requirements
that are almost impossible to meet.

The main strengths of the industry are its high economic growth and investment
activity, generally modern production equipment, a competent business association,
the fact that it is a priority sector within the economic strategy of the region, and a
good dialogue with the public authorities. The industry’s main weaknesses include a
shortage of qualified specialists, particularly engineers, the high dependency on
imported inputs, no export experience outside Russia and unclear ownership relations
in some cases.

The development potentials of the sector include (a) a change in focus away from not
only exploiting the SEZ import privileges towards development of more high quality,
high value products demanded by the consumers, and also towards improvements of
the local supply of meat inputs. There would seem to be a potential for the formation
of a regional meat processing cluster, (b) improvement of technical skills to produce
higher-value products - both engineers and other food processing specialists and (c)
further development of the dialogue and partnerships with public authorities and
training institutions to ripe the benefit of coordinated actions.

The EDSP may contribute to exploiting these potentials by (a) using BDS in
developing links within an emerging meat processing cluster in Kaliningrad with local
input providers, wholesalers and retailers, (b) strengthening of VET and other relevant
education institutions to be able to train/retrain workers in order to meet the
qualification needs of the meat processing industry, (c) providing support to the
public-private dialogue and partnership building, (d) assistance in strengthening of
business association, (e) improved access to credit, and (f) assistance in preparing a
consolidated sector action plan of the regional government that may enter into the
budgeting process.


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Like the furniture industry the food processing industry could gain from cooperation
with the ICT sector in the region. Again, cooperation could take place in the form of
development and/or purchase of software solutions such as software for supply chain
management, transportation and logistics, equipment maintenance, accounting,
billing, payroll management, inventory management, etc.

4.6.2 Pskov Region
Food Processing Industry
The food processing industry in Pskov includes meat processing plants, dairies,
processors of fruits and vegetables, bakeries, and fish processors. In a cluster context
the regional agricultural sector is an important upstream sector, while linkages to the
downstream packaging and also wholesale and retail trade sectors are central.

There are two large and about 10 small meat processing plants as well as nine large
and several small dairies. Together they account for about 40% of all enterprises in
the sector in the region. The industry comprises many SMEs, which are mostly
located in rural areas. The number of enterprises in the industry is estimated at 55 of
which 46 are SMEs. The total number of employees is about 4,600 of which 1,000 are
employed by the SMEs.

The sector has experienced high growth in recent years with real GRP more than
doubling between 1999 and 2003, and investments increasing by over 400% in the
same period - despite little interest by foreign investors. The industry has not yet fully
exploited its potentials. Although exports have also grown fast and now account for
two thirds of production, the industry faces strong competition from other Russian
regions and from abroad.

Cooperation between the small food processing enterprises does practically not exist,
but many of them cooperate with larger enterprises, mainly through subcontracting.
Cooperation with downstream enterprises such as the wholesale and retail trade, is
fairly well developed.

The Association of Enterprises on the Bakery and Flour Grinding Market unites, in
spite of its name, most enterprises on the food market in the region. It is well-known
by the regional administration that has established good working relations with it and
its members. The small enterprises within the sector are not members of the Chamber
of Commerce and Industry, but large and medium-sized enterprises tend to be.

While the larger food processing companies mainly get their raw materials from
abroad – depending on the season – the smaller enterprises are much more dependent
on local supplies. For dairy processing around 90% of the raw milk processed is
produced in the region. Financial constraints and adverse conditions of agricultural
companies often make the input situation unstable. In general, enterprises producing
end-products do not have adequate equipment for long-term storage that would give
additional opportunities for economic stability.

According to the enterprises the far most important problem is insufficient access to
credit. Most SMEs cannot or find it difficult to meet the requirements of commercial


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banks. Although investments have increased in recent years, there is a need for further
investment capital insofar as the existing equipment often is old and obsolete. The
second most important problem faced by the companies is the lack of qualified
specialists.

The strength of the industry is evidenced by the strong economic growth and
investment activity in recent years, high and growing export performance. The
performance of the sector may also be linked to the existence of a business association
cooperating with the regional authorities. Major problems faced by the industry
include a lack of long-term storage facilities, limited interest by foreign investors (low
FDI), difficulties in attracting and retaining qualified employees, limited access to
capital and the absence of new equipment and technologies.

The challenges and development potentials include (a) exploiting the growth potential
of the sector by taking advantage of a high willingness to invest in order to change the
focus towards more high-quality products demanded by the consumers, (b)
acquisition of new equipment and technologies needed to produce higher-quality
products, (c) improving the skills of employees with a view to producing higher-value
products, both those of engineers and other food processing specialists, and (d)
developing a dialogue and partnerships between public authorities, training
institutions and the industry to improve the business environment.

The EDSP may address these challenges and development potentials by (a) promoting
the use of BDS for developing business links within the emerging food processing
cluster in the region, (b) improved access to capital / investment support, (c)
strengthening the vocational education and training and other relevant education
institutions to enable them to train/retrain workers in order to meet the qualification
needs of the food processing cluster, (d) providing support to public-private dialogue
and partnership within the sector, (e) assistance in strengthening of the business
association (or business associations), (f) assistance to the regional administration in
preparing a consolidated action plan for the industry that may enter into the budgeting
process.

Tourism Industry
The tourist industry in Pskov is made up of hotels and companies providing other
types of accommodation, transport companies, public catering firms, entertainment
companies, sports facilities, travel agencies and others. The industry includes around
220 companies, of which an estimated 200 are SMEs. The industry employs around
3,800 people with about 800 working in SMEs.

Since the financial crisis in 1998, the sector has experienced an impressive growth,
both in terms of number of companies, employment and investments. The regional
administration estimates that the industry accounts for about 1% of GRP and that this
share may increase to up to 2-3% in 2010. The tourist industry is on the regional
administration’s priority list for economic development and a strategy describing the
priorities of the industry is presently being developed by the administration in close
cooperation with the industry.

The tourists include both Russians and foreign visitors. However, more than 90% of
all tourists stay less than three days in the region. The potential for increasing the


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number of incoming tourists is big according to sources in the sector. Most firms act
both as sub-contractors and as independent service providers. Tour operators often run
their own businesses, but they also act as partners or sub-contractors to other tourist
organisations, mainly located in Moscow or St. Petersburg.

While formal linkages exist between the tourist industry companies, cooperation
among them could be much further developed according to industry representatives.
Two business associations have been established in recent years: the Association of
Tour-operators and Tour Industry in the North-West Federal District (ASTUR).
Further, the Centre for Tourism Development, which is a non-commercial public-
private partnership. Finally, the Chamber of Commerce and Industry has created a so-
called Commission on Tourism Issues. All these organisations have expressed a
strong interest in participating in the EDSP.

Most educational institutions have departments for training specialists of relevance to
the industry. An International Academy of Tourism exists in Pskov. The industry
companies do cooperate with these institutions. However, the companies find it
difficult to attract and retain workers – including young specialists – as low salaries
lead to a high outflow of these to the big cities in other regions.

The strengths of the industry may be summarised as: an attractive nature and
numerous historic, cultural and architectural monuments, active business associations,
proximity of the region to the EU and full support of the regional administration.
Against this works insufficient infrastructure (particularly transport, accommodation
facilities and catering services), the existing visa regime between EU and Russia, that
creates a lot of difficulties not only for foreign tourists but also for firms within the
tourism industry in the region, undeveloped marketing and sales activities, the above-
mentioned difficulties in attracting and retaining specialists and inadequate
cooperation upstream and downstream within the industry.

Some of the means to exploit the development potentials include (a) joint
implementation by the public authorities and the industry of a development strategy
establishing the contributions to be made by the key stakeholders with regard to
investments, spatial planning, VET, etc. as well as improving cooperation upstream
and downstream, (b) development and implementation of specially designed VET
programmes to develop specialists for the sector, (c) improved marketing and sales
activities, including full utilisation of the Internet, (d) development of new tourist
products and (e) strengthening of the business associations.

The EDSP may contribute to this through: (a) Assistance in implementing the
strategy, including monitoring. Some assistance may primarily focus on the public
authorities (e.g. budget planning), whereas other assistance may primarily focus on
the industry (e.g. partnering). The Coordination Council on Tourism may play an
important role, (b) Improving cooperation between educational institutions and
enterprises with regard to VET, including curriculum development, (c) Applying BDS
in developing marketing and sales activities, (d) improved access to credit for
procurement of equipment, hardware and/or software, (e) Assistance in developing
new tourist products, and (f) strengthening of the business associations to able them to
provide the services required by their members and enter into a dialogue with public
authorities and educational institutions.


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4.7     Consistency between EDSP and Existing Programmes and Strategies

4.7.1 Kaliningrad Region
The EDSP is clearly consistent with official statements on the directions and policies
concerning economic and social development in the region, which are reflected in
major programme and strategy documents.

The ‘Federal Target Programme’36 establishes federal and regional priorities that
include support to SMEs as a topic to be addressed by a regional programme. The
‘Regional Strategy’ has a chapter on ‘Social policy’ in which the strategy clearly
states the need to fight structural unemployment – with a particular focus on
underdeveloped areas, especially the rural areas. The Strategy also gives priority to
enhancing the regional educational system.

The ‘Regional Programme for SME Development’ directly establishes the following
targets: development of credit and financial mechanisms for small entrepreneurs,
perfection of the functioning of the business infrastructure, and development of highly
skilled human resources through training in the area of small entrepreneurship.

4.7.2 Pskov Region
After the change of governor in early 2005 the ‘Concept of Social and Economic
Development of the Pskov Oblast on long-term prospects’ (see Section 2.1.1) was
found quite broad, not detailed enough and ineffective in addressing current economic
challenges. A new body: the ‘Committee for Strategic Development and Investments’
was formed within the regional administration.

Based on a new approach of the Ministry of Economic Development and using the
‘Concept’ as the base document the Committee has to develop a new programme
document for the ‘Social and Economic Development of the Pskov Oblast in Medium
and Long-Term Perspective’. A review of the work done so far to this effect
concludes that there is no contradiction between the old Concept, the new draft of the
programme document and EDSP.

The regional administration has developed a regional target programme for SMEs:
‘State Support and Development of Small-scale Business for 2002-2006’. SME
development and support is also declared a priority in the common policy of the
administration and has its own section in the new draft of the programme document.
However, the financing for the target programme for SMEs as well for some other
programmes has been temporary cut because of a deficit in the regional budget.



36
  In 2001 the federal authorities developed the Federal Target Programme for Kaliningrad as an
instrument to set a coordinated framework for formulating and implementing the federal social
development policy for the Kaliningrad Region. The overriding policy objective of the Programme was
to improve the living standards of the population of the region to be on par with those of Poland and
Lithuania.



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5        Component Outlines

5.1      Component 1: SME Development

5.1.1 Component Objective
The immediate objective of Component 1 is that the SMEs in the economic
programme sectors in the two regions increase their competitiveness and their access
to markets.

5.1.2 Subcomponent 1.1: Development of SME Policy Dialogue and Capacity of
      SME Associations
SME development is recognised in the regions as a means that will greatly contribute
to achieving a stable economic, social and political development. In order to attain
this    the   regional    authorities    should     develop   a     strategy     for:

     removing obstacles to enterprise creation in the regions – both at regional,
      municipal and local levels;
     establishing a facilitating environment for private business development;
     contributing to the development of appropriate market institutions;
     promoting compliance with basic social and environmental standards.

This should to the largest possible extent be done in dialogue and partnerships
between the regional authorities and the private sector associations and entrepreneurs.
Key to success in this area is the establishment of mechanisms for effective dialogue
between the partners. The strength of the business associations and the quality of their
staff are prerequisites for effective public/private dialogue and partnership initiatives.

While the regional authorities have taken steps to involve the private sector
organisations in dialogue in the past, the business associations and other organisations
representing the business community find that their influence has been inadequate and
that the resulting policies, strategies, legislation, support programmes etc. do not
sufficiently reflect the problems experienced by the businesses. This is to be
addressed through this subcomponent.

Objective
The immediate objectives of Subcomponent 1.1 is that dialogue and cooperation is
enhanced between the public authorities and the private business sector with a view
to:
   developing effective and consistent policies, strategies and programmes as well as
    support functions in selected municipalities to contribute to the development of
    SMEs in the regions;
   minimise administrative barriers, particularly at municipal levels; and
   improving the code of conduct in enterprise operations in the targeted sectors.

This is to be achieved through two elements under the subcomponent, each with a
separate budget:




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   Capacity building of government institutions and mechanisms for dialogue and
    cooperation (Subcomponent 1.1.a):

    the establishment of mechanisms for policy dialogue, cooperation and partnership
    between the public authorities, including regional and municipal authorities, and
    the business sector represented by the two-three economic programme sectors in
    each region – with a focus on the SMEs;

   Capacity building of business associations (Subcomponent 1.1.b):

    enhanced capacity of private business associations in the economic programme
    sectors to engage in advocacy work, promote code of conduct and compliance
    with basic environmental and social standards, and service their members as
    needed.

Strategy
The approach is to involve relevant stakeholders in the SME environment to help
create an effective dialogue on policy, strategy and programme issues as well as
administration of laws, rules and regulations, in order to improve the enabling
environment for business development. In order to bridge the gap between public
authorities   and     private   business      firms   the   approach    is    to:

   Map the present institutional framework for policy dialogue and cooperation
    between the public authorities and the private business sectors;

   Create mechanisms in the regions for effective ‘bottom up’ articulation of the
    needs of SMEs;

   Develop the capacity of the public authorities in the regions to undertake policy
    formulation and planning in dialogue with the private sector;

   Identify the main administrative barriers at regional, but not least municipal/local
    levels, focusing on those experienced by the economic programme sectors, with a
    view to designing measures to reduce them;

   Identify the need for and measures for supporting selected municipalities with
    higher growth potentials in utilising these potentials, e.g. through broad-based
    development of municipal economic development plans and institutional support
    functions in the municipal administrations;

   Develop the capacities of business associations to do advocacy and support their
    members in business development;

   Develop the capacity of public authorities to engage in public-private partnerships
    on CSR issues;

   Actually engaging the business sector associations in a dialogue with the
    authorities involved in SME policy, strategy and planning work;




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    Support CSR activities aiming at promoting code of conduct 37 and compliance
     with basic environmental and social standards for production.

Typical SME policy and advocacy issues to be addressed through these mechanisms
could                                                                        be:

    Recognition of the importance of the SME sector and development of an
     appropriate business development framework;
    Registration, licensing and permitting;
    Tax assessment methods related to firm sizes, turnover, ownership etc.;
    Access to land and associated fees (land entitlement, etc.);
    Corruption and harassment around regulations, taxes, access to land, etc.;
    Development of, access to and price of infrastructure (roads, water, electricity,
     telecommunications, etc.);
    Labour regulations on unemployment, wage guidelines, and apprenticeship
     systems;
    Vocational training and availability of labour;
    Bidding processes for public procurement contracts;
    Import and export regulations and processes;
    Availability of finance;
    Ensuring equal subsidies for both large and small enterprises;
    Code of conduct for the selected sectors
    Improving occupational health and safety, incl. HIV/AIDS;
    Compliance with environmental (e.g. EMAS, ISO 14001) or social (SA 8000)
     standards in production;
    Protecting the rights of women and minorities to do business.

Summary of Outputs
The expected outputs of the subcomponent are:

Capacity building of government institutions and mechanisms for dialogue and
cooperation

    A review of the structure and operation of the existing institutional arrangements
     for SME development in the regions;

    Mechanisms and assignment of clear institutional responsibilities for development
     and implementation of SME support policies, strategies and programmes among
     the public authorities and the private business sector;

    Enhanced capacity of the public authorities in the regions to undertake policy
     formulation and planning in dialogue with the private sector;



37
  For the agricultural sector see for example FAO (2003): International Code of Conduct on the
Distribution and Use of Pesticides (Revised Version), adopted by the Hundred and Twenty-third
Session of the FAO Council in November 2002. Food and Agriculture Organization of the United
Nations, Rome,
For the tourism sector, see for example Code of Conduct for the Protection of Children from Sexual
Exploitation in Travel and Tourism, www.thecode.org


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   Enhanced cooperation, working relationships and partnerships between the public
    authorities and representatives of the entrepreneurs, primarily business
    associations;

   Description of the main administrative barriers at regional, but primarily
    municipal/local levels, pertaining to the economic programme sectors and design
    of measures to reduce them;

   Improved enabling environment for business development at municipal levels, e.g.
    through development of municipal economic development plans and public
    support functions in the municipalities.

Capacity building of business associations

The business associations covered by this element are the Chamber of Commerce and
Industry in the two programme regions as well as the business associations or
organisations representing the furniture industry, meat processing industry and ITC in
Kaliningrad, and the food processing industry and tourism in Pskov.

The outputs or results of the support to business associations of relevance to the
economic programme sectors may include:

   A clear mission statement for an association’s role and strategy that describes
    what the association will take on;

   Identification and illustration of the value to the members of the association’s
    relationships with customers, suppliers, accountants, bankers, public (including
    regulatory) authorities, the labour force and trade unions – but also the general
    public;

   The membership base is developed;

   Enhanced capacity to undertake advocacy and participate in policy dialogue with
    the public authorities, e.g. through preparation of sector-specific policy and
    position papers;

   Enhanced capacity to initiate work place assessments and environmental audits as
    a basis for improving the working conditions and reducing the environmental
    impacts of the targeted sectors

   Code of conduct formulated and promoted within the targeted sectors;

   Increased compliance with environmental (e.g. EMAS, ISO 14001) or social (SA
    8000) standards in production within targeted sectors.

Types of Activities
The detailed design of the subcomponent, including the activities to be undertaken to
produce the above list of outputs, will to be identified during the mobilisation and
inception periods of the programme. A consultant will be hired by the MFA to



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undertake this assignment. TOR for the consultancy are attached to the programme
document as an annex.

Types of Inputs
The inputs to the subcomponent include funds for management and provision of
technical assistance through engagement of an international or national company or
organisation specialised in the concerned subjects. In addition, some funds may be
used for capital inputs and similar contributions, e.g. to CSR activities.

Sustainability and Replication Potential
The sustainability of the subcomponent is dependent on that good results will derive
from establishing the dialogue frameworks and that capacity is effectively developed
in the business associations related to the economic programme sectors.

As to the former, these results may take some years to materialise. The ‘investment’
in dialogue will start paying off gradually, but it is anticipated that the value of
dialogue and ensuing cooperation between the public authorities and the private sector
representatives will be clearly demonstrated during the programme period of three
years. This should pave the way for consolidating the structures and culture for
public-private dialogue that can be built upon beyond the programme period. Critical
for the success is that the efforts are undertaken in a transparent and democratic
manner in order to show that no organisations or sectors are being particularly
favoured as a result of the intervention.

With regard to the business associations the replication of the intervention can be
pursued through different means. The anticipated useful results may serve as a basis
for similar support intervention in other economic sectors of the economy, and/or the
lessons learned could be communicated to these other sectors through dissemination
of ‘good’ or ‘best’ practices in this field. Cross-sectoral fora and cooperation between
business associations within the two regions for exchange of information would be a
useful tool in this respect.

EDSP shall support the promotion of CSR as integrated part of the services of the
business associations’. From being a peripheral, almost an apologetic marginal
activity, EDSP shall enhance the institutionalisation of CSR as an integral part of the
value system38 of the associations’.

Institution and Target Group Involvement
The institutional approach proposed involves the following actors:

The regional administrations will be the responsible and implementing agencies for
the part of this subcomponent that addresses policy dialogue. Implementation will be
done in immediate cooperation with municipal and possibly also local authorities.
These public authorities will also be among the beneficiaries of the intervention.

The municipalities will be the immediate beneficiaries of interventions aimed at
strengthening or developing business support functions in selected growth
municipalities.

38
     Dickson, T. (2004), CSR: Moving on the front foot, European Business Forum, Summer 2004.


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It is proposed that the regional Chambers of Commerce and Industry (CCI) be
designated the responsible organisations for the part of the subcomponent that
addresses capacity development of business associations. The CCI and the business
associations in the two-three economic programme sectors (industries) will be direct
beneficiaries of this part of the subcomponent.

The ultimate beneficiaries of the subcomponent will be the SMEs that will benefit
from the policy dialogue and enhanced capacity of the business associations.

A consultant organisation will be responsible for providing assistance to the public
authorities and business associations that will enable these parties to enter into SME
policy dialogue and cooperation.39 The tasks and responsibilities of the public
authorities and private sector organisations involved in the subcomponent will be
ultimately established during the detailed design of the subcomponent, see section
‘Types of Activities’ above. The main stakeholders identified before the detailed
design are given below.

Table 5.1 Main Stakeholders in the Programme Subcomponent
                                  Roles
 Stakeholder                      Responsible                Implementing       Beneficiary
                                                             agency
 Regional administrations         x                      x                      x
 Municipal administrations                               (x)                    x
 Local administrations                                   (x)                    x
 Regional Chambers of x                                  x                      x
 Commerce and Industry
 Business associations                                                          x
 SMEs                                                    (x)                    x


5.1.3 Subcomponent 1.2: Facilitation of BDS Market Development
‘Business Development Services‘ (BDS) refer to a wide range of services used by
entrepreneurs to assist them in establishing, developing and making the operations of
their businesses effective. The services are intended to contribute to improvement of
the qualification of managers at all levels as well as employees of SMEs, existing
ones as well as start-ups, in order to improve their competitiveness and their business
effectiveness.

The area of BDS may be defined very broadly to include services related to market
access, infrastructure, policy/advocacy, input supply training and technical assistance,
technology and product development - and even alternative financing mechanisms (as
opposed to microfinance). A comprehensive overview of these types of BDSs is
provided in Annex 1.40

39
   The Neighbourhood Programme wishes to recruit an international or Russian firm/organisation to
provide such services in the two programme regions.
40
   This typology is used in: Small Enterprise Education and Promotion Network: SEEP Guide to
Business Development Services and Resources.


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Another distinction can be made between transactional and embedded BDSs.
Transactional BDSs are those services that are provided by BDS suppliers and bought
by the SMEs. Embedded BDSs are services that are provided ‘embedded’ in business
cooperation for instance. Examples are companies that buy products from SMEs
based on the companies supplying raw materials, product specifications and
assistance for the application of the production inputs supplied. It is noted that in the
EDSP, the BDS areas of policy/advocacy and technical training are dealt with in other
subcomponents of the programme.

Objectives
The immediate objective of Subcomponent 1.2 is that a market for BDSs is developed
in the economic programme sectors in the two regions by developing the supply range
and coverage of quality services and promoting SMEs’ demand for such services.

Strategy
Facilitation of market development rather than providing services. The approach
recommended for providing BDSs is one based on BDS market development where
the Danish Neighbourhood Programme provides funds for the development or
expansion of the BDS markets in the two regions. This would be done among others
by:

   undertaking market surveys to identify promising service products, making such
    market information available to BDS suppliers, assist the suppliers in developing
    and commercialising (new) services including market testing, and assist them in
    evaluating their services;

   sponsoring awareness campaign about how BDSs can help businesses solve
    typical problems, assist in developing payment models for SMEs that do not have
    the capacity to pay for services up front, and devise models for how groups of
    customers, e.g. from the same economic sector or cluster, can buy group services.




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Figure 5.1 Approach to Facilitating BDS Market Development
           (Supply and Demand) in Kaliningrad and Pskov


                                                                         SME
            Danish
            Neighbour-                           BDS                     SME
            hood                                 provider
            Programme

                                                                         SME



                                                                         SME
            BDS
            facilitator                          BDS
                                                 provider                SME


                                                                         SME


            Strategic
            partner                                                      SME

                                                 BDS
                                                 provider                SME


                                                                         SME
                          Facilitation of BDS demand and supply
                          Direct provision of services

Source: Donor Agencies for Small Enterprise Development (2001): Business Development Services for
Small Enterprises: Guiding Principles for Donor Intervention (adapted).

This approach, which is illustrated in




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Figure 5.1 above, has the potential of reaching a large number of SMEs in a cost-
effective way. It is different from providing services through BDS suppliers directly
as has been the case in some projects in the regions in the past.

The approach aims at developing a broad market consisting of BDS providers selling
services to SMEs on market terms, hence the term ‘transactional services’. The
approach rests on the assumption that well-organised, professional market-based BDS
providers form the best option for securing a sustainable provision of the specific
BDS services demanded by the SMEs. The approach would further be to first identify
and focus on services that are in high demand, which are the most feasible to deliver
and that maximise the contribution to the financial performance of the SMEs. This
will contribute to building credibility, which in turn will give BDS providers a basis
for launching more services.

The actors in the two regions, including the facilitators, possible strategic partners,
BDS providers and SMEs, are described in more detail below.


Selection of BDS facilitator and providers. The facilitator is an international or local
firm or institution hired by the Neighbourhood Programme to assist in the above
market development. The programme will assist at least three service providers in
each region in developing capacity to provide specific BDSs to the two economic
sectors targeted by the EDSP in each of the two programme regions (the furniture
industry and food processing industry in the Kaliningrad region and the food
processing industry and tourism in the Pskov region). The service providers will
evidently also cater to other sectors or industries of the economy. The number of
minimum three service providers should provide for sector specialisation,
competition, risk spreading, economies of scale and quick diffusion.

The approach further rests on the recommendation that selection of the BDS
facilitator and BDS providers be done on the basis of tendering. Those firms or
institutions that best meet the criteria for selecting BDS providers would participate in
programme with their services specifically targeted at the economic programme
sectors. Four types of candidate BDS providers may be considered in this process:
private firms, NGOs, public-private-partnerships (PPPs) and regional institutions
(such as the centres in Kaliningrad).

Whatever technical level and types of BDS providers that already exist in the two
regions, it is therefore important to decide on the role that the public authorities in the
region should play in this process in relation to the private sector. These authorities
have an interest in creating an environment conducive to the development of the
support infrastructure for SMEs given the role that small firms play in regional
economic development. That is why the 12 centres are established in the Kaliningrad
region. Experience from other countries shows, however, that service providers with a
private sector business background and experience tend to be the best to provide
BDSs.41

41
   An assessment of the performance of different types of institutional set-ups has been made in: ILO
(2003), Business Centres for Small Enterprise, Development, Experiences and Lessons from Eastern
Europe, SEED WORKING PAPER No. 57. The findings were that no clear conclusion could be
arrived at for the NGO-type model, and that the PPP-model did not demonstrate a good performance


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This suggests that a key role for the regional authorities in the longer term may be
limited to a strategic one, possibly acting as a catalyst and co-ordinator, while
working closely with the private sector, NGOs and similar organisations to help build
capacity in the development of market based services. It should be stressed, however,
that the regional network of Centres for Support of Small Enterprises (CSSEs) and the
possible new service providers to be developed under the EDSP should indeed be able
to co-exist, at least for a number of years provided that their fee structures are
comparable in order not to distort the market.

Demand and supply surveys, gap analysis and design of BDSs. Assistance in this area
is to be based on a thorough analysis of the support needs of the SMEs in the
economic programme sectors and the possible range of business advisory services that
are required to meet them. The demand analysis should establish what benefits the
SMEs are expecting from the services and how aware they are about BDSs and the
potential benefits. The outcome of the sector-specific needs assessment is to be
compared to existing services available in terms of range, volume and quality of the
services presently provided, strengths and weaknesses of existing service providers –
and if the SMEs use substitutes for BDSs for lack of such services on the market. This
would point to market opportunities and be the basis for the development of
interventions to address the needs that are considered the most beneficial to the
entrepreneurs.

Summary of Outputs
The expected outputs of the subcomponent are:

   Survey of demand for types of BDSs in the programmes sectors in the Kaliningrad
    and Pskov regions – in term of types, volume, willingness-to-pay, affordability,
    awareness of potential BDSs, expected benefits from BDSs, etc.;

   Survey of the types of BDS suppliers that exist in the two regions, the range and
    volume of services offered, the financial and technical sustainability of existing
    BDS programmes and other service providers, and their ability to develop
    additional services;

   Market development interventions designed for transactional BDSs services in
    the programme sectors in the two regions;

   Market development interventions designed for addressing embedded BDSs
    services in the programme sectors in the two regions;

   Minimum three qualified BDS providers are identified, contracted and capacitated
    in BDS delivery in each of the programme regions;

   Interventions to increase the demand for BDSs are developed and implemented;


according to a PHARE evaluation report. However, a tendering process for selection of the most
suitable local private institutions, often NGOs or entrepreneurs, appeared rather effective in creating
BDS centres adapted to local demand.



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    Cooperation between the BDS facilitators, strategic partners and regional
     authorities is operational and effective;

    Cooperation with the SMEs in the economic programme sectors in the two regions
     is established and effective.

Types of Activities
The detailed design of the subcomponent, including the activities to be undertaken to
produce the above list of outputs, will to be identified during the mobilisation and
inception periods of the programme. A consultant will be hired by the MFA to
undertake this assignment. TOR for the consultancy are attached to the programme
document as an annex.

Types of Inputs
The inputs to the subcomponent include funds for undertaking the detailed design of
the subcomponent and subsequent provision of technical assistance through
engagement of a BDS Facilitator.42 In addition, it is envisaged that some funds will be
used for capital inputs such as machinery, equipment and other types of technology,
including immaterial technology, and similar inputs for demonstration purposes.

Sustainability and Replication Potential
The big challenge is to make the BDS markets sustainable and hence the BDS
providers financially sustainable. According to the ‘Guiding Principles for Donor
Intervention’ referred to above financial viability and therefore the continued
provision of services can best be achieved if the services are paid for by the SMEs by
commercially motivated revenues. In order to achieve this the BDS providers should
sell their services at full cost as a minimum. For the BDS providers to be able to sell
their services they may initially offer low-cost services that have a short payback
period for the SME. The involvement of donor funding should not be made explicit in
order to minimise SMEs’ expectations of subsidised services.

There should be a clear demarcation between where the services of the facilitator stop
and where the services of the BDS start in order not to distort the potential BDS
market and as such jeopardise the sustainability of BDS providers. The BDS
providers may further obtain revenue from facilitating the exchange of embedded
services, and cross-subsidisation from one type of customers to another or between
services may also be considered to enhance profitability. The programme should not
subsidise the fees charged for BDSs but base the intervention on existing, possibly
underdeveloped, markets through the promotion of BDS innovation, provision of
market information, contribute to other product development costs and marketing of
the services among SMEs.

The subcomponent should have a clear exit strategy to be defined before the start of
implementation, linked to its objectives regarding market development. The intension
is that once the programme is successful in relation to providing services to the
economic programme sectors, the development of the BDS market to target other


42
  The Neighbourhood Programme wishes to recruit a company/institution to act as BDS Facilitator in
the two regions.


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business industries can be pursued. The intervention therefore also serves a
demonstration purpose.

Institution and Target Group Involvement
As briefly described above the institutional approach proposed involves the following
actors:

The facilitator is an international or local consultant or institution hired by the
Neighbourhood Programme. The facilitator will be responsible for expanding or
improving the BDS market by assisting BDS providers in developing new services,
train them in service delivery, and assist them in facilitating demand.

Furthermore, it would be useful to involve a strategic partner in each region that could
assist the facilitator in undertaking its assignment, e.g. by acting as sounding board in
decision-making. The partner in a region could for example be the regional Chamber
of Commerce and Industry or the body in the regional administration charged with
SME development.

The BDS providers are the firms that sell BDS directly to SMEs. They may be private
commercial or non-profit companies, NGOs, parastatals, regional or municipal/local
government agencies, industry or business associations, etc. 3

The immediate beneficiaries of the programme are the participating BDS providers,
while the ultimate beneficiaries are those SME that make successful use of the
services.

The tasks and responsibilities of the private sector firms and public authorities
involved in the subcomponent will be ultimately established during the detailed
design of the subcomponent, see section ‘Types of Activities’ above. The main
stakeholders identified before the detailed design are given below.

Table 5.2 Stakeholders in the Programme Subcomponent
                              Roles
 Stakeholder                  Responsible              Implementing     Beneficiary
                              (to be identified)      agency
                                                   (to be identified)
 Strategic partner                                                      x
 BDS providers                                                          x
 SMEs                                                                   x


BDS in the Field of Technology and Product Development
SMEs in the regions have expressed particular needs for getting access to technology
and other inputs to product development. The idea of establishing technology centres
or providing technology services has been discussed with the partners in the regions.

Establishment of business incubators being one possible vehicle for technology
transfer has been discussed and considered a non-viable option within the EDSP



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context because they are costly, organisationally complex and take a long time to
establish. It is recommended that the provision of services related to technology and
product development be provided through the BDS providers, e.g. in the form of
services aimed at technology transfers, technology commercialisation, linking SMEs
with technology suppliers, facilitating procurement of technology, leasing and rental
of equipment and product design.

As noted above, machinery and equipment and other technology inputs could also be
made available to the SMEs on a loan basis to assist the concerned enterprises and for
demonstration purposes.

Facilitation of Business-to-Business Cooperation
SMEs in the region are seeking cooperation with foreign partners regarding
acquisition of technology and getting access to markets and capital. The Private
Sector Development Programme (PSD Programme) of the Danish Ministry of Foreign
Affairs supports the establishment of cooperation between Danish companies and
companies in a number of countries. During the inception phase it will be assessed
how this facility can be brought into play through the BDS providers.

The objective would be business cooperation between regional SMEs and Danish
firms. The programme provides the following forms of assistance:

      preparatory phase: partner identification, study visits and feasibility studies;

     project execution/implementation phase: technical assistance and training, and
      improved external and working environment – through coverage of – the cost of
      establishment, promotion of exports and adaptation of technology.

5.1.4 Subcomponents 1.3: Provision of Financial Services
Microfinance in Russia is principally provided through four types of institutions:43

     Micro-lending Institutions (MLIs) specialised in extending credits only – usually
      operating on a non-profit basis and registered as NGOs, funds, co-operatives or
      branches of foreign NGOs;

     Credit Unions, including agricultural/rural credit co-operatives, which are
      membership organisations established to provide financial services to members
      only;

     Regional Funds operated under the auspices of the regional authorities and wholly
      or largely financed from the regional budget;

     Commercial banks, with a public, private and mixed capital base, extending
      credits on general market terms.

Regional funds operated under the auspices of the regional administrations and
commercial banks are presently the main finance institutions providing credit


43
     TACIS (2002): Improving of Access to Finance for Small Business in Russia; SMERUS 9803.


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specifically to SMEs in the programme regions. Others are the KMB Bank and
FORA, but they have played a minor role so far.

The regional administrations have had and still have an important role to play in
promoting SME development. In the past this has included operation of regional
funds targeting small business. However, given the limited capital base and capacity
to do so, the impact so far has been very limited compared to the estimated needs for
finance in the SME sector.

The alternative is commercial bank loans, but the banks’ loan conditions are generally
very difficult to meet by most applicants, especially the collateral requirement
equivalent to up to 200% of the loan amount. This is partially explained by the special
rules of the central bank system regarding credit regulation.

Objectives
The immediate objective of Subcomponent 1.3 is that SMEs in the economic
programme sectors have improved access to financial resources in order to support the
start or development of their businesses. This is to be achieved through:

   Strengthened institutional, organisational and technical capacity of up to three
    finance institutions in each programme region to provide microfinance services to
    SMEs in the economic programme sectors;

   Increased financial resources for the selected regional finance institutions to
    provide microfinance services to SMEs.

Strategy
In order to promote the concept of microfinance to SME it is recommended that
emphasis in the programme be placed on improving the credit supply first and
foremost through market-based solutions. It is proposed that the financial services
subcomponent primarily be implemented through banks that have demonstrated
interest and ability to mange small credits, specific credit lines and guarantee
schemes.

This strategy is adopted in order to (i) make use of existing capacity in banks to
extend credits, (ii) demonstrate the profitability of SME-lending and thereby (iii)
maximise sustainability of the EDSP activities beyond the programme period.
However, if there is a very strong justification for channelling funds through the
existing regional funds, this option should not be excluded.

The main financial instruments of the programme will be:

   Microloan fund(s) – i.e. capital grants to participating finance institutions chiefly
    to be used as capital for lending in cases where the capital base is insufficient to
    service SMEs;




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    Guarantee fund(s) that will provide participating finance institutions with
     guarantees for credits for which the entrepreneurs are unable to come up with
     sufficient collateral.44

Summary of Outputs
The expected outputs of the subcomponent are:

    Survey of the credit needs of SMEs in the designated economic programme
     sectors in the Kaliningrad and Pskov regions;

    Up to three finance institutions in each region (commercial banks or microfinance
     institutions) will have increased capacity to provide microfinance services to
     SMEs, on a financially sustainable basis;

    The number of microfinance customers served by the participating finance
     institutions will increase significantly each year during the programme
     implementation period (target growth rates to be established);

    Appropriate financial products and services for SMEs will have been developed –
     including non-collateral credit concepts, by the participating finance institutions
     one year from commencement of activities (if not already in place);

    Effective management systems, procedures and staff capable of handling
     microfinance, including investment appraisal capacity, will be in place in the
     participating finance institutions at the end of the programme, be it in within
     commercial banks or in specialised microfinance institutions;

    The interest rates charged will cover all costs of delivering the finance services.
     The participating finance institutions will continue to provide microfinance
     services beyond the programme period;

    Improved management competencies of SME owners and managers as regards
     financial management skills and increased knowledge of alternative methods of
     financing (to be covered by the programme’s BDS subcomponent).

Types of Activities
In order to determine the actual capital needs in terms of volume and type a survey is
to be undertaken in the economic sectors covered in the programme regions. The
results are to be compared with present suppliers of credit in order to establish the
financing gap. Detailed finance products and services to be offered to the SME will be
developed with a view to cover identified financing needs.

The finance institutions in the two regions that can most effectively use the financial
instruments of the programme to contribute to meeting these needs will be identified

44
  One of the main reasons why small businesses face difficulties in obtaining loans from commercial
banks is their inability to provide good quality collateral. Russian banks require marketable collateral
equivalent to up to 200% of the loan amount, since the risks involved in lending to small businesses is
perceived to be high. To overcome the barrier, a credit guarantee scheme can relieve the financier of
part of the risk that cannot be covered by the small enterprise itself.



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on the basis of a number of criteria, some of which are indicated above. Once the
most suitable finance institutions have been identified, management systems and
procedures will be developed and staff trained in these institutions to effectively
provide the SME related financial services.

The functioning of the schemes will regard to adequacy, effectiveness, barriers to
success and impact will be closely monitored to ensure that maximum use is made of
the resources. Lessons learned and good or best practices will be established to
provide for possible adjustment of operations and sharing of experience with other
institutions and economic sectors of the economy.

The detailed design of the subcomponent, including the activities to be undertaken to
produce the above list of outputs, will to be identified during the mobilisation and
inception periods of the programme. A consultant will be hired by the MFA to
undertake this assignment. TOR for the consultancy are attached to the programme
document as an annex.

Types of Inputs
The following inputs to the subcomponent are envisaged:

    A capital grant element for the microloan and guarantee funds. The resources will
     be granted or put at the disposal of the participating institutions to be used as
     capital for lending, as well as purchase of fixed assets – if needed – to facilitate
     their SME lending activities.

    Funds for institutional development. Technical assistance (TA) is to be provided
     by an international TA provider.45 This TA provider will be responsible for doing
     surveys, assist in developing finance products and services, and providing
     technical assistance to the participating finance institutions – possibly together
     with national experts and/or firms.

Sustainability and Replication Potential
The sustainability of the activities instigated by the subcomponent hinges on the
degree of success achieved in increasing the volume and value of credit extended to
prospective SMEs in the region. Given the experience from Russia that shows that
SMEs are generally effective and profitable, such success is realistic to achieve. This
is expected to convince the participating finance institutions to continue operations
beyond the programme period based on their own capital base.

The finance modalities to be developed are to be based on interest rates and
conditions that are intended to generate acceptable profits to the participating finance
institutions. On the other hand the conditions should be affordable and manageable by
the SMEs loan applicants. This points to the careful development of finance products
that balances the needs on both sides.




45
  The Neighbourhood Programme wishes to recruit an international company to act as TA provider
responsible for the implementation of the programme subcomponent/component. This TA provider will
be responsible for providing technical assistance to the participating finance institutions.


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The intension is that the experience gained from lending to prospective SMEs in the
economic programme sectors can serve as inspiration for lending to other sectors and
for other finance institutions to expand their involvement in SME lending. This would
warrant establishment of a mechanism for sharing lessons learned and best practices
to other institutions and economic sectors.

A clear exit strategy should be worked out at the start of implementation. The strategy
should among other things determine how funds remaining at the end of the
programme period should be used. One option would be use the funds as capital base
for continued lending to the economic programme sectors beyond the programme
period and/or extend the use of funds to lending to SMEs in other industries in the two
regions. A regional SME trust fund managed by a board with representatives of
relevant stakeholder could be given the legal mandate to continue supervising the
participating finance institutions.

Institution and Target Group Involvement
The regional responsible and implementing agencies of the subcomponent have not
been identified as yet. One option would be the representation of the Central
Administrative Board of the Bank of Russia in the Kaliningrad and Pskov regions, but
in the view of the Board representation in Kaliningrad the associations of lending
agencies and business associations in Kaliningrad would be more appropriate
candidates for becoming the responsible and implementing agencies.

The direct beneficiaries are the participating finance institutions that will attain
improved and enhanced capacity to provide microfinance services. The indirect
beneficiaries are the SMEs in the selected programme sectors who would have had
difficulties or found it impossible to access finance for lack of sufficient collateral or
inability to meet other requirements in the absence of the programme.

The tasks and responsibilities of the associations of lending agencies, business
associations and possibly public authorities to become involved in the subcomponent
will be ultimately established during the detailed design of the subcomponent, see
section ‘Types of Activities’ above. The main stakeholders identified before the
detailed design are given below.

Table 5.3 Main Stakeholders in the Programme Subcomponent
                                      Roles
                                      Responsible    Implementing    Beneficiary
 Stakeholder                          (to         be    agency
                                      identified)    (to          be
                                                     identified)
 Associations of lending agencies     x                 x
 Business associations                x                 x
 Up to three participating finance                                        x
 institutions in each region
 SMEs                                                                     x




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5.2    Component 2: Labour Market and Skills Development

5.2.1 Component Objectives
The immediate objective of Component 2 is a labour market system that responds
effectively and timely to the demand for skilled labour of the business sectors,
especially SMEs, in the economic programme sectors in the two regions.

This objective is to be achieved through:

     Strengthening of the Tripartite Labour Market System;
     Restructuring the Vocational Education and Training (VET) System;

5.2.2 Subcomponent 2.1: Strengthening the Tripartite Labour Market System
Skilled labour is strongly needed in the Kaliningrad and Pskov regions’ emerging
economic sectors, but it has proven difficult to increase the employment generation by
applying existing instruments. Therefore, this calls for a new type of service system
that is based on social dialogue and collaboration between different organisations
involved in supply, demand and labour policy formulation through an improved
regional tripartite system.

Successful tripartite dialogue has in this respect an improved potential to resolve
important economic and social issues, encourage good governance, advance social
and industrial peace and stability, and boost economic progress.

However, establishing a legal framework and formal tripartite institutions are no
guarantee for fruitful dialogue and cooperation between the authorities and the social
partners. In the Kaliningrad and Pskov regions the current tripartite systems are facing
great difficulties, and they do neither have the necessary support nor the capacity to
fulfil their objectives. Furthermore, the formal tripartite system does not include all
relevant stakeholders in the tripartite dialogue.




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                                                                    Primarily at the local/regional level:
                                                                    Public Institutions
                                              Public authorities    - employment services, including
                                                                    placement and reintegration services
                                                                    - education and training
                                                                    - others




       Employers                                                                 Trade Unions
       Primarily at the /local
       level:
       Individual employers




                                         New Social Partners
                           Business network         NGOs    Primarily at the local level:
                           on social issues                 Commercial Actors
                                                            - placement and reintegration services, etc
                                                            - education and training
                                                            - others

     Figure 5.2 The Development from Tripartite to Multipartite Labour Market
     System (cf. Andersen & Mailand 2002)

The tripartite system in the programme regions may benefit from including elements
from the increasingly popular concept of new social partnerships. In these new
partnerships, the existing participants from the tripartite labour market system
(employers, trade unions, public authorities) build ties with new social actors - e.g.,
NGOs, public and commercial employment services, business networks or
commercial operators - in order to improve policies, decision-making processes and
labour market monitoring and evaluation. Such new social partnerships will represent
a movement from a tripartite to a multipartite labour market system, see Figure 5.246.

Actively involvement of new social partners like employers clubs and branch
associations in the tripartite system not only improves the possibilities for labour
market monitoring. It may also strengthen the legitimacy of these organisations and
create an incentive for SMEs to become members. Furthermore, it has the potential of
improving the social dialogue and by that also the labour market monitoring within
the specific targeted sectors.

46
  Andersen, S.K. & Mailand, M. (2002), The Role of Employers and Trade Unions in Multipartite
Social Partnerships, The Copenhagen Centre, Copenhagen.


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Regarding promotion of CSR it is considerably easier to create an enabling
environment if the selected sectors are pushed to act through the presence of drivers.
Drivers can take various forms—including legal, commercial, and social—and they
may take both positive and negative forms. An example is local governments, which
apply Supplier Code of Conduct that sets minimum performance standards for the
public purchasing policies. Such code of conduct allows government entities to
choose business partners on the basis of good labour practices47.

Not only regional authorities but also trade unions, business associations and NGOs
have an important role to play in the process of promoting CSR in Kaliningrad and
Pskov Regions – by informing, supporting, monitoring and controlling the companies.

In order to promote CSR it is essential that there are relevant human capacities and
institutions such as inspectorates and business associations to pursue the social,
environmental, and economic goals inherent in this agenda.

For example, the failure or inability of the authorities to enforce labour standards,
despite the presence of legal, social, and to some degree commercial drivers of strong
labour practices remains a factor that undermines the enabling environment.
Therefore the EDSP’s capacity building initiatives shall aim at strengthening the
capacity of the tripartite stakeholders to improve environmental and social standards
in the targeted sectors.

Labour supply or demand imbalances in specific labour market segments greatly
endanger sustainable economic growth. To counter such mismatch, labour market
monitoring is crucial. Labour market monitoring enables policy makers, enterprises
and other stakeholders with a more strategic approach to identifying and subsequently
solving such labour market discrepancies. Furthermore, it enables the federal
employment services to implement adequate active labour market policies aimed at
tackling upcoming skill shortages. In that perspective, labour market monitoring may
help to reduce adjustment costs arising from mismatches on the labour market.

A strengthened tripartite dialogue will serve as a valuable monitoring tool, and serve
as an early warning system regarding the level of demand and supply gap. Moreover,
enhanced capacity of the tripartite stakeholders will improve their individual and
collective capacity to plan and implement relevant sector specific labour market
policies that can generate the following benefits:

    Improve the regional authorities’ ability to monitor the development in
     unemployment, wage structure, industrial injuries etc.;
    Increase the public authorities’ ability to promote public-private partnerships on
     CSR related issues, e.g. environmental concerns, labour market integration of
     marginalised groups, HIV/AIDS48, etc.;


47
  See for example Vancouver City Council:
http://vancouver.ca/ctyclerk/cclerk/20050217/cs7AppendixB.htm.
48
  For sectoral codes on HIV/AIDS see for example ILO (2001): An ILO code of practice on HIV/AIDS
and the world of work. International Labour Office, Geneva, p. 29-31


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   Enable VET institutions to monitor the labour market and determine how to plan
    their activities;
   Improve the tripartite stakeholders’ ability to promote code of conduct and
    compliance with environmental (e.g. EMAS, ISO 14001) or social (SA 8000, AA
    1000) standards in the production;
   Identify and address CSR related issues such as internal and external environment
    by promoting partnerships between companies, public authorities and NGOs on
    issues related to CSR;
   Make it possible for employers to compare wage and productivity levels in their
    business with the regional averages;
   Make trade unions capable of monitoring wage levels, occupational health and
    safety etc. across industries;
   Provide individual job seekers and employment services with better advice on
    labour market and employment trends.

However, strengthened tripartite dialogue alone is not enough to achieve such
benefits. Public authorities and the social partners also strongly require the necessary
organisational capacity to engage in labour market monitoring - e.g., provide timely
and relevant input to the tripartite dialogue. Moreover, the capacity of social partners
to participate in the planning and implementation of supplementing sector specific
labour market analyses, and subsequently analyse the data in order to formulate
adequate recommendations and policy responses, need to be further developed and
improved.

Objectives
The immediate objective of subcomponent: Strengthening the Tripartite Labour
Market System in order to promote effective and efficient tripartite dialogue in the
targeted sectors. This is to be achieved through:

   Improvement of the formal tripartite dialogue institutions’ capacity to forecast
    future labour market needs and make recommendations for relevant policy
    responses;
   Improvement of the tripartite partners’ ability to address CSR related issues:
   Improvement of the foundation for decision making based on relevant and sector
    specific data.

Strategy
The main strategy of this component is to pursue a bottom-up approach, where the
tripartite partners are provided with the necessary capacity and human resources to
engage in a constructive tripartite dialogue.

In order to support the institutionalisation of a fruitful regional tripartite dialogue, it is
important to examine the barriers for effective operation and shortcomings of the
current tripartite system. A thorough analysis of the regional tripartite systems will
therefore provide a common basis for development of a more adequate tripartite
system.

Initially the EDSP is to initiate an investigation of how the regional tripartite systems
in the programme regions are functioning de facto today, and identify barriers for a
constructive tripartite dialogue. On the basis of this investigation the programme shall


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facilitate consensus building and a common vision for future tripartite cooperation.
The initial analyses will be instrumental to facilitate the institutionalisation process of
a constructive tripartite dialogue in Kaliningrad and Pskov regions.

The outcome of the initial examination should be a tripartite system that is targeted
and which fits the sectors’ specific needs for collaboration. Development of the
tripartite system should take its point of departure in the existing legal framework, and
thus the regional tripartite agreements.

The success of the tripartite system in the targeted regions is dependent on the support
of the tripartite partners’ attitude towards tripartite dialogue is therefore also greatly
decisive. Due to this, the active participation of all relevant stakeholders in the
analysis is crucial in order to ensure ownership and commitment to the outcome and
further tripartite process. Other relevant new social partners, such as the federal
employment service as well as private employment services also need to be involved.

The tripartite stakeholders’ commitment is also decisive in relation to CSR related
issues. By coordinating the training and education and other CSR related activities in
close cooperation with subcomponent 1.1, it is the aim to strengthen the stakeholders’
interest and engagement in activities and partnerships addressing and promoting CSR.

For the regional tripartite partners to benefit from the TACIS supported labour market
information (LMI) system, their capacity to use the LMI system as a strategic tool to
fight structural unemployment are to be enhanced. Therefore, organisational
development is necessary in order to improve the design, implementation and
assessment of regional labour market policies, and to improve the coordination,
cooperation, and knowledge sharing between the regional authorities and the social
partners.

However, labour market monitoring cannot rely on the current statistical data alone
due to its limited reliability and validity. The work of the tripartite system could
benefit from supplementing the LMI system with additional sector specific labour
market analyses. By applying qualitative research methods, such as sector specific
focus group interviews and narrative based monitoring tools, the tripartite partners
may obtain a more thorough understanding of causes and effects of labour market
mismatches at sector level. Moreover, sector specific labour market analyses will
ensure consensus among partners regarding present and future needs within specific
sectors. Therefore one of the immediate objectives of the component is to build the
capacity of the regional tripartite systems to identify information gaps, commission
sector specific qualitative analyses from the federal employment service, and
transform such analysis into relevant recommendations and policy responses.

Summary of Outputs
Expected outputs of the subcomponent are:

   Analysis of the barriers for successful tripartite dialogue in the targeted sectors;
   Identification of solutions to sector specific barriers, and formulation of regional
    action plans in dialogue with all relevant stakeholders involved in formal and
    informal tripartite labour market system;



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     Organisational changes in the tripartite labour market system in the targeted
      sectors that improve the design, implementation and assessment of regional labour
      market policies, and strengthen the coordination, collaboration, and knowledge
      sharing between the employers, trade unions, public authorities and new social
      partners, such as public and commercial employment services;
     Training and education that enables employers, trade unions and public authorities
      to conduct labour market analyses (e.g. on the supply and demand for labour,
      qualification gaps, training needs, etc.) based on the LMI system and qualitative
      technologies;
     Training and education that enables tripartite stakeholders to address CSR related
      issues.

The interrelationship between the subcomponent’s outputs is illustrated below.


      Regional action          Organisational            Improved
      plans developed          changes in the            tripartite
      in dialogue with         tripartite system         dialogue
      all relevant
      stakeholders


                                                         Improved
      Initial analysis         Training and              capacity to
                                                         forecast future
      of the barriers          education that
      for successful           enables the               labour market
      tripartite               stakeholders to           needs and make
      dialogue in the          provide and use           recommenda-
      targeted sectors         labour market             tions for
                               analyses                  relevant policy
                                                         responses

    Figure 5.3 The interrelationship between the subcomponent’s outputs.



Type of Activities and Inputs
Technical assistance shall be provided to conduct a thorough analysis of barriers for a
well functioning tripartite regional dialogue. This is required in order to provide a
common ground for revision and development of the tripartite systems in Kaliningrad
and Pskov regions.

On the basis of the initial tripartite analysis’ recommendations and outcomes, possible
areas for programme intervention and technical assistance should be identified for the
assistance to correspond with the actual needs of support. Technical assistance and
investments should be provided in order to facilitate the institutionalisation of
tripartite systems in the targeted regions.

Technical assistance in the form of training is required. Such training programmes
will provide the public authorities, trade unions, employers' associations and the
employment services with the human resources needed to enhance their capacity to
provide and use qualitative and quantitative data for labour market analyses, as well
as for translating such analyses into relevant recommendations and policy responses.


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Focussed technical assistance to federal employment service to strengthen their
capacity to conduct sector specific labour market studies that can supplement the
TACIS supported LMI system. Moreover, CSR training shall provide the tripartite
stakeholders the necessary know-how in how to identify and address CSR related
issues.

Technical investments should be made available for the tripartite institutions to
acquire and fund relevant regional labour market research provided by the federal
employment service or local private consultants.

The detailed design of the subcomponent, including the activities to be undertaken to
produce the above list of outputs, will to be identified during the mobilisation and
inception periods of the programme. A consultant will be hired by the MFA to
undertake this assignment. TOR for the consultancy are attached to the programme
document as an annex.

Sustainability and Potential for Replication
The component is formulated on the basis of needs identified by the local
stakeholders and hence the programme assistance is anchored in locally defined
problems.

The framework nature of the EDSP ensures the necessary flexibility for defining more
detailed and accurate intervention and technical assistance during the inception phase.

For the LMI system to become a relevant strategic tool, it is important that the
stakeholders have the necessary capacity to ensure accurate input data, and that they
know how to use the output data, as well as how to identify the data’s limitations. By
providing training and other organisational development initiatives, the EDSP
supports the implementation of the LMI system. In this way, the EDSP activities
support the sustainability of the TACIS Program, and vice versa.

It is the intention that the experiences gained from improving tripartite and promoting
CSR within the targeted sectors may serve as inspiration for other sectors. The
subcomponent may also provide good and relevant lessons learned and good practices
to other institutions and programmes aiming at improving labour market conditions as
well as employment generation.

Institution and Target Group Involvement
The priority themes of this component are private sector support and good
governance, as the programme intervention targets public as well as private labour
market stakeholders. The targeted institutions and organisations, as well as their roles,
are illustrated in the table below.

The direct beneficiaries are the tripartite dialogue partners, regional authorities, VET
institutions, unions and employers’ associations that will obtain improved capacity to
engage in the regional tripartite dialogue. Secondly the programme targets the federal
employment service due to its key role in labour market monitoring.

The indirect beneficiaries are the workers and employers who will benefit from an
enhanced organisational capacity of their organisations’ improved representation.


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The tasks and responsibilities of the public authorities and labour market
organisations involved in the subcomponent will be ultimately established during the
detailed design of the subcomponent, see section ‘Types of Activities and Inputs’
above.

Table 5.4 Main Stakeholders in the Programme Subcomponent
                                        Roles
 Stakeholder                            Responsible         Implementing   Beneficiary
                                                            agency
 Department of Labour and Social x                      x                  x
 Development
 Employer Assoc.& Trade Unions                          x                  x
 Companies in two            selected                                      x
 economic sectors
 NGOs                                                   x                  x
 Federal Employment          service                    x                  x
 (only in Pskov)
 Selected VET institutions                                                 x


5.2.3 Subcomponent 2.2: Restructuring the Vocational Education and Training
      (VET) System
If the Kaliningrad and Pskov regions are to compete successfully in an era of rapid
economic and technological change the productivity needs to be improved. This
requires not only capital investment, but also a work force that has the flexibility to
acquire new skills for new jobs as the structures of economies and occupations
change.49 Furthermore, the transitional nature of the economy implies new
requirements for the employees’ qualifications, competence and motivation.

There is substantial evidence that demonstrates that VET can play an essential role in
promoting economic growth and socio-economic development, benefiting individuals,
their families, local communities and society in general. Moreover, most employment
opportunities in the twenty-first century are likely to be centred on new processes and
services requiring specialised knowledge and skills not yet available in general
educational institutions.50

One of the main objectives of the EDSP is to assist people in finding relevant and
sustainable employment opportunities. The demand side can be stimulated by
supporting entrepreneurship and SME development, e.g. through technology transfer,
tax incentives, financial services and access to credit, improved advisory and
consultancy capacity, etc. On the supply side, training and education are important
instruments.


49
  World Bank, 1991: Vocational and technical education and training, Washington, p. 7
50
  UNESCO-UNEVOC, September 2003: UNESCO-UNEVOC in brief, International Centre for
Technical and Vocational Education and Training, Bonn, p. 5.


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Realising that VET is of critical importance for the social and economic development
in Kaliningrad and Pskov regions, the EDSP will support the creation of the necessary
conditions for delivering VET that meets labour market requirements. Restructuring
the existing system requires a number of hardware and software inputs including
infrastructure (e.g., modern materials and facilities), human resources (the skills and
competences of trainers), and procedures (teaching manuals, quality assessment
systems etc.). Moreover, occupational health and safety education, including
HIV/AIDS, should be integrated into the curriculum of vocational training51.

As mentioned, both the Kaliningrad and Pskov regions face high unemployment rates,
and this negative development constitutes a serious threat to the future development
of the regions. This is especially because public authorities have found it difficult to
implement active employment policies due to permanent regional and local budget
deficits.

This also goes for the VET systems in the two regions. The VET systems have not
been able to catch up with the rapid change in the labour market demands.
Decentralisation of responsibility and management of the VET system from federal to
regional levels has not resulted in an adequate responsiveness towards local labour
markets needs. This situation has contributed to the imbalance of labour demand and
supply the Kaliningrad and Pskov regions are facing today, as it implies that
unemployment and shortages of skilled labour occur simultaneously.

However, an internal focus on the human, technical and financial resources does not
in itself bridge the gap between the supply and demand for vocational training. In
order to improve the relevance of the vocational training institutions to the labour
market, the EDSP must also address other issues.

It is important to improve the enterprises’ capacity to elaborate training needs
analysis. Experience shows that it is important that the private sector plans their
employees’ education and training to counter future competence gaps. Moreover,
strategic education planning ensures that the private sector receive a good return on
the resources that are spent on the development of their employees’ qualifications –
these e.g., being purchase of courses, in-house development activities etc. Qualified
employees also increase the private sector’s competitiveness, and education planning
and continued focus on employee development are contributory factors to attracting
and retaining employees. Therefore, capacity building is important and necessary for
the private sector for it to formulate its own skills and training needs. The VET
institutions may be a relevant partner in this respect concerning the educational
planning process, as both the VET system and the individual enterprises can benefit of
knowledge about the private sector’s future skills requirements.

An improved and continued commitment and awareness of the stakeholders at local
and regional levels is a precondition for strengthening the institutional capacity for
management and for further developing the quality of the VET. In consequence, the
actual prioritisation and design of initiatives must be developed in close collaboration
with public authorities, employers, trade unions and VET institutions. On the basis of

51
  See for example ILO (2001): An ILO code of practice on HIV/AIDS and the world of work.
International Labour Office, Geneva.


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the tripartite approach, proper linkage could therefore with reason be established and
provided through a VET forum/council between VET providers, and relevant public
authorities, employers and trade unions. This will enable stakeholders to share
information on the demand and supply for labour, and to plan the future VET.
Independent experts, NGOs and other relevant stakeholders could in this respect also
be included and invited to join the forum depending on needs assessments.

Partnership building between the training providers is also important and highly
relevant. In restructuring the vocational training institutions, there will be a need for
the training and education providers to cooperate - e.g., regarding development of
new training programmes, specialisation of training institutions etc. in order to reduce
development cost and enhance general knowledge sharing. Partnership with
international relevant resource institutions could in this respect also contribute
constructively with relevant expertise and know-how.

Improved management and efficient use of the resources are important preconditions
for the VET institutions to become sustainable. In order to improve the VET
institutions’ performance, creation of an incentive system should be developed. Such
system should ensure that VET institutions are rewarded for offering training
programmes that are in demand by the general labour market instead of the current
supply driven incentive system. In order for the restructuring of the vocational
training system to succeed, the financing mechanism must be adapted to the new
market and employment realities.

Regional monitoring and evaluation systems should also be developed, as national
monitoring mechanisms are not in place to monitor and evaluate the quality and
impact of vocational education. A performance measurement system will increase the
accountability of the vocational training institutions and enable the training and
education providers as well as the tripartite institutions to modify policies and
operations according to the labour market needs.

It is also important that the EDSP maintains a strong and continued focus on social
inclusion in relation to vocational training and education. Danish assistance will pay
special attention to initiatives that improve training and education facilities that target
vulnerable groups, e.g. staff facing lay-off and re-training of unemployed to address
the dynamic nature of the transitional economy and hence structural unemployment.

Objectives
The immediate objective of subcomponent is to improve the vocational education and
training system in order to meet labour market requirements in the targeted economic
sectors (the furniture industry and food processing industry in the Kaliningrad region
and the food processing industry and tourism in the Pskov region). This is to be
achieved through:

   Increased investments in VET infrastructure to improve and modernise the
    educational environment;

   Increased human resource development in VET institutions that enables
    employees to provide vocational education and training that meets labour market
    requirements;


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   Increased partnerships between VET institutions and private enterprises to rectify
    the imbalance of labour demand and supply;

   Development of a quality management system that allows administrators, policy
    makers and employers to monitor and evaluate the effectiveness and impact of the
    VET system;

   Increasing the administrators’ capacity to measure the efficiency of VET
    institutions by improving existing performance management systems.

Strategy
Together the various elements of the subcomponent provide a comprehensive
approach to improving the VET system in the targeted regions. The VET
infrastructure investment element attempts to provide the necessary means for
increased investments in vocational training infrastructure by subsidising cutting
edge-equipment and technologies. Emphasis will be put on providing the technical
basis for promoting high quality VET. The necessary upgrading of skills and
competences of VET teachers and trainers will be addressed through the human
resource element, which aims at enhancing professional know-how and to introduce
new pedagogical methodologies. The VET systems’ limited market linkage will be
addressed through the partnership element.

The major focus of this element is to assist partnerships between VET institutions, the
individual enterprises and other regional stakeholders, and hence to increase and
improve their ability to share information on the demand and supply for labour, in
addition to planning the future VET. The partnership element also aims at raising the
awareness and capacity of individual enterprises to apply strategic educational
planning. The quality management element aims at developing and providing proper
mechanisms and feed back structures for the stakeholders to share information on the
demand and supply for labour and planning the future VET. The need for monitoring
and evaluation measures will also be addressed through the performance management
element.

Summary of Outputs
Expected outputs of the subcomponent are:

VET infrastructure investment element:
    Supporting investments in vocational training infrastructure by subsidising
     cutting edge-equipment and technologies through a VET Infrastructure Fund.

Human resource element:
   Retraining programmes of teachers in VET institutions developed and
    implemented to enhance professional know-how and introduce new pedagogical
    methodologies;
   Strategies developed to integrate occupational health and safety education, incl.
    HIV/AIDS, in training and re-training programmes.


Partnership element:


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    Formalised partnership-building activities between VET institutions internally,
     and between VET institutions, individual enterprises, and the tripartite system,
     especially the public authorities, need to be developed and successfully
     institutionalised.

Quality management element:
    Mechanisms and feed back structures developed to monitor and evaluate the
     quality and impact of vocational education in relation to the labour requirements
     at the enterprise level.
    VET forum/council established for the relevant stakeholders to share
     information on the demand and supply for labour and planning the future VET.
    Curricula developed to reflect changes in labour market demands in the targeted
     economic sectors.

Performance management element:
    The subcomponent will support the development of a monitoring and evaluation
     system that gives VET institutions incentives to provide VET that is in demand
     by the labour market.

Type of Activities and Inputs
The subcomponents require different types of technical assistance and investments.

Direct technical investments are needed for capacity building initiatives. One
initiative is the establishment of a VET Infrastructure Fund. The purpose of the fund
is to serve as a resource pool for investments and innovations in the educational
environment - e.g., up-to-date training and IT equipment.

Re-training of teachers in new teaching and learning methodologies, interactive
methods, IT skills, etc. should be provided in form of courses, workshops and
seminars. Moreover, partnerships should be established with private enterprises for
trainers to have on-the-job training on the use of new technologies.

Partnership activities between VET institutions and the enterprises should also aim at
improving the quality of the practical training and providing information on future
education and labour requirements. Assistance should be provided to develop on-the-
job training programmes for VET students and training programmes for factory
trainers for them to acquire pedagogical skills.

In order to enhance the VET systems’ capacity to identify and respond adequately to
current and future labour market requirements, the EDSP should assist the VET
institutions to facilitate strategic education planning within individual enterprises.

Furthermore, the technical assistance should facilitate formalised partnership building
activities between the VET institutions, individual enterprises and relevant authorities,
including establishment of a VET forum/council in order to improve the monitoring,
evaluation and planning of VET.

Technical assistance should also be provided in order to support the Department of
Education and Science in Kaliningrad region, the Central Administrative Board of the
General and Vocational Training in Pskov region, in addition to the participating VET


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institutions to develop and implement policies, strategies and curricula. Moreover,
assistance should be provided to support the development of a monitoring and
evaluation system hereby giving VET institutions incentives to provide VET that is in
demand by the labour market.

The detailed design of the subcomponent, including the activities to be undertaken to
produce the above list of outputs, will to be identified during the mobilisation and
inception periods of the programme. A consultant will be hired by the MFA to
undertake this assignment. TOR for the consultancy are attached to the programme
document as an annex.

Sustainability and Potential for Replication
The sustainability perspective is rooted in the actual design of the intervention. The
programme intervention is channelled through existing structures aiming to strengthen
already established institutions. By developing the capacity of the institutions, the
programme aims at empowering relevant policy makers, administrators and
educational managers for them to improve their own performance and co-operation
with new actors in a changing social and economic environment.

The financial investments are limited to finance capacity building initiatives and the
VET Infrastructure Fund. Deposing the financial resources in a fund is a way for the
programme to counter financial dependency. At the same time, the fund ensures that
the financial resources are used for capacity building and innovations purposes, and
not spend on running expenses. By working indirectly through existing institutions,
the programme intervention is more likely to have a positive impact on the VET
system in the regions.

Furthermore, Danish assistance to development of the VET systems in the targeted
regions should also support the current decentralisation process where management
and financial responsibility are transferred from federal to regional levels.

It is the intension that experiences gained during the programme will inspire VET
development in other economic sectors. Furthermore, lessons learned and good
practices may be summarised and contribute to improve future VET development
programmes.

Institution and Target Group Involvement
The direct beneficiaries are the participating VET institutions that will attain
improved and enhanced capacity to provide VET. The VET institutions will be
selected on the basis of their specialities, as only VET institution with specialities
relevant to the targeted sectors should benefit directly from the EDSP. The indirect
beneficiaries are the businesses in the targeted sectors that would have had difficulties
in both attracting qualified labour and applying educational planning without the
programme. The VET students are also indirect beneficiaries, as they will benefit
from the improved VET.

In order to succeed, the development of the vocational training system must be
planned and implemented with involvement of the relevant stakeholders – most
notably the Department of Education and Science in Kaliningrad region, the Central
Administrative Board of the General and Vocational Training in Pskov region, other


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relevant regional authorities, the vocational education and training institutions with
relevant specialities, private enterprises within the targeted economic sectors,
territorial associations of trade unions, associations of employers, and regional
tripartite institutions.

The tasks and responsibilities of the public authorities and VET institutions involved
in the subcomponent will be ultimately established during the detailed design of the
subcomponent, see section ‘Types of Activities and Inputs’ above.

Table 5.5 Main Stakeholders in the Programme Subcomponent
                                        Roles
    Stakeholder                         Responsible        Implementing Beneficiary
                                                            agency
    Department of Education and Science x              x                 x
    in the Kaliningrad and Pskov regions
    Selected VET institutions                                            x
    Companies in two selected sectors                                    x




5.3       Cross-cutting Issues

5.3.1 Gender Equality
The EDSP shall consistently promote gender equality as an integral part of the
planning and implementation of the five subcomponents of the programme. The
gender-specific difficulties faced by women engaged in business activities in the
selected programme sectors, either as workers, managers or as entrepreneurs, shall be
carefully assessed. Concrete remedial measures shall be developed and implemented
to address the needs of women in the selected programme sectors.

The EDSP gender strategy will:

     Be aligned with national policies on gender equality and private sector
      development and use government structures where in place to address gender
      inequalities;
     Support policies and regulatory services that address gender equality;
     Support women’s active participation in decision-making processes;
     Encourage women to participate in the Business Development Service
      interventions;
     Base part of the programme monitoring on gender-specific data on objective as
      well as output levels;
     Integrate considerations about gender equality into the programme design and
      implementation.

5.3.2 Good Governance
Good governance forms an integral part of the programme through the support to
municipalities and regional authorities in developing an enabling environment for



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SME development. Issues of good governance will be mainstreamed throughout the
programme including:

   Municipalities and other public institutions with a focus on transparency in public
    administration and service delivery;
   Business organisations with a focus on transparency as well as awareness raising;
   Support to the Public-Private dialogue forums will include elements relating to
    good governance and the fight against corruption.

Danida’s Action Plan to Fight Corruption (2003-8) will, as appropriate, be integrated
in all programme activities.

5.3.3 Environment
The EDSP will ensure that supported interventions do not have a negative
environmental impact, and it will support SMEs in minimising negative
environmental impacts of their activities. The programme will also support initiatives
that will improve occupational safety and health issues as well as environmental
management. Environmental impact of interventions will be considered an important
criterion when supporting activities within the programme.




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6       Budget
The total budget of the five-year Economic Development Support Programme (EDSP)
in the Kaliningrad and Pskov regions is DKK 110 million; corresponding to
RUB 502 million, see the table below.

Table 6.1 EDSP Budget for the Programme Period 2005-2010
COMPONENT                                              DKK MILLION        RUB MILLION 1)
1.   SME Development
1.1  SME Policy and Advocacy Capacity of               10,525,000          47,994,000
     Business Associations
1.2 Facilitation of BDS Market Development             8,525,000           38,874,000
1.3 Provision of Financial Services                    22,525,000          102,714,000
Subtotal – Component 1                                 41,575,000          189,582,000
Labour Market and Skills Development                                       0
2.1 Strengthening the tripartite labour market         3,525,000           16,074,000
     system;
2.2 Restructuring the vocational education             32,925,000          150,138,000
     and training (VET) system;
Subtotal - Component 2                                 36,450,000          166,212,000
Subtotal – All Components                              78,025,000          355,794,000
Contingencies                                          7,800,000           35,568,000
Unallocated                                            8,075,000           36,822,000
Programme management and coordination2)                10,000,000          45,600,000
Monitoring, reviews and evaluation                     5,000,000           22,800,000
 Process consultant                                      1,100,000         5,016,000
 Subtotal - Non-component-specific                       31,975,000        145,806,000
 GRAND TOTAL                                             110,000,000       501,600,000
1)                                                              2)
   Exchange rate prevailing 30 November 2005: 1 DKK = 4.56 RUB. Includes Programme Offices.

The two programme components and their respective subcomponents have separate
indicative budgets. It is anticipated that the budget resources will be distributed more
or less evenly between the Kaliningrad and Pskov regions. A more detailed
breakdown of the budget among components, subcomponents and regions is given in
Annex 2.

The budgets will be subject to yearly reviews and possible revision. Thus, the final
yearly distribution between the components and subcomponents will be determined
annually based on needs, absorptive capacity, work plans and implementation
performance.

The budget includes contingencies of DKK 7.8 million for uncertainties relating to the
costs of the subcomponents, about DKK 8.1 million of unallocated funds for new
areas of programme intervention and DKK 10.0 million for programme management
and coordination. DKK 5.0 million have been set aside for monitoring, review and
evaluation activities.

The Russian authorities are expected to contribute to programme activities in kind by
way of making staff available for programme management purposes, meetings,



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training etc. as well as office facilities for meetings and other programme activities.
An agreement on the nature and size of such contributions is to be made between the
programme management and participating partners early in the implementation phase.
It is further expected that programme funds directed at public organisations and
institutions are reflected in regional and local budgets as soon as possible. Programme
funds cannot replace funds that would otherwise have had to be spent under public
funding such as investments in training facilities and related costs.




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7        Management and Organisation

7.1      Management Structures for Programme and Components

7.1.1 Overall Structure
The management structure of the programme and its components in each of the two
programme regions is illustrated in the figure below.


                           Steering Committee
                           Programme signatories:
                           main cooperating partners:
                            Danish Min. of Foreign
                            Affairs / NAB
                            Regional Governors




                           Programme Committee
                           Representatives of main
                           cooperating partners:
                            Regional authorities
                            Municipal/local
                             authorities
                            Business associations
                            Employers associations
                            Trade unions
                            NAB
                                                                                Programme Office
                                                                                 Programme adviser
                                                                                 Local staff




 Component                 Component                    Component
 Management                Management                   Management                         Consulting firms
                                                                                           providing technical
 Enabling Environment      SME Financing                Labour Market                      assistance
 for Business / SME        (Subcomp. 1.3)               Development
 Development                                            (Subcomp. 2.1 + 2.2)               Subcomponents
 (Subcomp. 1.1 +1.2)                                    Representatives of:                1.1 and 1.2
                                                         Consulting firm
 Representatives of:       Representatives of:           Regional authorities
                                                                                           Subcomponent 1.3
  Consulting firm          Consulting firm             Federal Employment
  Regional authorities     Business associations        Services (only Pskov)            Subcomponents
  Municipal/local          Regional authorities        Business associations            2.1 and 2.2
   authorities              Finance institution(s)      Employers’ associations
  Business associations                                 Trade unions
                                                         VET institutions



Figure 7.1 Management Structure of the EDSP in Each Programme Region




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As indicated in the figure the five subcomponents of the programme will be
implemented through three implementation modules, also referred to as
implementation components.

Table 7.1 Implementation Components (Modules) of the EDSP
 Implementation component (module)     Subcomponents
 Enabling Environment for Business /   1.1 SME policy, and advocacy capacity and services of
 SME Development                           business associations
                                       1.2 Facilitation of business development services (BDS)
                                           market development
 SME Financing                         1.3 Provision of financial services
 Labour Market Development             2.1 Strengthening the tripartite labour market system
                                       2.2 Restructuring the vocational education and
                                           training (VET) system



7.1.2 Steering and Management Bodies
As shown in Figure 7.1 the programme will be managed and implemented through a
number of steering and management bodies. In each region there will two steering
bodies: an overall Steering Committee and a Programme Committee while practical
and day-to-day management of the programme’s subcomponents in each region will
be performed via Programme Managers assisted by a Programme Office. These
bodies are described below.

The Danish Ministry of Foreign Affairs (MFA)/Neighbourhood Programme (NAB) is
the overall responsible body for the Danish support, assisted by two Programme
Offices.

The EDSP will be managed by NAB of the Danish MFA in close cooperation with the
Government of the Kaliningrad region and the Pskov regional administration. The
cooperation will be implemented under the general Agreement between the
Government of the Kingdom of Denmark and the Government of the Russian
Federation on Technical Co-operation (1997), and will be anchored by the signing of
the EDSP Programme Document by the Danish MFA and the Kaliningrad and Pskov
regional administrations.

Steering Committees. Overall Steering Committees (SC) for the EDSP comprising the
signatories of the Agreement between Denmark and the Kaliningrad and Pskov
regional administrations respectively shall be established. The main function of the
Steering Committees will be to approve annual EDSP action plans and budgets on the
basis of joint annual reviews of the EDSP.

Programme Committees. In each region the main cooperation partners will form a
regional Programme Committee (PC). As the objective of the EDSP is to cater for
development of both the private and the public sectors, the composition of the PC
should be balanced between public and private sector stakeholders. Thus, the PC will
include members from the relevant departments of the regional administration as well
as representatives from the business and employers’ organisations, trade unions and
the Danish MFA as mentioned tentatively in the cover page. MFA/NAB will also be


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represented in the PCs. The principal mandates is monitoring of progress,
coordination of programme activities at the overall level, and review/endorsement of
recommendations of joint annual reviews. The PCs should meet semi-annually or as
needed.

Component Management / Programme Managers. The activities of the programme
subcomponents will be managed by Programme Managers (consultancy firms
contracted by MFA) in close partnerships with the private and the public sector
recipient institutions in the Kaliningrad and Pskov regions. Their mandate and
responsibility is to implement the subcomponent activities in accordance with annual
work plans and budgets.

Programme Offices. NAB will establish two Programme Offices (PO), one in the
Kaliningrad region and one in the Pskov region. Each PO will be manned by an
international Programme Adviser and local office support staff. The POs will
represent NAB in all programme matters as well as facilitate the undertaking of
activities within their regions and cooperation between the regions.

As an overall principle the EDSP activities shall be planned and implemented by the
individual cooperation partners involved following their own internal decision-
making procedures. The rationale is that other public or private organisations would
have no mandate to participate in these processes, and may have conflicting interests
too. Therefore, the PCs in the two regions shall not be given any role in managing the
individual subcomponent activities in detail. The PCs shall concentrate on strategic
issues and on coordinating the activities to be supported. Accordingly, the two PCs
shall not be directly involved in detailed planning and budgeting of activities.

7.1.3 Mandates of Steering and Management Bodies
The various steering and management bodies will be provided with mandates to
clearly delineate their responsibilities. These mandates are to be elaborated in detail
during the inception phase of the programme. The main mandates envisaged are
indicated in the table below.

A list of proposed implementation procedures, agreements and contracts to provide
for flexible management of the programme is attached as Annex 4.




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Table 7.2 Outline of Steering and Management Mandates
 EDSP BODIES                       MAIN MANDATES
 Steering Bodies
 Steering Committee (SC)              Approval of recommendations of joint annual reviews,
                                       including:
                                        approval of annual actions plans;
                                        approval of annual budgets;
                                      Discussion and resolution of issues related to overall
                                       government-to-government cooperation.
 Programme Committee (PC)             Monitoring achievement of programme objectives in the
                                       region;
                                      Ensuring that synergies between subcomponents are tapped;
                                      Assist implementing organisations in overcoming problems
                                       encountered in cooperation with other partners;
                                      Coordination of inputs to the joint annual review together
                                       with the programme offices;
                                      Endorsement of joint annual review recommendations;
                                       including: reallocation of resources and use of unallocated
                                       budget funds;
                                      Recommendation on coordinating issues related to donor
                                       programmes and projects.
 Management and Support Bodies
 Component/        Sub-component      Management       responsibility   for   implementing  the
 Management                            subcomponent activities in accordance with annual work
                                       plans and budget;
                                      Progress and financial reporting;
                                      Preparation of annual work plans and budgets;
                                      Identification and development of synergy activities.
 Programme office                     Overall management and facilitation of programme
                                       implementation, including:
                                      Representing NAB in all programme matters;
                                      Facilitating all activities within their regions and cooperation
                                       between the regions, e.g. coordination of activities in the two
                                       regions as appropriate;
                                      Preparing the Inception Report for the region;
                                      Consolidating work plans and budgets of all sub-components
                                       for joint annual reviews;
                                      Assist the joint annual review teams;
                                      Provide office space for consultants working on more sub-
                                       components.



7.2      Financial Management
The programme will be implemented through programme subcomponents whose
activities will be managed by Programme Managers (consultancy firms contracted by
MFA) in partnerships with private and public sector institutions. The financing
modalities will be guided by the Danida Financial Management Guidelines and in
compliance with the Danida Anti Corruption Code of Conduct.



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Some general principles in financial management include:

    On behalf of NAB the regional Programme Adviser will enter into a direct
     Memorandum of Understanding or contract with each participating public or
     private sector organisation or consultancy firms;
    Programme Managers will be responsible for managing and accounting for
     programme funds;
    Each Programme Manager receiving programme funds shall open and operate a
     separate and dedicated programme bank account;
    Accounts shall be maintained in accordance with the Danish Aid Management
     Guidelines (AMG) and with the Internationally Accepted Accounting Standards.
    Funds shall be released after the presentation and approval of quarterly financial
     reports;
    In case of lack of accountability, action in accordance with Government of
     Russia procedures and Danida’s guidelines will be taken, and further Danish
     funding to the involved institutions may be put on hold till the issue is resolved;
    Annual financial reports and statements shall in principle be subject to an audit
     by an independent External Auditor. For the audit of funds to public
     organisations, the Programme Advisers will appoint and contract an external
     audit firm.

These principles are further specified below.

7.2.1 Financial Procedures Manual
During the programme’s inception phase, i.e. first half year of 2006, a ‘Financial
Procedures Manual’ will be prepared by the Programme Consultant (Nordic
Consulting Group) together with MFA, the two Programme Advisers for the
Kaliningrad and Pskov regions and in consultation with the main Russian partners.
The manual shall specify the financial management system, the procedures for
budgeting, flow of funds, disbursement of funds, accounting and accounts
management, reporting and other aspects of financial management of the programme.
The manual will follow the above-mentioned principles.

7.2.2 Budgeting Procedure
Budgets for each subcomponent activities shall be prepared on a yearly basis. The
activity-based annual budgets will be prepared by the Programme Managers in close
consultations with each participating organisation and aligned with their respective
financial year. The work plans and budgets will be prepared in accordance with the
programme document and approved by the Steering Committees for Kaliningrad and
Pskov respectively. Programme Managers shall revise and update budgets and present
them to MFA on a quarterly basis taking into account the expenditure position at the
end of each quarter and projections for the future.

Unallocated funds under the programme are available for financing of activities that
have not been planned and budgeted for at the time of programme approval. These
funds may only be used for financing of new activities based on concrete budgets for
the planned new activities. Annual reviews will make recommendations on the use of
unallocated funds and transfer of funds from one subcomponent to another.




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The overall Steering Committees will approve annual action plans and budgets. The
Programme Committees will comment on the recommendations of the annual reviews
before they are approved by the overall Steering Committees.

7.2.3 Funds Management
In order to meet the financial management requirements of MFA the following system
for flow of funds will apply.

Funds for financing programme activities are transferred quarterly from MFA to the
programme accounts of each Programme Manager to cover activities under their
subcomponent(s). Funds for financing Programme Office activities are channelled
biannually from MFA to the Programme Advisers in the Programme Offices.
Financial reporting will take place quarterly to MFA. MFA will register financial
flows in Danida’s Project Data Base (PDB).

The Programme Managers and the Programme Advisers shall ensure that the
necessary documentation for transfer of funds from MFA are timely prepared and
comply with the AMG. Request for funds from Programme Managers/Programme
Advisers must be signed by the accountable Programme Manager/Programme
Adviser.

The MFA will make periodic – quarterly in the beginning – instalments to the
Programme Managers’ bank accounts based on cash flow projections. Release of
funds from MFA will be based on approved work plans, budgets and activity-based
financial reports from the partner organisations compiled by the Programme
Managers.


        Steering
        Committees
        (Approval of annual
        budgets and work plans)                              Subcomponent 1.1
                                   Programme
                                   manager
                                                             Subcomponent 1.2

      Programme
      Committees
      (review/endorsement
      of recommendations)          Programme
                                                             Subcomponent 1.3
                                   manager



                                                             Subcomponent 2.1
           Danish MFA              Programme
             (NAB)                 manager
                                                             Subcomponent 2.2



                                   Programme                 Programme
                                   adviser                   activities

Figure 7.2 Financial Flows for the EDPS in Each Programme Region


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7.2.4 Accounting Principles and Financial Reporting
Financial reporting will be undertaken in accordance with the principles and rules laid
out in the Financial Procedures Manual reflecting the ‘Financial Management
Guidelines’ (May 2004) of the AMG.

Each Programme Manager/Programme Office shall prepare financial reports. This
will include quarterly expenditure statements with supporting documentation and
consolidated quarterly statements of account. The quarterly statements will also
include provisional budgets for the next period and requests for release of funds in
overview.

The Programme Managers/Programme Offices will submit expenditure statements to
MFA on a quarterly basis and consolidated partner organisation/office activity
statements once a year.

7.2.5 Auditing Procedures
All accounts prepared by Programme Managers/ Programme Advisers shall be appro-
priately audited. MFA will appoint reputable firms to carry out – initially – annual,
external audits following internationally accepted principles. The audit reports,
including financial statements for the fiscal period audited, are to be submitted to
MFA not later than six months after the end of the financial year. A final audit will be
undertaken within three months after the completion of the subcomponents.




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8       Monitoring, Reporting, Reviews and Evaluations

8.1     Indicators
Tentatively, achievement of the programme objectives will be measured against the
indicators below. Indicators for measuring delivery of outputs are to be elaborated at
component and subcomponent levels during the inception phase.

Ideally, the chosen indicators should allow documentation of programme performance
in terms of effectiveness, efficiency and impact in relation to the strategic goals of
Danish development assistance, the specific targets defined in relation to the EDSP as
well as the actual costs of producing the outputs.

 EDSP                                                 Verifiable indicators
 Overall                                Objective     None defined.
 Improved living conditions of the populations in
 the Kaliningrad and Pskov regions resulting from
 business development and job creation.
 Intermediate Objectives                              - Investment, turnover and financial results of
 New SMEs are established and effective               SMEs in the economic programme sectors
 operations of existing SMEs are facilitated in       increase by at least 15% annually from 2006-
 order to increase value-added and create jobs.       2009.
                                                      - Net employment in the economic programme
                                                      sectors rises from 2006-2009 as a result of
                                                      programme interventions
 COMPONENT 1: SME DEVELOPMENT
 Immediate objective
 Increased competitiveness and market access of
 the SMEs in the economic programme sectors in
 the two regions.
 Subcomponent 1.1 SME Policy Dialogue and Advocacy Capacity of Business Associations
 Immediate objective                                  Verifiable indicators
 Enhanced dialogue and cooperation between the        - SME-related policies, strategies and support
 regional authorities and the private business        programmes are developed or improved, and
 sector to develop effective and consistent           their implementation strengthened as a result of
 policies, strategies and programmes to support       dialogue between the regional authorities and the
 SME development.                                     private sector associations and enterprises.
                                                      - Regional Chambers of Commerce and sectoral
                                                      business associations have a clear advocacy
                                                      agenda formulated in terms of SME position and
                                                      policy                                    papers.
                                                      - Sectoral business associations are actively
                                                      participating in the SME development agenda.
                                                      - 80% increase in the members’ satisfaction with
                                                      services and advocacy of the business
                                                      association.

 Reduced administrative barriers and enhanced         - Reduced processing times for registrations,
 business support, particularly at municipal level.   approvals, permits, licences etc.
                                                      - 50% increase in the SME’s satisfaction with
                                                      services of local authorities.

 Improved social and environmental standards in       - Number of companies achieved certification
 enterprise operations in the economic programme      according to ISO standard (for example ISO



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 sectors.                                             14001) or other internationally recognised
                                                      standards.
                                                      - Number of representatives from the tripartite
                                                      partners trained in social and environmental
                                                      issues.
                                                      - Number of formalised partnerships on CSR
                                                      issues established between the public and private
                                                      sectors.
                                                      - Number of occupational accidents.
                                                      - Rate of satisfaction with labour conditions
                                                      among workers in SMEs.
 Subcomponent 1.2 Facilitation of BDS Market Development
 Immediate objective                                  Verifiable indicators
 A market for BDSs is developed in the economic       BDS providers offer relevant and quality BDSs
 programme sectors by developing the supply           to SMEs in the economic programme sectors
 range and coverage of quality services and           (and likely other sectors) and SMEs buy the
 promoting SMEs’ demand for the services.             services.
 Subcomponent 1.3 Provision of Financial Services
 Immediate objective                                  Verifiable indicators
 SMEs in the economic programme sectors have          Existing finance institutions provide affordable
 improved access to financial resources in order to   loans to SMEs in the economic programme
 support the start or development of their            sectors based on guarantee and/or microloan
 businesses.                                          funds provided by the programme.
 COMPONENT 2: LABOUR MARKET AND SKILLS DEVELOPMENT
 Immediate objective
 A labour market system that responds effectively
 and timely to the demand for skilled labour of the
 business sectors, especially SMEs, in the
 economic programme sectors in the two regions.
 Subcomponent 2.1 Strengthening the Tripartite Labour Market System
 Immediate objective                                  Verifiable indicators
 Effective and efficient tripartite dialogue in the   - Stakeholders involved in the organisational
 programme regions.                                   development of the tripartite labour market
                                                      system show medium-very high level of
                                                      satisfaction.
                                                      - The majority of the stakeholders use LMI
                                                      system when planning and implementing labour
                                                      market policies.
                                                      - The share of labour disputes resolved
                                                      successfully.
                                                      - Rate of satisfaction with labour conditions
                                                      among workers in SMEs.
                                                      - Number of representatives from the tripartite
                                                      partners trained in social and environmental
                                                      issues.
 Subcomponent 2.2 Restructuring the Vocational Education and Training (VET) System Skills
                  Development
 Immediate objective                                  Verifiable indicators
 The vocational and educational systems are           - Number of VET schools of excellence related to
 improved in order to meet labour market              the economic programme sectors.
 requirements in the economic programme               - Number of training programmes/curricula
 sectors.                                             developed.




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                                            - Closer cooperation established between VET
                                            schools and employees.
                                            - Number of students having acquired skills
                                            demanded by the SMEs.
                                            - Increased awareness of occupational health and
                                            safety, incl. HIV/AIDS among students.



8.2    Reporting
The inception phase will enable the programme management to prepare the first
annual work plan, and develop a detailed monitoring system and procedures for the
proper management of programme activities. At the end of the first six months of the
programme period, all recipient organisations shall prepare an inception report for
approval by the EDSP Programme Committee (PC).

The inception report shall be in line with MFA Guidelines for Programme
Management (April 2005) and include an annual work plan, an activity-based budget,
listing of planned outputs, activities and inputs for the first year of the programme,
and details regarding the monitoring system for the programme.

The inception report shall include a clearly specified division of responsibilities
among the various stakeholders involved in the implementation of the programme.
The inception report should specify the principles of management and operation of
each of the subcomponents, including approval procedures at subcomponent level.

During the implementation process, each executing organisation should report on
progress of implementation to the regional EDSP PC six-monthly. Progress and
financial reports are key instruments for enabling regional partners and the
Neighbourhood Programme to monitor and assess the progress of the programme and
its components.

The reports, which should be based on annual work plans and budgets, provide the
basis for decisions on necessary adjustments and also serve as documentation for the
implementation of the programme. The Programme Adviser shall submit all progress
reports to the EDSP PC. The PC will endorse the reports at its meetings and take the
necessary follow-up measures. The Programme Office will prepare draft reporting
formats, which shall be approved by the PC.

At the end of programme period each component/subcomponent shall prepare a
completion report as described in MFA’s Guidelines for Programme Management and
submitted to the PC and the Neighbourhood Programme. The completion report shall
account for the implementation, outputs and results achieved. Emphasis should be put
on analysing on the indicators as specified by the LFA matrix of the programme
document and the inception reports. The completion report should also explain
deviations from the LFA matrix and contain an evaluation of whether the objectives
of the programme have been met and whether the achieved results are deemed
sustainable. Completion reports shall be submitted to the MFA for approval no later
than two months after the completion of the programme. The PC must, as for other
regular reports, approve of or comment on the completion report.



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8.3      Monitoring
Monitoring is an essential tool for programme management. Monitoring will provide
the PC and Programme Office with information that is required for measuring
progress and effectiveness of activities and possible adjustment of strategies,
procedures, institutional arrangements and allocation of resources. Monitoring data
will also be an essential basis for reporting to the Government of the Russian
Federation, the Neighbourhood Programme, and other interested organisations.

Wherever possible the monitoring system should be harmonised with that of the
concerned organisations and adjusted to regional strategies and policies. It is strongly
recommended that the monitoring system for EDSP’s interventions in Kaliningrad is
fully integrated in the “Complex Action Plan, CAP of the regional administration
regarding the implementation of the regional strategy of socio-economic
development. CAP shall focus on the implementation of the following four major
goals, which are inline with the priorities of the EDSP:

     Creation of conditions for further development of the human resources and the
      efficient use of these;
     Formation of a competitive regional economy based on innovation and intellectual
      resources;
     Promotion of SMEs;
     Achievement of social consolidation, thereby strengthening Russian state policy in
      the region and protecting interest of the population.

The monitoring system of CAP is built around the following three levels of indicator
system, which has the necessary building blocks for accommodating the specific
requirements of the EDSP sub-components: macro level, meso level and micro level.
Furthermore the CAP could contribute to strengthening public private dialogue
through transparent system of performance reporting, which highlights the role and
the contribution of the regional administration in facilitating economic development.

It is suggested that the monitoring system of the Pskov Oblast Administration is based
on a simplified version of the CAP, which could be introduced as a pilot initiative
focussing on the EDSP interventions. This strategy will allow the sharing of
experience and transfer of best practices, which could facilitate full-scale
implementation of the CAP concept in Pskov Oblast Administration.

When possible the EDSP monitoring should utilise existing sources of information
and analyse it for its specific purpose. Furthermore, in order to keep the collection of
monitoring data within reasonable proportions, merely information that is considered
essential is collected. Frequently, data collection far exceeds what is needed for
management and planning purposes.

In order to monitor EDSP performance, indicators have been defined at three levels in
accordance with the different levels of objectives and outputs, viz. programme
(development objective) level, component (intermediate objective) and sub-
component (immediate objective/output) level. Output monitoring serves two
purposes. First, it is an instrument by which the component/subcomponent
management can assess performance and actual progress. The monitoring system will


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inform the decision-makers whether the component is on track and progressing as
scheduled. Secondly, the monitoring system can be used to assess the impact of the
project activities.

It is the responsibility of the individual subcomponents to establish monitoring routines.
Already at the outset of the implementation, i.e. during the inception phase, the
component management should design adequate monitoring systems and commission
possible baseline surveys. As data that can serve as a basis for benchmarking of
performance are not available in several cases, it may be necessary to carry out
baseline surveys. The MFA shall contract an experienced monitoring specialist that has
the required expertise to assist with design of the modalities for monitoring and possible
baseline surveys. Moreover the monitoring specialist shall support the individual
subcomponents in conducting reliable and valid monitoring. Detailed TOR for the
monitoring specialist shall be prepared during the mobilisation phase of the EDSP.
Indicators for measurement of progress of outputs are also to be developed at
component and sub-component levels during the mobilisation/inception phase with
specific quantifiable benchmarks and timeframe.

8.4     Reviews and Evaluations
EDSP will be subject to annual reviews undertaken jointly by the Neighbourhood
Programme and the Russian partners. Reviews may have a different focus and
emphasis from year to year and will not necessarily be full-scale reviews for
individual components. In addition to annual Neighbourhood Programme reviews,
MFA may decide in collaboration with the management of the partner organisations
to undertake technical assessments on specific issues at any time during the
component period. The EDSP PC endorses the Review Aide Memoires.

Evaluations of the entire programme or parts thereof may be carried out during or by
the end of the component period. It will be the joint responsibility of MFA’s
Evaluation Secretariat and the relevant Russian authorities as well as the recipient
organisation to facilitate the evaluation.

 Report and Review activities              Timing
 Inception Report                          After the first six months of the programme period
 Progress and Financial Reports            Six-monthly
 Completion Reports                        Completion reports submitted no later than two
                                           months after the completion of the programme
 Neighbourhood Programme Reviews/ Review   Annually
 Aide Memoirs
 Technical assessments                     Any time during the component period
 Evaluation                                During or by the end of the programme period




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9        Assumptions and Risks
As EDSP aims at economic growth through business sector development, the success
of the entire programme is dependent on the development of external and internal
demand factors and macro-economic stability. Assessment of major risks for the
successful implementation of the two components shall be undertaken during the
mobilisation phase of the EDSP.

9.1      Assumptions
The main assumptions for implementing the EDSP are that:

General
     The regions will experience sustainable macroeconomic, legal and political
      stability that will provide a basis for foreign investment, local market
      development and trust among entrepreneurs to develop their businesses;

     In the case of Kaliningrad the privileges that apply to the Special Economic Zone
      will not change significantly in the short to medium term, which could otherwise
      jeopardise the business prospects for some industries.

SME Development
     The regional authorities will implement their policies and plans aimed at an
      improved enabling environment for private business development, especially in
      the area of SMEs;

     The concerned regional, provincial and other public authorities will fully support
      the programme approach being one based on public-private cooperation and
      partnership with appropriate involvement of civil society organisations;

     The regional, municipal and local authorities will stand by their expressed interest
      in enhanced cooperation with the private sector on the development of policies,
      strategies and plans for business development and growth in the regions with
      particular emphasis on SMEs;

     It will be possible to mobilise interest among SMEs in the economic programme
      sectors to become active members of business associations to enable the
      associations to develop a membership base and provide advocacy and other
      services;

     The SMEs will acknowledge that BDSs designed to meet their articulated needs
      help solve their problems and that the value of the BDSs exceed the market price -
      if properly designed and professionally delivered;

     There will qualified candidates (private enterprises, NGOs, public-private-
      partnerships (PPPs) and/or regional institutions) interested in becoming involved
      in the programme as BDS providers;

     In each region up to three finance institutions can be found that are interested in
      participating in the programme and that have demonstrated interest in and ability
      to mange small credits, specific credit lines and/or guarantee schemes;


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     It will be possible to develop loan concepts with conditions (collateral
      requirement, interest rate, repayment period and profile, etc.) that the SMEs can
      meet.

Labour Market and Skills Development
     The regional authorities continue to pursue and encourage tripartite dialogue
      together with the employers associations and trade unions;

     Employers associations and trade unions have the capacity to participate in the
      tripartite dialogue;

     Cooperation among employers and the vocational training schools will be
      established;

     Motivation of employers and employees to take part of the EDSP;

     Vocational training schools get adequate resources from the regional and federal
      budgets to provide training services designed under the programme;

     Availability of enterprises and employers capable and willing to provide on-the-
      job training;

     Targeted enterprises are interested and willing to improve the external
      environment and working conditions.


9.2      Risks
The following risks may affect achievement of the programme objectives:

     Difficulties in mobilising entrepreneurs to support business associations develop
      their advocacy and service capacity may make it difficult to establish policy
      dialogue;

     SMEs finding it difficult to pay for BDSs at market prices maintaining that they
      cannot afford such services would put the development of the BDS market at risk;

     An appropriate division of the roles between the public and the private sectors in
      providing BDSs cannot be obtained, which will negatively affect the BDS market
      development;

     Trained teachers still remain with the VET institutions;

     The Kaliningrad tripartite partners might not benefit from the TACIS supported
      labour market information (LMI) system due to insufficient donor coordination.




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10           Implementation Plan
The EDSP will commence in December 2005 and end in December 2010. The
programme will start with a mobilisation phase of three months followed by an
inception phase of three months. The first review of the EDSP shall be conducted
after the completion of the inception phase. The first year of programme
implementation will start in May-June 2006. This is illustrated in the figure below.


Year                           2005             2006                              2007 2008 2009 2010

Activities           Month     ->11   11   12   1      2   3   4   5   6   7-12

Mobilisation phase
Inception phase
Implementation phase

Recruitment of local support
staff
Undertaking of detailed
design by consultants
Recruitment of firms for
implementation (tendering)
Programme implementation

Figure 10.1 Programme Phases and Activities

The international Programme Advisers will be recruited prior to the mobilisation
phase, while local support staff will be employed during the mobilisation phase.

International consultants will be hired to undertake the detailed design of the
subcomponents during the period December 2005 – March 2006. For each
subcomponent this will include an action plan (plan of implementation) and TOR for
implementing the subcomponent.

Firms/organisations to provide technical assistance to the subcomponents based on a
tendering process will be recruited during the period February – May 2006.

The overall EDSP implementation plan will be prepared based on the implementation
plans for the subcomponents. The work will involve the consultants preparing the
detailed design, the Programme Offices – assisted by the process consultant.

During the inception phase programme management guidelines, including the
Financial Procedures Manual and monitoring systems will be developed.

The consolidated implementation plan will be broken down into annual work plans to
be reviewed and further detailed on an annual basis. The inception phase will be
concluded with an inception report, which will give an account of all important issues
related to planning, financing, monitoring, indicators and reporting.

A list of programme outputs and associated activities during the mobilisation,
inception and implementation phases are shown in Annex 3.




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Annex 1: Types of Business Development Services


Market Access           marketing business                  subcontracting            and
                        market linkages                      outsourcing
                        trade fairs and product             marketing trips and meetings
                         exhibitions                         market research
                        development of samples for          market space development
                         buyers                              showrooms
                        market information                  packaging
                                                             advertising
Infrastructure          storage and warehousing             information through       print,
                        transport and delivery               radio, TV
                        business incubators                 internet access
                        telecommunications                  computer services
                        courier                             secretarial services
                        money transfer
Policy/Advocacy         training in policy advocacy         direct advocacy on behalf of
                        analysis and communication           SEs
                         of policy                           sponsorship of conferences
                        constraints and opportunities       policy studies
Input Supply            linking SEs to input suppliers      inputs
                        improving suppliers’ capacity       facilitating the establishment
                         to                                   of bulk
                        provide regular supply of           buying groups
                         quality                             information on input supply
                                                              sources
Training and            mentoring                           technical training
Technical               feasibility    studies   and        counselling/advisory services
Assistance               business plans                      legal services
                        exchange visits and business        financial and taxation advice
                         tours                               accountancy                and
                        franchising                          bookkeeping
                        management training
Technology              technology                          facilitating      technology
and Product              transfer/commercialisation           procurement
Development             linking SEs and technology          quality             assurance
                         suppliers                            programmes
                                                             equipment leasing and rental
                                                             design services
Alternative             factoring companies that            equity financing
Financing                provide working capital for         facilitating supplier credit
Mechanisms               confirmed orders
Source: Small Enterprise Education and Promotion Network: SEEP Guide to Business Development
Services and Resources. Reproduced in ILO (2003): Seminar Reader. BDS Primer.




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Annex 2: Budget Framework for the EDSP
Budget framework for the EDSP in the Kaliningrad and Pskov
Regions

Sub- Activity                 Allocatio Unit      Numb Internat. = Rate     Amount      Prepa Mobilisa        Sub-      Shared Kalinin- Pskov
com-                          n                   er of I          (DKK)    (DKK)       -      t.     & Imple com-      by    the grad
pone                                              units National =                      ration inceptio -     ponents   two
nt                                                      N                                      n        menta           regions
                                                                                                        -tion
1,1    Prepare TOR        for Process                                                   X
       consultant              consultan
                               t
1,1   Hire consultant for Process                                                             X
      preparation           of consultan
      detailed design          t
1,1   Prepare        detailed Consulta     Work   3     I (+N)    175.000   525.000           X                         525.000
      design                   nt          Months
1,1   Hire of consultant for NAB                                                              X
      implementation
1.1.a Deliver        capacity Consulta     Lump   1     I+N       5.500.000 5.500.000                  X                5.500.000
      building      services, nt           Sum
      government
1.1.b Deliver        capacity Consulta     Lump   1     I+N       3.500.000 3.500.000                  X                3.500.000
      building      services, nt           Sum
      private sector
1,1   Incidental activities                       1               1.000.000 1.000.000                  X                            500.000   500.000
1,1   Sub-total subcomponent 1.1                                                                             10.525.0
                                                                                                             00
1,2    Prepare TOR        for Process                                                   X
       consultant             consultan
                              t
1,2    Hire consultant for Process                                                            X
       preparation         of consultan
       detailed design        t
1,2    Preparation         of Consulta     Work   3     I (+N)    175.000   525.000           X                         525.000
       detailed design        nt           Months
1,2    Hire of consultant for NAB                                                             X
       implementation
1,2    Deliver       capacity Consulta     Lump   1     I+N       7.000.000 7.000.000                  X                7.000.000
       building services and nt            Sum




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      support the selected
      BDS providers
1,2   Incidental activities                       1            1.000.000 1.000.000           X                          500.000   500.000
1,2   Sub-total subcomponent 1.2                                                                 8.525.00
                                                                                                 0
1,3   Prepare TOR        for Process                                                 X
      consultant             consultan
                             t
1,3   Hire consultant for Process                                                        X
      preparation         of consultan
      detailed design        t
1,3   Prepared      detailed Consulta    Work   3     I (+N)   175.000   525.000         X                  525.000
      design                 nt          Months
1,3   Hire of consultant for NAB                                                         X
      implementation
1,3   Provide       capacity Consulta    Lump     1   I        2.000.000 2.000.000           X              2.000.000
      building services and nt           Sum
      monitor
      implementation
1,3   Financial support to Consulta      Lump     2   I        10.000.00 20.000.00           X                          10.000.00 10.000.00
      SMEs                   nt          Sum                   0         0                                              0         0
1,3   Sub-total subcomponent 1.3                                                                 22.525.0
                                                                                                 00
2,1   Prepare TOR        for Process                                                 X
      consultant             consultan
                             t
2,1   Hire consultant for Process consultant
      preparation         of
      detailed design
2,1   Prepare       detailed Consulta Work    3       I (+N)   175.000   525.000         X                  525.000
      design                 nt        Months
2,1   Provide facilitation Consulta Lump      1       I+N      2.500.000 2.500.000           X              2.500.000
      and capacity building nt         Sum
      services
2,1   Study tours            Consulta Lump    2       I        250.000   500.000             X              500.000
                             nt        Sum
2,1   Sub-total subcomponent 2.1                                                                 3.525.00
                                                                                                 0
2,2   Prepare TOR for Process consultant                                             X
      consultant
2,2   Hire consultant        Process consultant                                          X
2,2   Prepare       detailed Consulta Work        3   I (+N)   175.000   525.000         X                  525.000




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      design                  nt        Months
2,2   Hire consultant for     NAB                                                  X
      implementation
2,2   Provide facilitation    Consulta Lump      1     I+N   4.900.000 4.900.000       X              4.900.000
      and capacity building   nt       Sum
      services
2,2   Equipment packages Consulta Lump           5,5   I     5.000.000 27.500.00       X   32.925.0               13.750.00 13.750.00
                         nt       Sum                                  0                   00                     0         0
2,2   Sub-total subcomponent 2.2

      SUB-TOTAL ALL SUBCOMPONENTS                                      78.025.00           78.025.0 28.525.00 24.750.00 24.750.00
                                                                       0                   00       0         0         0
      Contingencies                                                    7.800.000                    7.800.000
      Programme         management         and 1             10.000.00 10.000.00   X   X            10.000.00
      coordination                                           0         0                            0
      Monitoring, reviews, evaluation            1           5.000.000 5.000.000   X   X              5.000.000
    Process consultant                           1           1.100.000 1.100.000   X                  1.100.000
    Unallocated                                  1           8.075.000 8.075.000       X              8.075.000
EDS GRAND TOTAL                                                        110.000.0                      60.500.00 24.750.00 24.750.00
P                                                                      00                             0         0         0
TOT
AL




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 Annex 3: List of Activities and Outputs
 Proposed List of Activities and Outputs for the Programme Mobilisation,
 Inception and Implementation Periods


 Sub-           Description                       Activities during               Activities during
 components                                       mobilisation period and         implementation period
                                                  inception period
     All        Monitoring of the                 Hire consultant.                Consultant services
                programme
     All        Monitoring of development         Hire consultant                 Consultant services
                against programme indicators
     1.1.a      Capacity building at business     Hire consultant. Consultant     Consultant services for
                associations                      prepare action plans            implementation of action
                                                  (Kaliningrad and Pskov)         plans
     1.1.b      Planning at regional,             Hire consultant. Consultant     Consultant services for
                municipal, district authorities   prepare action plans for the    implementation of action
                                                  regions, municipalities,        plans
                                                  districts
      1.2       Facilitation of BDS market        Recruitment of facilitator,     Facilitator services to the
                development                       who will make criteria and      selected BDS service
                                                  procedures for selection of     providers. One contract to
                                                  BDS service providers.          cover both regions.
      1.3       Provision of financial            Hire consultant to prepare      Hire consultant for
                services to SMEs                  design and action plan and to   facilitating/monitoring of
                                                  prepare agreements with         implementation.
                                                  financial institutions.         Consultant
                                                                                  facilitating/monitoring
                                                                                  services.
      1.3                                         One consultant contract to      One consultant contract to
                                                  cover both regions.             cover both regions.
     2.1.a      Strengthen the tripartite         Labour Market Department        Consultant services for
                labour market system:             of the Regional                 implementation of action
                Assistance to the regional        Administration: Prepare         plans.
                authorities                       action plan.
                                                  Hire consultant
     2.1.b      Tripartite: Assistance to         Recruitment of                  Consultants/cooperation
                labour unions                     consultants/cooperation         partners services
     2.1.c      Tripartite: Assistance to         partners.
                employers                         Consultants/cooperation
                                                  partners prepare action plans
     2.2        Restructuring the VET             Hire consultant. Consultant     Consultant services for
                system                            to prepare detailed plan for    implementation
                                                  VET schools as well as TOR
                                                  for implementation, in
                                                  cooperation with
                                                  Department for Education of
                                                  the Regional Administration.
                                                  One plan for each region.




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Annex 4: List of Implementation Procedures, Agreements and
Contracts
List of Proposed Implementation Procedures, Agreements and Contracts to Enable
Flexible Management

1. Overall agreements

Signing the Programme Document
Partners: The NAB and the representative of the Government of the Russian
Federation.
Initiator: NAB.
Timing: Immediately after Danish appropriation/during mobilisation period. The
document should be endorsed by Programme Committee members of each region.

2. Implementation procedures

Terms of reference for joint annual review.
Partners:
• The NAB;
• For Kaliningrad Region: The Government of the Kaliningrad Region (Department
   of Economic Development and Trade).
• For Pskov Region: Committee for Strategic Development and Investment
Initiator: NAB/PO in each region.
Timing: First review: Immediately after the completion of the inception report.
Coverage: Each region separately.

Financial Procedures Manual
Partners: The NAB and the PO in each region.
Initiator: NAB.
Timing: Inception period.
Coverage: Each region separately.

Monitoring of the programme: Contract with consultant
Partners: NAB and consultant.
Initiator: NAB.
Timing: Inception period.
Coverage: Both regions at the same time.

Monitoring of development against programme indicators: Contract with consultant
Partners: NAB and consultant.
Initiator: NAB.
Timing: Inception period.
Coverage: Both regions at the same time.

3. Components and subcomponents

1.1.a: Agreements (or letters of intent) with Chambers of Commerce and Industry in
Kaliningrad and Pskov, and with selected sector business associations in Kaliningrad



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and Pskov on capacity building activities and outputs (total number of agreements:
1+3 for Kaliningrad and 1+2 for Pskov).
Partners: Chambers of Commerce and Industry, Business Associations, PO’s.
Initiator: PO in each region.
Timing: Inception period.
Coverage: Each region separately.

1.1.b: Agreements on the modalities of support to planning at regional, municipal and
district authorities.
Partners: Departments for SME development of regional, municipal and district level,
PO’s. Initiator: PO in each region.
Timing: Inception period.
Coverage: Each region separately.

1.1.a and b: Contract with consultant.
Partners: NAB and consultant.
Initiator: NAB.
Timing: Inception period.
Coverage: Both regions at the same time.

1.2: Contract with facilitator for BDS market development.
Partners: NAB and facilitator.
Initiator: NAB.
Timing: Inception period or start of implementation period.
Coverage: Both regions at the same time.

1.3: Agreements with financial institutions on opening a “Danish window” for micro-
finance. Partners: PO’s and financial institutions.
Initiator: PO in each region based on consultant’s recommendations.
Coverage: Each region separately, depending on the organisational structure of
financial institutions.

1.3: Contract with monitor of financial services.
Partners: NAB and consultant.
Initiator: NAB.
Timing: Start of implementation period.
Coverage: Both regions at the same time.

2.1.a: Agreement with Labour Department of the Regional Administration in each
region regarding action plan for strengthening the tripartite system.
Partners: PO in each region and Labour Department in each Regional Administration.
Initiator: PO in each region.
Timing: Inception period.
Coverage: Each region separately.

2.1.b: Agreement with Labour Unions in both regions.
Partners: PO in each region, and labour union(s) in each region.
Initiator: PO in each region.
Timing: Inception period.
Coverage: Each region separately.


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2.1.c: Agreement with Employers’ organisations in both regions.
Partners: PO in each region, and employers’ organisations in each region.
Initiator: PO in each region.
Timing: Inception period.
Coverage: Each region separately.

2.1.a: Contract with consultant for support to Labour Department of the Regional
Administration in each region regarding strengthening the tripartite system in the two
regions.
Partners: NAB and consulting company(ies)/NGO(s).
Initiator: NAB. Timing: Inception period.
Coverage: Both regions at the same time.

2.1.b and 2.1.c: Contract with consultant/cooperation partner(s) for support to labour
unions and employers organisations in the two regions.
Partners: NAB and consulting company(ies)/NGO(s).
Initiator: NAB. Timing: Inception period.
Coverage: Both regions at the same time.

2.2: Agreements on restructuring of the VET systems in the two regions.
Partners: PO in each region and Department of Education in each Regional
Administration.
Initiator: PO in each region.
Timing: Inception period.
Coverage: Each region separately.

2.2: Contract with consultant on services for restructuring the VET systems.
Partners: NAB and consulting company.
Initiator: NAB.
Timing: Inception period.
Coverage: Both regions at the same time.




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Annex 5: TOR for Detailed Design of Sub-Component 1.1
File number: 403.Rusland.1
November2005

                   The Danish Neighbourhood Programme

                                  Terms of Reference

                                          for

                Detailed Design of Subcomponent 1.1 of EDSP:

      Preparation of action plan and TOR for implementation of
        support to public authorities and business associations
                in the Kaliningrad and Pskov regions

1. Background

1.1 Economic Development Support Programme (EDSP)

The Department of the Neighbourhood Programme of the Danish Ministry of Foreign
Affairs is in the process of developing an Economic Development Support
Programme (EDSP) in the Kaliningrad and the Pskov regions together with its
Russian partners in the regions.

The overall objective of the programme is that the living conditions of the populations
in the Kaliningrad and Pskov regions are improved as a result of business
development and job creation. This is to be achieved through increased
competitiveness and market access of the SMEs, development of the labour market
systems, and enhanced technical skills of the labour force. This is also expected to
promote the further stabilisation and integration of the regions into the Baltic Sea
region.

The Kaliningrad and Pskov regions are two of the closest regions of the Russian
Federation to the Baltic Sea and Denmark. Denmark has had extensive cooperation
with both these regions along with the Leningrad region since the early 1990s. As the
regions are geographically separated the programme will have two distinct parts, but
there is scope for sharing of experience and joint participation in programme activities
in the two regions.

The EDSP builds upon interventions that are mutually enforcing and together
contribute to meeting the economic and social programme objectives. It is made up of
two closely interlinked components:




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   Component 1: SME Development
    The immediate objective of this component is that SMEs in the economic
    programme sectors (see below) will increase their competitiveness and access to
    local, Russian and export markets;

   Component 2: Labour Market and Skills Development
    The immediate objective of this component is that a labour market system is
    developed that responds effectively and timely to the demand for skilled labour of
    the business sectors, especially SMEs, in the economic programme sectors in the
    two regions.

The two components are made up of three and two subcomponents respectively.
Further, the programme will focus on two economic sectors (industries) in each
region, see section 4.

By targeting a limited number of sectors, the combined interventions in each of the
sectors covered will be of such magnitude that a critical mass of support can be
obtained by taking full advantage of the intended synergies between the programme
subcomponents. The programme elements and approach is illustrated in the figure
below.


    Regional economies
                          COMPONENT 1                        COMPONENT 2

                          1.1 SME policy
                          dialogue and advocacy              2.1 Strengthening the
                          capacity of business               tripartite labour market
     Two economic         associations                       system
     sectors in each
     region               1.2 Facilitation of
                          business development               2.2 Restructuring the
                          services (BDS) market              vocational education
                          development                        and training (VET)
                                                             system
                          1.3 Provision of
                          financial services




The programme is to create a framework and process for industrial development. The
programme will not only facilitate the development of a shared vision on how to
develop the selected sectors, but will also create a process to ensure that actions are
taken to build an enabling business environment.

Moreover, the EDSP shall focus on creating awareness among selected sectors to the
effect that better labour and environmental standards can improve the competitiveness
of targeted enterprises. First, access to EU markets requires compliance with basic
labour and environmental standards. These requirements are placed in a handful of
formal trade agreements and more frequently, through the contractual requirements of
buyers. Second, increasing evidence demonstrates a positive link between good labour


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management and increased productivity, suggesting that the competitiveness of
individual companies and even industries may improve as a result of better labour and
environmental workplace practices. The ILO Factory Improvement Programme has
demonstrated such positive links.

The EDSP is to achieve this through relevant business associations to disseminate the
latest thinking on the development of the selected sectors and on building competitive
advantages at the enterprise and sector levels. This process is expected to bring about
analytical results on the sectors, which will lead to a constructive and realistic debate
on competitiveness and provide the selected sectors with adequate inputs for taking
strategic action.

These TOR address the above Component 1.1: SME policy dialogue and advocacy
capacity of business associations.


1.2 SME Development

Development of Micro, Small and Medium Enterprises (SMEs)

SMEs are generally considered to be one of the principal driving forces in economic
development in Russia given their contributions as follows:

   SMEs stimulate private ownership and entrepreneurial skills;
   The SME sector forms the backbone of the market economy;
   SMEs are flexible and can adapt quickly to changing market demand and supply
    situations. A competitive SME sector is therefore a precondition for sustainable
    development;
   SMEs generate employment. Through job creation, SMEs can successfully
    contribute to alleviation of poverty and activation of the unemployed population;
   SMEs help diversify economic activity and make a significant contribution to
    exports and trade;
   SMEs contribute significantly to the regional and local development;
   By taking part in cross-border co-operations, SMEs contribute to the development
    of the border areas and facilitate to understand cross-cultural differences in the
    neighbouring countries.

Barriers to SME Development

However, the development of the SME sectors in the two regions is hampered by a
number of factors. They include insufficient policy dialogue between regional
authorities and the private sector on business development, administrative barriers,
insufficient SME development infrastructure including inadequate supply of business
development services (BDS), and difficulties in obtaining financing of business
activities on affordable conditions.

Further, weak tripartite systems that are not properly institutionalised, labour markets
that suffer from lack of transparency, a vocational education and training (VET)
sector that is not sufficiently responsive to local needs, and limited focus on issues
related to social Corporate Responsibility (CSR).


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1.3 Rationale and Contents of Subcomponent 1.1:
  SME Policy Dialogue and Advocacy Capacity of Business Associations

According to the EDSP programme document the rationale and contents of
Subcomponent 1.1: SME Policy Dialogue and Advocacy Capacity of Business
Associations are envisaged to be as follows:

Rationale

SME development is recognised in the regions as a means that will greatly contribute
to achieving a stable economic, social and political development. In order to attain
this    the   regional    authorities    should     develop   a     strategy     for:

   Removing obstacles to enterprise creation in the regions – both at regional,
    municipal and local levels;
   Establishing a facilitating environment for private business development;
   Contributing to the development of appropriate market institutions;
   Promoting code of conduct and compliance with basic social and environmental
    standards.

This should to the largest possible extent be done in dialogue and partnerships
between the regional authorities and the private sector associations and entrepreneurs.
Key to success in this area is the establishment of mechanisms for effective dialogue
between the partners. The strength of the business associations and the quality of their
staff are prerequisites for effective public/private dialogue and partnership initiatives.

While the regional authorities have taken steps to involve the private sector
organisations in dialogue in the past, the business associations and other organisations
representing the business community find that their influence has been inadequate and
that the resulting policies, strategies, legislation, support programmes etc. do not
sufficiently reflect the problems experienced by the businesses. This is to be
addressed through this subcomponent.

Objective

The immediate objective of Subcomponent 1.1 is that dialogue and cooperation is
enhanced between the public authorities and the private business sector with a view
to:

   Developing effective and consistent policies, strategies and programmes as well as
    support functions in selected municipalities to contribute to the development of
    SMEs in the regions;
   Minimise administrative barriers, particularly at municipal levels; and
   Improving the code of conduct in enterprise operations in the targeted sectors.




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This is to be achieved through:
  The establishment of mechanisms for policy dialogue, cooperation and partnership
   between the public authorities, , including regional and municipal authorities, and
   the business sector represented by the two economic programme sectors in each
   region – with a focus on the SMEs;

   Enhanced capacity of private business associations in the economic programme
    sectors to engage in advocacy work, promote code of conduct and compliance
    with basic environmental and social standards, and service their members as
    needed.

Strategy

The approach is to involve relevant stakeholders in the SME environment to help
create an effective dialogue on policy, strategy and programme issues, as well as
administration of laws, rules and regulations, in order to improve the enabling
environment for business development. In order to bridge the gap between public
authorities and private business firms the approach is to:

   Map the present institutional framework for policy dialogue and cooperation
    between the public authorities and the private business sectors;

   Create mechanisms in the regions for effective ‘bottom up’ articulation of the
    needs of SMEs;

   Develop the capacity of the public authorities in the regions to undertake policy
    formulation and planning in dialogue with the private sector;

   Identify the main administrative barriers at regional, but not least municipal/local
    levels, focusing on those experienced by the economic programme sectors, with a
    view to designing measures to reduce them;

   Identify the need for and measures for supporting selected municipalities with
    higher growth potentials in utilising these potentials, e.g. through broad-based
    development of municipal economic development plans and institutional support
    functions in the municipal administrations;

   Develop the capacities of business associations to do advocacy and support their
    members in business development;

   Develop the capacity of public authorities to engage in public-private partnerships
    on CSR issues;

   Actually engaging the business sector associations in a dialogue with the
    authorities involved in SME policy, strategy and planning work;

   Support CSR activities aiming at contributing to a positive internal and external
    business climate and address some of the important cross-cutting issues (gender,
    environment, HIV/AIDS, human rights).



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Typical SME policy and advocacy issues to be addressed through these mechanisms
could be:

   Recognition of the importance of the SME sector and development of an
    appropriate business development framework;
   Registration, licensing and permitting;
   Tax assessment methods related to firm sizes, turnover, ownership etc.;
   Access to land and associated fees (land entitlement, etc.);
   Corruption and harassment around regulations, taxes, access to land, etc.;
   Development of, access to and price of infrastructure (roads, water, electricity,
    telecommunications, etc.);
   Labour regulations on unemployment, wage guidelines, and apprenticeship
    systems;
   Vocational training and availability of labour;
   Bidding processes for public procurement contracts;
   Import and export regulations and processes;
   Availability of finance;
   Ensuring equal subsidies for both large and small enterprises;
   Code of conduct for the selected sectors
   Improving occupational health and safety (OHS), including measures against
    HIV/AIDS;
   Compliance with environmental standards in production (e.g. EMAS, ISO 14001)
    or social (SA 8000);
   Protecting the rights of women and minorities to do business.

Summary of Outputs

The expected outputs of the subcomponent are:

Capacity building of government institutions and mechanisms for dialogue and
cooperation

   A review of the structure and operation of the existing institutional arrangements
    for SME development in the regions;

   Mechanisms and assignment of clear institutional responsibilities for development
    and implementation of SME support policies, strategies and programmes among
    the public authorities and the private business sector;

   Enhanced capacity of the public authorities in the regions to undertake policy
    formulation and planning in dialogue with the private sector;

   Enhanced cooperation, working relationships and partnerships between the public
    authorities and representatives of the entrepreneurs, primarily business
    associations.

   Description of the main administrative barriers at regional, but primarily
    municipal/local levels, pertaining to the economic programme sectors and design
    of measures to reduce them;


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   Improved enabling environment for business development at municipal levels, e.g.
    through development of municipal economic development plans and public
    support functions in the municipalities.

Capacity building of business associations

New and existing associations can be supported in different ways. They may be given
public law status or remain entirely voluntary NGO-type bodies. The latter is
recommended. The outputs or results of the support to business associations of
relevance to the economic programme sectors may include:

   A clear mission statement for an association’s role and strategy that describes
    what the association will take on;

   Identification and illustration of the value to the members of the association’s
    relationships with customers, suppliers, accountants, bankers, public (including
    regulatory) authorities, the labour force and trade unions – but also the general
    public;

   The membership base is developed;

   Enhanced capacity to undertake advocacy and participate in policy dialogue with
    the public authorities, e.g. through preparation of sector-specific policy and
    position papers.

   Enhanced capacity to initiate work place assessments and environmental audits
    that could lead to improvement of working conditions and external environment;

   Code of conduct formulated and promoted within the targeted sectors;

   Increased compliance with environmental (e.g. EMAS, ISO 14001) or social (SA
    8000) standards in production within targeted sectors.


2. Objectives

The objective of the consultancy is to prepare a detailed action plan for support to the
public authorities and business associations in the Kaliningrad and Pskov regions as
well as TOR for implementation of the action plan.


3. Outputs

The outputs of the assignment are:

   A detailed action plan for support to the local authorities and business associations
    in the Kaliningrad and Pskov regions;
   TOR for implementation of the action plan (to be used for tendering);
   Concurrence of relevant stakeholders on the contents of action plan.


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4. Scope of Work

The work to be undertaken under this assignment complements the above objectives
and outputs (Section 1.3) of a logical framework for subcomponent 1.1 by
formulating activities and inputs, as well as related indicators, means of verification,
assumptions and risks.

The programme will cover the following economic sectors (industries) in the
programme regions:

Kaliningrad
  furniture industry;
  food processing industry.

Pskov
  food processing industry;
  tourism.

It should be noted that if it turns out during programme implementation that the
programme may cover more than the above sectors in the regions, assistance could be
extended to additional economic sectors. No such sectors are to be covered by the
assignment described in these TOR.

Henceforth, business associations refer to the following: the regional chambers of
commerce and industry and the sector-specific business associations in the above
programme sectors.


4.1 Capacity Building of Government Institutions and Mechanisms for Dialogue
  and Cooperation (Subcomponent 1.1.a)

The framework for business development includes the development of business/SME-
related policies, strategies and plans as well as legislation and regulations to support
and govern their implementation.

Description and Analysis of Present Situation

   Establish the present framework for business/SME development in the regions
    including business development policies, strategies and plans as well as related
    legislation and regulations;

   Review and describe the responsibilities and operation of existing government
    institutions involved in developing the framework for business/SME development
    in the regions, including organisations, institutions and departments of the regional
    government, large municipalities and local government;

   Establish who are the main similar bodies at the federal level and how the regional
    bodies link up and cooperate with these;


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   Review and describe the operation and responsibilities of existing business
    associations in SME development in the regions, including the regional chambers
    of commerce and industry, business associations in the programme sectors and
    possibly others;

   Establish how business-related policies, strategies and plans are developed by the
    regional, municipal and local governments and the involvement of the business
    community and possibly the Duma;

   Determine shortcomings and inexpediencies encountered in developing policies,
    strategies and plans in the past with a view to establish how the process could be
    improved in the opinion of the government and business-related stakeholders;

   Identify the need for improving the capacity of the organisations and their staff to
    develop policies, strategies and plans as well as to draft legislation and
    regulations;

   Identify the need for improving the capacity of the organisations and their staff to
    enter into public private dialogue and partnerships in the field of developing SME-
    related policies, strategies, plans and legislation;

   Identify the main administrative barriers at regional, but not least municipal/local
    levels, focusing on those experienced by the economic programme sectors;

   Review and describe the present status of internal and external environment,
    including occupational health and safety within the economic programme sectors
    with a view to establish how CSR activities could improve the situation;

   Identify the need for improving the capacity of public authorities to promote
    improvements of internal and external environment of production.

Development of Action Plan, Indicator System and TOR for Plan
Implementation

   Develop an action plan with activities aimed at (i) improving the process of
    developing business-related policies, strategies and plans and associated
    legislation and regulations and (ii) reducing administrative barriers, and (iii)
    designing measures for supporting selected growth municipalities in realising their
    growth potentials. This would include activities aimed at:

     Creating a clear institutional responsibility among government bodies involved
      in business and SME development;

     Establishing a mechanism for development and implementation of SME
      support policies, strategies and programmes in a dialogue between public
      authorities and the private business sector represented by business associations
      – and possibly leading business companies;




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     Assuring that the initiatives are in consonance with federal business/SME
      development programmes and take full advantage of possible support from
      federal level;

     Building capacity in regional, municipal and local authorities with regard to
      development of small business policy, including capacity to assess the needs of
      SMEs;

     Building capacity of public and private stakeholders to formulate and promote
      code of conduct and compliance with basic environmental and social standards;

     Building capacity in regional, municipal and local authorities with regard to
      engage in dialogue on SME development with the private business sector;

     Reducing administrative barriers at regional, but not least municipal/local
      levels focusing on those barriers experienced by the programme sectors;

     Designing measures to support selected growth municipalities, e.g. through
      broad-based development of municipal economic development plans and
      institutional support functions in the municipal administrations.

   Identify activities that will lead to tangible results in the short term (first year) –
    possibly in the form of pilot projects – in order to demonstrate the utility of the
    programme subcomponent, including CSR-related activities, to the stakeholders;

   Exploit the synergy potential between the Kaliningrad and Pskov regions in the
    implementation of subcomponents 1.1.a;

   Develop quantifiable indicators and means of verification for measuring the
    achievement of subcomponent 1.1.a objectives, delivery of outputs and
    undertaking of activities.

   Establish assumptions and risks related to implementation of the subcomponent;

   Establish baseline against which to monitor the performance of the subcomponent
    1.1.a based on the above-mentioned indicators;

   Establish baseline against which to monitor the performance of CSR-related
    activities;

   Describe the tasks and responsibilities of each of the stakeholders involved in the
    subcomponent and obtain their consent;

   Develop TOR for implementation of the action plan that can be used as the basis
    for a tendering process.

4.2 Capacity Building of Business Associations (Subcomponent 1.1.b)

Description and Analysis of Present Situation



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   Establish to what extent there are formal business associations or the like in the
    programme sectors, including for each of them:

       Mission statement / objectives of the associations;
       Membership base and membership fee structure;
       Organisational structure and staffing;
       Funding of the association’s activities;
       The extent to which they play a leading role in representing the sector.

   Establish the capacity of the associations with respect to:

     Advocacy and other lobbying activities (position papers submitted to
      government, committee work, surveys, media stories, advertising, etc.);
     Services provided to members;
     Participating in public/private dialogue and partnerships.

   Identify the need for improving the capacity of business associations to promote
    CSR.


Development of        Action    Plan,   Indicator    System and       TOR     for   Plan
Implementation

   Develop an action plan with activities aimed at improving the capacity of the
    business associations in the field of policy dialogue with the public authorities
    regarding business/SME development (including business-related policies,
    strategies and plans and associated legislation and regulations. This would include
    activities aimed at:

     Developing the business associations’ advocacy capacity and capacity to enter
      into dialogue with government authorities through:

     Assisting the associations in formulating mission statements / objectives if not
      already in existence;

     Assisting the associations in assessing the needs of their members;

     Assisting the associations in developing their membership base;

     Assisting the associations in promoting code of conduct and compliance with
      basic environmental and social standards;
      training the associations in:
          Preparing position papers for submission to government,
          Participating in and provide inputs to committee work,
          Preparing sector-related surveys,
          Producing media stories,
          CSR related issues undertaking advertising, etc.




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     Assist the associations in developing strategies and plans for future provision
      of business development services (BDS) possibly with assistance from
      subcomponent 1.2 of the EDSP;
     Assist the association in developing strategies and plans for promotion of code
      of conduct and compliance with basic environmental and social standards.

   Identify activities that will lead to tangible results in the short term (first year) –
    possibly in the form of pilot projects – in order to demonstrate the utility of the
    programme subcomponent, including CSR-related activities to the stakeholders;

   Exploit the synergy potential between the Kaliningrad and Pskov regions in the
    implementation of subcomponents 1.1.b;

   Develop quantifiable indicators and means of verification for measuring the
    achievement of subcomponent 1.1.b objectives, delivery of outputs and
    undertaking of activities.

   Establish assumptions and risks related to implementation of the subcomponent;

   Establish baseline against which to monitor the performance of the subcomponent
    1.1.b based on the above-mentioned indicators;

   Describe the tasks and responsibilities of each of the stakeholders involved in the
    subcomponent and obtain their consent;

   Develop TOR for implementation of the action plan that can be used as the basis
    for a tendering process.

Budget (Inputs)

The budget framework for sub-component 1.1 is:

   Capacity building of government institutions and mechanisms for dialogue and
    cooperation (DKK 5.5 million);
   Capacity building of business associations (DKK 3.5 million);
   Incidentals (DKK 1 million).

The Consultant shall:

   Develop a budget for the subcomponents 1.1.a and 1.1.b at activity level within
    the above budget framework;

   Identify possible budget contributions from government authorities and business
    associations in kind and in monetary terms.




5. Organisation of the Work


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A team of international consultants (referred to as the Consultant) will undertake the
assignment. The Consultant is encouraged and expected to hire local consultants in
the Kaliningrad and Pskov regions to assist them in getting access to relevant
stakeholders and informants, undertaking the analytical work, interpreting results and
discussing recommendations.

During the assignment, the Consultant will liaise with and report regularly to the
consultancy firm Nordic Consulting Group (NCG), which has been contracted by the
Neighbourhood Programme of the Ministry of Foreign Affairs to clarify issues in the
TOR and comment on the Consultant’s work.

The Consultant will be provided with relevant written materials, see Section 8.

Prior to field missions the Consultant will meet with staff of the Neighbourhood
Programme and NCG to discuss the objectives of the assignment and issues of
clarification. Furthermore, the Consultant shall visit Denmark before finalisation of
the document outputs to agree on the final contents with the Neighbourhood
Programme and NCG.

6. Composition of Consultant Team

International Team Members

   Specialist in development of business development framework by government
    organisations, development of capacity to undertake policy, strategy and plan
    formulation, and development of policy dialogue;

   Specialist in SME development, development of business associations, and
    development of capacity to undertake advocacy.

National Team Members

   Specialist on business analysis and development in the Kaliningrad region;
   Specialist on business analysis and development in the Pskov region.


7. Timing and Reporting

The EDSP will start in December 2005 with a mobilisation phase of three months
followed by an inception period of three months. The first year of programme
implementation will start in May – June 2006.

The assignment will be undertaken during the period December 2005 – March 2006.
Field visits are to take place in January – February 2006.

A Final Draft of the TOR for implementation of the action plan shall be submitted not
later 1 March 2006 and the Final TOR for implementation of the action plan shall be
submitted not later 31 March 2006.



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A Final Draft of the Detailed action plan shall be submitted not later 15 March 2006
and the Final Detailed action plan shall be submitted not later than 31 March 2006.

The draft final documents shall be submitted for comments to NCG, NAB as well as
responsible Russian authorities, organisation and private sector stakeholders involved
in the subcomponent. The final documents shall take into account the comments
received. The documents should be made in both the English and the Russian
languages.

The recipients of the results of the assignment are:

   The Neighbourhood Programme Department, Danish Ministry of Foreign Affairs
    (MFA);

   The two Programme Offices in the Kaliningrad and Pskov regions;

   The Russian partners and stakeholders among the public authorities and in the
    private business community.


8. Background Documents

The consultants should make use the following background documents.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Economic
    Development Support Programme, Russia. Final programme document.
    September 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study of
    Economic Sectors in Kaliningrad and Pskov Oblast's. Final report. September
    2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study on
    Economic, Labour Market and Training Issues in Kaliningrad and Pskov Oblasts,
    Russia. July 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Concept
    Paper for Seminars in Kaliningrad and Pskov regions. March 2005.




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Annex 6: TOR for Detailed Design of Sub-Component 1.2
File number: 403.Rusland.1
November 2005

                   The Danish Neighbourhood Programme

                                  Terms of Reference

                                          for

                Detailed Design of Subcomponent 1.2 of EDSP:

 Preparation of action plan and TOR for implementation of support
   to business development services in the Kaliningrad and Pskov
                              regions


1. Background

1.1 Economic Development Support Programme (EDSP)

The Department of the Neighbourhood Programme of the Danish Ministry of Foreign
Affairs is in the process of developing an Economic Development Support
Programme (EDSP) in the Kaliningrad and the Pskov regions together with its
Russian partners in the regions.

The overall objective of the programme is that the living conditions of the populations
in the Kaliningrad and Pskov regions are improved as a result of business
development and job creation. This is to be achieved through increased
competitiveness and market access of the SMEs, development of the labour market
systems, and enhanced technical skills of the labour force. This is also expected to
promote the further stabilisation and integration of the regions into the Baltic Sea
region.

The Kaliningrad and Pskov regions are two of the closest regions of the Russian
Federation to the Baltic Sea and Denmark. Denmark has had extensive cooperation
with both these regions along with the Leningrad region since the early 1990s. As the
regions are geographically separated the programme will have two distinct parts, but
there is scope for sharing of experience and joint participation in programme activities
in the two regions.

The EDSP builds upon interventions that are mutually enforcing and together
contribute to meeting the economic and social programme objectives. It is made up of
two closely interlinked components:




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   Component 1: SME Development
    The immediate objective of this component is that SMEs in the economic
    programme sectors (see below) will increase their competitiveness and access to
    local, Russian and export markets;

   Component 2: Labour Market and Skills Development
    The immediate objective of this component is that a labour market system is
    developed that responds effectively and timely to the demand for skilled labour of
    the business sectors, especially SMEs, in the economic programme sectors in the
    two regions.

The two components are made up of three and two subcomponents respectively.
Further, the programme will focus on two economic sectors (industries) in each
region, see Section 4.

By targeting a limited number of sectors, the combined interventions in each of the
sectors covered will be of such magnitude that a critical mass of support can be
obtained by taking full advantage of the intended synergies between the programme
subcomponents. The programme elements and approach is illustrated in the figure
below.


    Regional economies
                          COMPONENT 1                          COMPONENT 2

                          1.1 SME policy
                          dialogue and advocacy                2.1 Strengthening the
                          capacity of business                 tripartite labour market
     Two economic         associations                         system
     sectors in each
     region               1.2 Facilitation of
                          business development                 2.2 Restructuring the
                          services (BDS) market                vocational education
                          development                          and training (VET)
                                                               system
                          1.3 Provision of
                          financial services




The programme is to create a framework and process for industrial development. The
programme will not only facilitate the development of a shared vision on how to
develop the selected sectors, but will also create a process to ensure that actions are
taken to build an enabling business environment.

The EDSP is to achieve this through relevant business associations to disseminate the
latest thinking on the development of the selected sectors and on building competitive
advantages at the enterprise and sector levels. This process is expected to bring about
analytical results on the sectors, which will lead to a constructive and realistic debate



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on competitiveness and provide the selected sectors with adequate inputs for taking
strategic action.

These TOR address the above Component 1.2: Facilitation of business development
services (BDS) market development.


1.2 SME Development

Development of Micro, Small and Medium Enterprises (SMEs)

SMEs are generally considered to be one of the principal driving forces in economic
development in Russia given their contributions as follows:

   SMEs stimulate private ownership and entrepreneurial skills;
   The SME sector forms the backbone of the market economy;
   SMEs are flexible and can adapt quickly to changing market demand and supply
    situations. A competitive SME sector is therefore a precondition for sustainable
    development;
   SMEs generate employment. Through job creation, SMEs can successfully
    contribute to alleviation of poverty and activation of the unemployed population;
   SMEs help diversify economic activity and make a significant contribution to
    exports and trade;
   SMEs contribute significantly to the regional and local development;
   By taking part in cross-border co-operations, SMEs contribute to the development
    of the border areas and facilitate to understand cross-cultural differences in the
    neighbouring countries.

Barriers to SME Development

However, the development of the SME sectors in the two regions is hampered by a
number of factors. They include insufficient policy dialogue between regional
authorities and the private sector on business development, administrative barriers,
insufficient SME development infrastructure including inadequate supply of business
development services (BDS), and difficulties in obtaining financing of business
activities on affordable conditions.

Further, weak tripartite systems that are not properly institutionalised, labour markets
that suffer from lack of transparency, a vocational education and training (VET)
sector that is not sufficiently responsive to local needs, and limited focus on issues
related to social Corporate Responsibility (CSR).


1.3 Rationale and Contents of Subcomponent 1.2:
  Facilitation of BDS Market Development

Background

‘Business Development Services‘ (BDS) refer to a wide range of services used by
entrepreneurs to assist them in establishing, developing and making the operations of


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their businesses effective. The services are intended to contribute to improvement of
the qualification of managers at all levels as well as employees of SMEs, existing
ones as well as start-ups, in order to improve their competitiveness and their business
effectiveness.

The area of BDS may be defined very broadly to include services related to market
access, infrastructure, policy/advocacy, input supply training and technical assistance,
technology and product development - and even alternative financing mechanisms (as
opposed to microfinance).

Another distinction can be made between transactional and embedded BDSs.
Transactional BDSs are those services that are provided by BDS suppliers and bought
by the SMEs. Embedded BDSs are services that are provided ‘embedded’ in business
cooperation for instance. Examples are companies that buy products from SMEs
based on the companies supplying raw materials, product specifications and
assistance for the application of the production inputs supplied. It is noted that in the
EDSP, the BDS areas of policy/advocacy and technical training are dealt with in other
subcomponents of the programme.

Objectives

The immediate objective of Subcomponent 1.2 is that a market for BDSs is developed
in the economic programme sectors in the two regions by developing the supply range
and coverage of quality services and promoting SMEs’ demand for such services.

Strategy

Facilitation of market development rather than providing services. The approach
recommended for providing BDSs is one based on BDS market development where
the Danish Neighbourhood Programme provides funds for the development or
expansion of the BDS markets in the two regions. This could be done among others
by:

   Undertaking market surveys to identify promising service products, making such
    market information available to BDS suppliers, assist the suppliers in developing
    and commercialising (new) services including market testing, and assist them in
    evaluating their services;

   Sponsoring awareness campaign about how BDSs can help businesses solve
    typical problems, assist in developing payment models for SMEs that do not have
    the capacity to pay for services up front, and devise models for how groups of
    customers, e.g. from the same economic sector or cluster, can buy group services.




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Approach to Facilitating BDS Market Development (Supply and Demand) in
Kaliningrad and Pskov


                                                                         SME
            Danish
            Neighbour-                           BDS                     SME
            hood                                 provider
            Programme

                                                                         SME



                                                                         SME
            BDS
            facilitator                          BDS
                                                 provider                SME


                                                                         SME


            Strategic
            partner                                                      SME

                                                 BDS
                                                 provider                SME


                                                                         SME
                          Facilitation of BDS demand and supply

                          Direct provision of services


Source: Donor Agencies for Small Enterprise Development (2001): Business Development Services for
Small Enterprises: Guiding Principles for Donor Intervention (adapted).

This approach, which is illustrated in the figure above, has the potential of reaching a
large number of SMEs in a cost-effective way. It is different from providing services
through BDS suppliers directly as has been the case in some projects in the regions in
the past.

The approach aims at developing a broad market consisting of BDS providers selling
services to SMEs on market terms, hence the term ‘transactional services’. The
approach rests on the assumption that well-organised, professional market-based BDS
providers form the best option for securing a sustainable provision of the specific
BDS services demanded by the SMEs. The approach would further be to first identify
and focus on services that are in high demand, which are the most feasible to deliver
and that maximise the contribution to the financial performance of the SMEs. This
will contribute to building credibility, which in turn will give BDS providers a basis
for launching more services.

The actors in the two regions, including the facilitators, possible strategic partners,
BDS providers and SMEs, are described in more detail below.




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Selection of BDS facilitator and providers. The facilitator is an international or local
firm or institution hired by the Neighbourhood Programme to assist in the above
market development. The programme will assist at least three service providers in
each region in developing capacity to provide specific BDSs to the two economic
sectors targeted by the EDSP in each of the two programme regions. The service
providers will evidently also cater to other sectors or industries of the economy. The
number of minimum three service providers should provide for sector specialisation,
competition, risk spreading, economies of scale and quick diffusion.

The approach further rests on the recommendation that selection of the BDS
facilitator and BDS providers be done on the basis of tendering. Those firms or
institutions that best meet the criteria for selecting BDS providers would participate in
programme with their services specifically targeted at the economic programme
sectors. Four types of candidate BDS providers may be considered in this process:
private firms, NGOs, public-private-partnerships (PPPs) and regional institutions
(such as the centres in Kaliningrad).

Whatever technical level and types of BDS providers that already exist in the two
regions, it is therefore important to decide on the role that the public authorities in the
region should play in this process in relation to the private sector. These authorities
have an interest in creating an environment conducive to the development of the
support infrastructure for SMEs given the role that small firms play in regional
economic development. That is why the 12 centres are established in the Kaliningrad
region. Experience from other countries shows, however, that service providers with a
private sector business background and experience tend to be the best to provide
BDSs

This suggests that a key role for the regional authorities in the longer term may be
limited to a strategic one, possibly acting as a catalyst and co-ordinator, while
working closely with the private sector, NGOs and similar organisations to help build
capacity in the development of market based services. It should be stressed, however,
that the regional network of Centres for Support of Small Enterprises (CSSEs) and the
possible new service providers to be developed under the EDSP should indeed be able
to co-exist, at least for a number of years provided that their fee structures are
comparable in order not to distort the market.

Demand and supply surveys, gap analysis and design of BDSs. Assistance in this area
is to be based on a thorough analysis of the support needs of the SMEs in the
economic programme sectors and the possible range of BDS that are required to meet
them.

Summary of Outputs

The expected outputs of the subcomponent are:

   Survey of demand for types of BDSs in the programmes sectors in the Kaliningrad
    and Pskov regions – in term of types, volume, willingness-to-pay, affordability,
    awareness of potential BDSs, expected benefits from BDSs, etc.;




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   Survey of the types of BDS suppliers that exist in the two regions, the range and
    volume of services offered, the financial and technical sustainability of existing
    BDS programmes and other service providers, and their ability to develop
    additional services;

   Market development interventions designed for transactional BDSs services in
    the programme sectors in the two regions;

   Market development interventions designed for addressing embedded BDSs
    services in the programme sectors in the two regions;

   Minimum three qualified BDS providers are identified, contracted and capacitated
    in BDS delivery in each of the programme regions;

   Interventions to increase the demand for BDSs are developed and implemented;

   Cooperation between the BDS facilitators, strategic partners and regional
    authorities is operational and effective;

   Cooperation with the SMEs in the economic programme sectors in the two regions
    is established and effective.


2. Objectives

The objective of the consultancy is to prepare an action plan and TOR for
implementation of support to business development services (BDS) in the Kaliningrad
and Pskov regions.

3. Outputs

The outputs of the assignment are:

   A detailed action plan for support to BDS in the Kaliningrad and Pskov regions;
   TOR for implementation of the action plan (to be used for tendering);
   Concurrence of relevant stakeholders on the contents of action plan.


4. Scope of Work

The work to be undertaken under this assignment complements the above objectives
and outputs (Section 1.3) of a logical framework for subcomponent 1.2 by
formulating activities and inputs, as well as related indicators, means of verification,
assumptions and risks.

Economic Programme Sectors

The programme will cover the following economic sectors (industries) in the
programme regions:



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Kaliningrad
  furniture industry;
  food processing industry.

Pskov
  food processing industry;
  tourism.

It should be noted that if it turns out during programme implementation that the
programme may cover more than the above sectors in the regions, assistance could be
extended to additional economic sectors. No such sectors are to be covered by the
assignment described in these TOR.

Description and Analysis of Present Situation in the Economic Programme
    Sectors

Demand for BDS in the economic programme sectors

   Establish what kind of services that are being demanded by the SMEs at present;

   Establish what kind of services that are not in demand at present and why so;

   Establish what kind of benefits the SMEs are expecting to get from the services
    demanded;

   Determine how aware the SMEs are about the existence and benefits of BDSs.

Transactions

   Assess the market size for the different kinds of BDSs in the economic sectors –
    including latent demand;

   Assess how many of the SMEs (e.g. in percentage) acquire BDS through fee-for-
    service transactions, services embedded in other commercial transactions, services
    paid for by a commercial third party, and services for free;

   Establish how the services are delivered (what form, where) and how the SMEs
    want the services delivered;

   Determine what service feature the SMEs want and how satisfied they are with the
    services currently available;

   Determine what prices the SMEs pay for the services.

Supply

   Establish what types of BDS providers that exist and cater to the economic
    programme sectors;

   Determine what type of services they offer in terms of range, volume and quality


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    Assess strengths and weakness of existing suppliers;

    Determine if the SMEs use substitutes for BDSs for lack of such services on the
     market.

Gap analysis

    Based on the above – establish market opportunities for BDS providers that can be
     supported through the programme;

    Establish the capacity development needs of the BDS providers.

Development of Action Plan, Indicator System and TOR for Plan
Implementation

On the basis of the above the consultant should develop an action plan with activities
aimed at developing the market for BDSs with a special focus on the economic
programme sectors. The action plan should include activities aimed at:

    Assisting the BDS providers in:

      Designing and developing transactional BDSs particularly relevant to SMEs in
       the economic programme sectors in the regions52;

      Commercialising (new) services, including market testing;

      Developing payment models for SMEs that do not have the capacity to pay for
       services up front;

      Devise models for how groups of customers, e.g. from the same economic
       sector or cluster, can buy group services;

      Evaluating their services.

    Designing awareness campaign(s) about how BDS can help businesses solve
     typical problems;

    Developing the capacity through training of the BDS providers to deliver the
     services demanded by he SMEs in the economic programme sectors;

    Assisting the SMEs, possibly through their respective business associations, in
     identifying, designing and developing embedded BDSs particularly relevant to
     SMEs in the economic programme sectors in the regions;




52
  Should include BDS related to Corporate Social Responsibility such as occupational health and
safety as well as external environment.


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   Identify activities that will lead to tangible results in the short term (first year) –
    possibly in the form of pilot projects – in order to demonstrate the utility of the
    programme subcomponent to the stakeholders;

   Exploit the synergy potential between the Kaliningrad and Pskov regions in the
    implementation of the subcomponents;

   Develop quantifiable indicators and means of verification for measuring the
    achievement of the subcomponent’s objectives, delivery of outputs and
    undertaking of activities.

   Establish assumptions and risks related to implementation of the subcomponent;

   Establish a baseline against which to monitor the performance of the
    subcomponent based on the above-mentioned indicators;

   Describe the tasks and responsibilities of each of the stakeholders involved in the
    subcomponent and obtain their consent;

   Develop criteria for and procedures for identifying and selecting BDS providers to
    be covered by the programme through an application process (minimum three
    qualified BDS providers are expected to be identified, contracted and capacitated
    in BDS delivery in each of the programme regions);

   Design a monitoring system for the BDS Facilitator to monitor programme
    implementation and adjust activities accordingly if and when required;

   Determine if a strategic partner in each region to assist the facilitator in
    undertaking its assignment, e.g. by acting as sounding board in decision-making,
    is beneficial to the subcomponent, and if so identify the most suitable strategic
    partner (e.g. the Chamber of Commerce and Industry);

   Describe the tasks and responsibilities of each of the stakeholders involved in the
    subcomponent and obtain their consent;

   Develop TOR for implementation of the action plan that can be used as the basis
    for a tendering process.

Budget (Inputs)

The budget framework for the sub-component is DKK 7.0 million to finance capacity
building services and support to BDS market development by the facilitator plus
DKK 1.0 million for incidental activities.

The Consultant shall:

   Develop a budget for the subcomponent within the above budget framework;

   Identify possible budget contributions from the financial institutions participating
    in the subcomponent – in kind and in monetary terms.


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5. Organisation of the Work

A team of international consultants (referred to as the Consultant) will undertake the
assignment. The Consultant is encouraged and expected to hire local consultants in
the Kaliningrad and Pskov regions to assist them in getting access to relevant
stakeholders and informants, undertaking the analytical work, interpreting results and
discussing recommendations.

During the assignment, the Consultant will liaise with and report regularly to the
consultancy firm Nordic Consulting Group (NCG), which has been contracted by the
Neighbourhood Programme of the Ministry of Foreign Affairs to clarify issues in the
TOR and comment on the Consultant’s work.

The Consultant will be provided with relevant written materials, see Section 8.

Prior to field missions the Consultant will meet with staff of the Neighbourhood
Programme and NCG to discuss the objectives of the assignment and issues of
clarification. Furthermore, the Consultant shall visit Denmark before finalisation of
the document outputs to agree on the final contents with the Neighbourhood
Programme and NCG.


6. Composition of Consultant Team

International Team Members

   Specialist in development of business development services;

   Specialist in analysis and development of SMEs in transition economies,

National Team Members

   Specialist on business analysis and development in the Kaliningrad region;
   Specialist on business analysis and development in the Pskov region.


7. Timing and Reporting

The EDSP will start in December 2005 with a mobilisation phase of three months
followed by an inception period of three months. The first year of programme
implementation will start in May – June 2006.

The assignment will be undertaken during the period December 2005 – March 2006.
Field visits are to take place in January – February 2006.

A Final Draft of the TOR for implementation of the action plan shall be submitted not
later 1 March 2006 and the Final TOR for implementation of the action plan shall be
submitted not later 31 March 2006.



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A Final Draft of the Detailed action plan shall be submitted not later 15 March 2006
and the Final Detailed action plan shall be submitted not later than 31 March 2006.

The draft final documents shall be submitted for comments to NCG, NAB as well as
responsible Russian authorities, organisation and private sector stakeholders involved
in the subcomponent. The final documents shall take into account the comments
received. The documents should be made in both the English and the Russian
languages.

The recipients of the results of the assignment are:

   The Neighbourhood Programme Department, Danish Ministry of Foreign Affairs
    (MFA);

   The two Programme Offices in the Kaliningrad and Pskov regions;

   The Russian partners and stakeholders among the public authorities and in the
    private business community.


8. Background Documents

The consultants should make use the following background documents.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Economic
    Development Support Programme, Russia. Final programme document.
    September 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study of
    Economic Sectors in Kaliningrad and Pskov Oblast's. Final report. September
    2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study on
    Economic, Labour Market and Training Issues in Kaliningrad and Pskov Oblasts,
    Russia. July 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Concept
    Paper for Seminars in Kaliningrad and Pskov regions. March 2005.




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Annex 7: TOR for Detailed Design of Sub-Component 1.3
File number: 403.Rusland.1
November 2005

                   The Danish Neighbourhood Programme

                                  Terms of Reference

                                          for

                Detailed Design of Subcomponent 1.3 of EDSP:

 Preparation of action plan and TOR for implementation of support
     to financial services in the Kaliningrad and Pskov regions



1. Background

1.1 Economic Development Support Programme (EDSP)

The Department of the Neighbourhood Programme of the Danish Ministry of Foreign
Affairs is in the process of developing an Economic Development Support
Programme (EDSP) in the Kaliningrad and the Pskov regions together with its
Russian partners in the regions.

The overall objective of the programme is that the living conditions of the populations
in the Kaliningrad and Pskov regions are improved as a result of business
development and job creation. This is to be achieved through increased
competitiveness and market access of the SMEs, development of the labour market
systems, and enhanced technical skills of the labour force. This is also expected to
promote the further stabilisation and integration of the regions into the Baltic Sea
region.

The Kaliningrad and Pskov regions are two of the closest regions of the Russian
Federation to the Baltic Sea and Denmark. Denmark has had extensive cooperation
with both these regions along with the Leningrad region since the early 1990s. As the
regions are geographically separated the programme will have two distinct parts, but
there is scope for sharing of experience and joint participation in programme activities
in the two regions.

The EDSP builds upon interventions that are mutually enforcing and together
contribute to meeting the economic and social programme objectives. It is made up of
two closely interlinked components:




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   Component 1: SME Development
    The immediate objective of this component is that SMEs in the economic
    programme sectors (see below) will increase their competitiveness and access to
    local, Russian and export markets;

   Component 2: Labour Market and Skills Development
    The immediate objective of this component is that a labour market system is
    developed that responds effectively and timely to the demand for skilled labour of
    the business sectors, especially SMEs, in the economic programme sectors in the
    two regions.

The two components are made up of three and two subcomponents respectively.
Further, the programme will focus on two economic sectors (industries) in each
region, see section 4.

By targeting a limited number of sectors, the combined interventions in each of the
sectors covered will be of such magnitude that a critical mass of support can be
obtained by taking full advantage of the intended synergies between the programme
subcomponents. The programme elements and approach is illustrated in the figure
below.


    Regional economies
                          COMPONENT 1                          COMPONENT 2

                          1.1 SME policy
                          dialogue and advocacy                2.1 Strengthening the
                          capacity of business                 tripartite labour market
     Two economic         associations                         system
     sectors in each
     region               1.2 Facilitation of
                          business development                 2.2 Restructuring the
                          services (BDS) market                vocational education
                          development                          and training (VET)
                                                               system
                          1.3 Provision of
                          financial services




The programme is to create a framework and process for industrial development. The
programme will not only facilitate the development of a shared vision on how to
develop the selected sectors, but will also create a process to ensure that actions are
taken to build an enabling business environment.

The EDSP is to achieve this through relevant business associations to disseminate the
latest thinking on the development of the selected sectors and on building competitive
advantages at the enterprise and sector levels. This process is expected to bring about
analytical results on the sectors, which will lead to a constructive and realistic debate
on competitiveness and provide the selected sectors with adequate inputs for taking
strategic action.


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These TOR address the above Component 1.3: Provision of financial services.

1.2 SME Development

Development of Micro, Small and Medium Enterprises (SMEs)

SMEs are generally considered to be one of the principal driving forces in economic
development in Russia given their contributions as follows:

     SMEs stimulate private ownership and entrepreneurial skills;
     The SME sector forms the backbone of the market economy;
     SMEs are flexible and can adapt quickly to changing market demand and supply
      situations. A competitive SME sector is therefore a precondition for sustainable
      development;
     SMEs generate employment. Through job creation, SMEs can successfully
      contribute to alleviation of poverty and activation of the unemployed population;
     SMEs help diversify economic activity and make a significant contribution to
      exports and trade;
     SMEs contribute significantly to the regional and local development;
     By taking part in cross-border co-operations, SMEs contribute to the development
      of the border areas and facilitate to understand cross-cultural differences in the
      neighbouring countries.

Barriers to SME Development

However, the development of the SME sectors in the two regions is hampered by a
number of factors. They include insufficient policy dialogue between regional
authorities and the private sector on business development, administrative barriers,
insufficient SME development infrastructure including inadequate supply of business
development services (BDS), and difficulties in obtaining financing of business
activities on affordable conditions.

Further, weak tripartite systems that are not properly institutionalised, labour markets
that suffer from lack of transparency, a vocational education and training (VET)
sector that is not sufficiently responsive to local needs, and limited focus on issues
related to social Corporate Responsibility (CSR).


1.3 Rationale and Contents of Subcomponent 1.3:
  Provision of Financial Services

Background

Microfinance in Russia is principally provided through four types of institutions:53

        Micro-lending Institutions (MLIs) specialised in extending credits only – usually
         operating on a non-profit basis and registered as NGOs, funds, co-operatives or

53
     TACIS (2002): Improving of Access to Finance for Small Business in Russia; SMERUS 9803.


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     branches of foreign NGOs;

    Credit Unions, including agricultural/rural credit co-operatives, which are
     membership organisations established to provide financial services to members
     only;

    Regional Funds operated under the auspices of the regional authorities and
     wholly or largely financed from the regional budget;

    Commercial banks, with a public, private and mixed capital base, extending
     credits on general market terms.

Regional funds operated under the auspices of the regional administrations and
commercial banks are presently the main finance institutions providing credit
specifically to SMEs in the programme regions. Others are the KMB Bank and
FORA, but they have played a minor role so far.

The regional administrations have had and still have an important role to play in
promoting SME development. In the past this has included operation of regional
funds targeting small business. However, given the limited capital base and capacity
to do so, the impact so far has been very limited compared to the estimated needs for
finance in the SME sector.

The alternative is commercial bank loans, but the banks’ loan conditions are generally
very difficult to meet by most applicants, especially the collateral requirement
equivalent to up to 200% of the loan amount. This is partially explained by the special
rules of the central bank system regarding credit regulation.

Objectives

The immediate objective of Subcomponent 1.3 is that SMEs in the economic
programme sectors have improved access to financial resources in order to support the
start or development of their businesses. This is to be achieved through:

    Strengthened institutional, organisational and technical capacity of up to three
     finance institutions in each programme region to provide microfinance services
     to SMEs in the economic programme sectors;

    Increased financial resources for the selected regional finance institutions to
     provide microfinance services to SMEs.

Strategy

In order to promote the concept of microfinance to SME it is recommended that
emphasis in the programme be placed on improving the credit supply first and
foremost through market-based solutions. It is proposed that the financial services
subcomponent primarily be implemented through banks that have demonstrated
interest and ability to mange small credits, specific credit lines and guarantee
schemes.



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This strategy is adopted in order to (i) make use of existing capacity in banks to
extend credits, (ii) demonstrate the profitability of SME-lending and thereby (iii)
maximise sustainability of the EDSP activities beyond the programme period.
However, if there is a very strong justification for channelling funds through the
existing regional funds, this option should not be excluded.

The main financial instruments of the programme will be:

    Microloan fund(s) – i.e. capital grants to participating finance institutions chiefly
     to be used as capital for lending in cases where the capital base is insufficient to
     service SMEs;

    Guarantee fund(s) that will provide participating finance institutions with
     guarantees for credits for which the entrepreneurs are unable to come up with
     sufficient collateral.

Summary of Outputs

The expected outputs of the subcomponent are:

    Survey of the credit needs of SMEs in the designated economic programme
     sectors in the Kaliningrad and Pskov regions;

    Up to three finance institutions in each region (commercial banks or
     microfinance institutions) will have increased capacity to provide microfinance
     services to SMEs, on a financially sustainable basis;

    The number of microfinance customers served by the participating finance
     institutions will increase significantly each year during the programme
     implementation period (target growth rates to be established);

    Appropriate financial products and services for SMEs will have been developed
     – including non-collateral credit concepts, by the participating finance
     institutions one year from commencement of activities (if not already in place);

    Effective management systems, procedures and staff capable of handling
     microfinance, including investment appraisal capacity, will be in place in the
     participating finance institutions at the end of the programme, be it in within
     commercial banks or in specialised microfinance institutions;

    The interest rates charged will cover all costs of delivering the finance services.
     The participating finance institutions will continue to provide microfinance
     services beyond the programme period;

    Improved management competencies of SME owners and managers as regards
     financial management skills and increased knowledge of alternative methods of
     financing (to be covered by the programme BDS subcomponent).

2. Objectives



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The objective of the consultancy is to prepare a detailed action plan for support to
financial services in the Kaliningrad and Pskov regions to improve the access to credit
of SMEs in the economic programme sectors, as well as to prepare TOR for
implementation of the action plan.


3. Outputs

The outputs of the assignment are:

   A detailed action plan for support to the financial services in the Kaliningrad and
    Pskov regions;

   TOR for implementation of the action plan (to be used for tendering);

   Concurrence of relevant stakeholders on the contents of action plan.


4. Scope of Work

The work to be undertaken under this assignment complements the above objectives
and outputs (Section 1.3) of a logical framework for subcomponent 1.3 by
formulating activities and inputs, as well as related indicators, means of verification,
assumptions and risks.

The programme will cover the following economic sectors (industries) in the
programme regions:

Kaliningrad
  furniture industry;
  food processing industry.

Pskov
  food processing industry;
  tourism.

It should be noted that if it turns out during programme implementation that the
programme may cover more than the above sectors in the regions, assistance could be
extended to additional economic sectors. No such sectors are to be covered by the
assignment described in these TOR.


Description and Analysis of Present Situation

   Assess the capital needs of the SMEs in economic programme sectors in terms of
    volume, type and conditions;

   Identify existing providers of credit - including microfinance institutions, and
    types and conditions (size of loans and other credit types, maturity period, interest
    rates, repayment periods, etc.) of credit extended to SMEs;


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   Assess the willingness and effectiveness of existing credit providers in responding
    to the demand for microfinance;

   Establish the main reasons for SMEs not having access to microfinance;

   Determine alternatives credit options for SME that do not have access to formal
    credit;

   Review existing laws or regulations on finance institutions to determine possible
    barriers to providing microfinance;

   Establish the possible existence of other international support programmes
    providing credit lines for SMEs (microfinance) and the modalities used.

Development of        Action   Plan,    Indicator   System and       TOR     for   Plan
Implementation

On the basis of the above:

   Design a credit facility for the EDSP programme covering the two programme
    regions, including:

     Identification (either through tendering or analysis) of the finance institutions
      in the two regions that can most effectively implement the credit facility of the
      programme;

     If tendering is opted for: establish criteria for selecting the programme finance
      institutions;

     Optimum utility of the programme funds, i.e. through use of the resources for
      microloan fund(s) and/or guarantee fund(s) - see section on “Budget” below;

     Detailed finance products and services to be offered to the SME (in
      cooperation with representatives of the economic business sectors of the
      programme and the finance institutions to implement the credit facility);

     Identification of the need for capacity development in the participating
      financial institutions to manage the credit facility, e.g. screening/evaluation of
      credit applications, assessment of business plans, etc.;
     Drawing up of a training programme to meet the resulting training needs of the
      participating finance institutions;

     Development of a system for monitoring the credit facility with regard to
      adequacy, effectiveness, barriers to success and impact to ensure that
      maximum use of resources;

     Establish a system for generating lessons learned as well as good or best
      practices to provide for possible adjustment of operations and sharing of
      experience with other institutions and economic sectors of the economy


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     Design of an exit strategy to follow once the programme comes to an end.

   Identify activities that will lead to tangible results in the short term (first year) –
    possibly in the form of pilot projects – in order to demonstrate the utility of the
    programme subcomponent to the stakeholders;

   Exploit the synergy potential between the Kaliningrad and Pskov regions in the
    implementation of the subcomponents;

   Develop quantifiable indicators and means of verification for measuring the
    achievement of the subcomponent’s objectives, delivery of outputs and
    undertaking of activities;

   Establish assumptions and risks related to implementation of the subcomponent;

   Establish baseline against which to monitor the performance of the subcomponent
    based on the above-mentioned indicators;

   Describe the tasks and responsibilities of each of the stakeholders involved in the
    subcomponent and obtain their consent;

   Develop TOR for implementation of the action plan that can be used as the basis
    for a tendering process.

Budget (Inputs)

The budget framework for the sub-component is as follows:

   Capacity building services and monitoring of implementation (DKK 2.0 million)
   Financial support to SMEs (DKK 20.0 million).

The Consultant shall:

   Develop a budget for the subcomponent within the above budget framework;

   Identify possible budget contributions from the financial institutions participating
    in the subcomponent – in kind and in monetary terms.

5. Organisation of the Work

A team of international consultants (referred to as the Consultant) will undertake the
assignment. The Consultant is encouraged and expected to hire local consultants in
the Kaliningrad and Pskov regions to assist them in getting access to relevant
stakeholders and informants, undertaking the analytical work, interpreting results and
discussing recommendations.

During the assignment, the Consultant will liaise with and report regularly to the
consultancy firm Nordic Consulting Group (NCG), which has been contracted by the



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Neighbourhood Programme of the Ministry of Foreign Affairs to clarify issues in the
TOR and comment on the Consultant’s work.

The Consultant will be provided with relevant written materials, see Section 8.

Prior to field missions the Consultant will meet with staff of the Neighbourhood
Programme and NCG to discuss the objectives of the assignment and issues of
clarification. Furthermore, the Consultant shall visit Denmark before finalisation of
the document outputs to agree on the final contents with the Neighbourhood
Programme and NCG.


6. Composition of Consultant Team

International Team Members

   Specialist in development of microfinance/banking institutions or schemes in
    transition economies and similar economies;

   Microfinance / credit union human resources management (HRM) / training
    specialist.

National Team Members

   Specialist on the financial market and financial institutions in Russian regions;

   Specialist on business analysis and development in the Kaliningrad and/or Pskov
    regions.


7. Timing and Reporting

The EDSP will start in December 2005 with a mobilisation phase of three months
followed by an inception period of three months. The first year of programme
implementation will start in May – June 2006.

The assignment will be undertaken during the period December 2005 – March 2006.
Field visits are to take place in January – February 2006.

A Final Draft of the TOR for implementation of the action plan shall be submitted not
later 1 March 2006 and the Final TOR for implementation of the action plan shall be
submitted not later 31 March 2006.

A Final Draft of the Detailed action plan shall be submitted not later 15 March 2006
and the Final Detailed action plan shall be submitted not later than 31 March 2006.

The draft final documents shall be submitted for comments to NCG, NAB as well as
responsible Russian authorities, organisation and private sector stakeholders involved
in the subcomponent. The final documents shall take into account the comments



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received. The documents should be made in both the English and the Russian
languages.

The recipients of the results of the assignment are:

   The Neighbourhood Programme Department, Danish Ministry of Foreign Affairs
    (MFA);

   The two Programme Offices in the Kaliningrad and Pskov regions;

   The Russian partners and stakeholders among the public authorities and in the
    private business community.


8. Background Documents

The consultants should make use the following background documents.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Economic
    Development Support Programme, Russia. Final programme document.
    September 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study of
    Economic Sectors in Kaliningrad and Pskov Oblast's. Final report. September
    2005.

   Tacis: Project SMERUS 9803, Support to the Development of Small
    Entrepreneurship. Improving Access to Finance for Small Business in Russia.
    Moscow 2002.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study on
    Economic, Labour Market and Training Issues in Kaliningrad and Pskov Oblasts,
    Russia. July 2005.




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Annex 8: TOR for Detailed Design of Subcomponent 2.1
File number: 403.Rusland.1
November 2005




                   The Danish Neighbourhood Programme

                                  Terms of Reference

                                          for

                Detailed Design of Subcomponent 2.1 of EDSP:

     Preparation of action plan and TOR for implementation of
 support to tripartite stakeholders in Kaliningrad and Pskov regions




1. Background

1.1 Economic Development Support Programme (EDSP)

The Department of the Neighbourhood Programme of the Danish Ministry of Foreign
Affairs is in the process of developing an Economic Development Support
Programme (EDSP) in the Kaliningrad and the Pskov regions together with its
Russian partners in the regions.

The overall objective of the programme is that the living conditions of the populations
in the Kaliningrad and Pskov regions are improved as a result of business
development and job generation. This is to be achieved through increased
competitiveness and market access of the SMEs, development of the labour market
systems, and enhanced technical skills of the labour force. This is also expected to
promote the further stabilisation and integration of the regions into the Baltic Sea
region.

The Kaliningrad and Pskov regions are two of the closest regions of the Russian
Federation to the Baltic Sea and Denmark. Denmark has had extensive cooperation
with both these regions along with the Leningrad region since the early 1990s. As the
regions are geographically separated the programme will have two distinct parts, but
there is scope for sharing of experience and joint participation in programme activities
in the two regions.

The EDSP builds upon interventions that are mutually enforcing and together
contribute to meeting the economic and social programme objectives. It is made up of
two closely interlinked components:


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   Component 1: SME Development
    The immediate objective of this component is that SMEs in the economic
    programme sectors (see below) will increase their competitiveness and access to
    local, Russian and export markets;

   Component 2: Labour Market and Skills Development
    The immediate objective of this component is that a labour market system is
    developed that responds effectively and timely to the demand for skilled labour of
    the business sectors, especially SMEs, in the economic programme sectors in the
    two regions.

The two components are made up of three and two subcomponents respectively.
Further, the programme will focus on two economic sectors (industries) in each
region, see Section 4.

By targeting a limited number of sectors, the combined interventions in each of the
sectors covered will be of such magnitude that a critical mass of support can be
obtained by taking full advantage of the intended synergies between the programme
subcomponents. The programme elements and approach is illustrated in the figure
below.


    Regional economies
                          COMPONENT 1                        COMPONENT 2

                          1.1 SME policy
                          dialogue and advocacy              2.1 Strengthening the
                          capacity of business               tripartite labour market
     2 economic           associations                       system
     sectors in each
     region               1.2 Facilitation of
                          business development               2.2 Restructuring the
                          services (BDS) market              vocational education
                          development                        and training (VET)
                                                             system
                          1.3 Provision of
                          financial services




The programme is to create a framework and process for industrial development and
job generation. The programme will not only facilitate the development of a shared
vision on how to develop the selected sectors, but will also create a process to ensure
that actions are taken to build an enabling business environment.

In consequence, these TOR address the above subcomponent 2.1: Strengthening the
Tripartite Labour Market System.



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1.2 The Tripartite Labour Market System

Skilled labour is strongly needed in the Kaliningrad and Pskov regions’ emerging
economic sectors, but it has proven difficult to increase the employment generation by
applying existing instruments. Therefore, this calls for a new type of service system
that is based on social dialogue and collaboration between different organisations
involved in supply, demand and labour policy formulation through an improved
regional tripartite system.

To fight structural labour market problems, the stakeholders need tools and capacity
to forecast future labour market needs and make recommendations for relevant policy
responses. A labour market information (LMI) system can be defined as a set of
procedures and mechanisms to obtain reliable data for analysis and decision-making
in the sphere of the labour market.

In Kaliningrad region the European TACIS Programme is to support development of
a comprehensive LMI system, and the EDSP programme will support development of
a similar system in Pskov region. In both regions the EDSP programme will support
stakeholders to obtain adequate capacity as well as the necessary know-how to
formulate effective tripartite policy responses, coordinate implementation and assess
the effect of these policy responses on structural unemployment.

The EDSP shall focus on creating awareness among selected sectors that better labour
and environmental standards improve the competitiveness of enterprises. First, access
to EU markets requires compliance with basic labour and environmental standards.
These requirements are placed in a handful of formal trade agreements, and more
frequently, through the contractual requirements of buyers. Second, again increasing
evidence demonstrates a positive link between good labour management and
increased productivity, suggesting that the competitiveness of individual companies
and even industries may improve as a result of better labour and environmental
workplace practices. The ILO Factory Improvement Programme has demonstrated
such positive links.

In this context the EDSP shall strengthen the role of the tripartite in creating an
enabling environment for the achievement of good labour and environmental
standards.

Barriers for Tripartite Dialogue
In principle, the legal framework and formal tripartite institutions are in place, but de
facto the tripartite systems in the Kaliningrad and Pskov regions are weak and not
properly institutionalised. This is partly due to the limited capacity of the
organisations involved. In particular, the capacity of the employers associations is
weak. Moreover, there is no tradition for tripartite dialogue and especially employers
are reluctant to participate in existing formal tripartite institutions. Generally, the
labour market also suffers from the lack of transparency.



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1.3 Rationale and Contents of Subcomponent 2.1:
  Strengthening the Tripartite Labour Market System

According to the EDSP programme document the rationale and contents of
Subcomponent 2.1: Strengthening the Tripartite Labour Market System are envisaged
to be as follows:

Rationale

A strengthened tripartite dialogue will serve as a valuable monitoring tool, and serve
as an early warning system regarding the level of demand and supply gap. Moreover,
enhanced capacity of the tripartite stakeholders will improve their individual and
collective capacity to plan and implement relevant sector specific labour market
policies that can generate the following benefits:

   Improve the regional authorities’ ability to monitor the development in
    unemployment, wage structure, industrial injuries etc.;
   Enable VET institutions to monitor the labour market and determine how to plan
    their activities;
   Make it possible for employers to compare wage and productivity levels in their
    business with the regional averages;
   Make trade unions capable of monitoring wage levels, occupational health and
    safety etc. across industries;
   Provide individual job seekers and employment services with better advice on
    labour market and employment trends;
   Improve the regional authorities’ ability to promote code of conduct and social
    and environmental standards for production.

Labour supply or demand imbalances in specific labour market segments greatly
endanger sustainable economic growth. To counter such mismatch, labour market
monitoring is crucial. Labour market monitoring enables policy makers, enterprises
and other stakeholders with a more strategic approach to identifying and subsequently
solving such labour market discrepancies through effective and targeted policy
responses.

Furthermore, it enables the federal employment services to implement adequate active
labour market policies aimed at tackling upcoming skill shortages. In that perspective,
effective Tripartite Labour Market System may help to reduce adjustment costs
arising from mismatches on the labour market.

Objective

The immediate objective of subcomponent 2.1 is to strengthening the Tripartite
Labour Market System in order to promote effective and efficient tripartite dialogue
in the targeted sectors.



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This is to be achieved through:

   Improvement of the formal tripartite dialogue institutions’ capacity to forecast
    future labour market needs and make recommendations for relevant policy
    responses;

   Improvement of the foundation for decision making based on relevant and sector
    specific data.

Strategy

The main strategy of this component is to pursue a bottom-up approach, where the
tripartite partners are provided with the necessary capacity and human resources to
engage in a constructive tripartite dialogue. In order to pursue this goal the approach
is to:

   Examine the barriers for effective operation and shortcomings of the current
    tripartite system. A thorough analysis of the regional tripartite system shall
    provide a common basis for development of a more adequate tripartite system.

   Initiate an investigation of how the regional tripartite systems in the targeted
    regions are functioning de facto, and identify barriers for a constructive tripartite
    dialogue.

   Facilitate consensus building and a common vision for future tripartite
    cooperation. The initial analysis will be instrumental to facilitate the
    institutionalisation process of a constructive tripartite dialogue in the targeted
    regions.

   Develop the capacity of tripartite stakeholders to improve the design,
    implementation and assessment of regional labour market policies, and improve
    the coordination, cooperation, and knowledge sharing between the regional
    authorities and the social partners.

Typical issues to be addressed through the tripartite labour market system could be:

   availability and demand of skilled labour;
   labour regulations;
   wage guidelines;
   workplace conditions;
   unemployment;
   vocational training;
   apprenticeship systems;
   in-service training;
   occupational health and safety;
   adoption and implementation of codes of conduct;
   promotion of social environmental standards, e.g., ISO 14000 and SA 8000.

Summary of Outputs
Expected outputs of the subcomponent are:


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   Analysis of barriers for successful tripartite dialogue in the targeted sectors;

   Identification of solutions to sector specific barriers, and formulation of a regional
    action plan in dialogue with all relevant stakeholders involved in formal and
    informal tripartite labour market system;

   Organisational changes in the tripartite labour market system in the targeted
    sectors that can improve the design, implementation and assessment of regional
    labour market policies, and strengthen the coordination, collaboration, and
    knowledge sharing between the employers, trade unions, public authorities and
    new social partners, such as public and commercial employment services;

   Establishment of a pilot labour market information (LMI) system in Pskov region
    focussing on the targeted sectors;

   Training and education that enables employers, trade unions and public authorities
    to conduct sector labour market analysis (e.g. on the supply and demand for
    labour, qualification gaps, training needs, etc.).

   Training and education that enables local authorities, employers and trade unions
    to promote the introduction and enforcement of code of conduct among enterprises
    in the targeted sectors, and promote sectors wide social and environmental
    standards, e.g., ISO 14000.

The interrelationship between the subcomponent’s outputs is illustrated below.


    Regional action           Organisational       Improved tripartite
    plans developed in        changes in the       dialogue
    dialogue with all         tripartite system
    relevant
    stakeholders                                   L




    Initial analysis of the   Training and         Improved capacity
    barriers for success-     education that       to forecast future
    full tripartite           enables the          labour market needs
    dialogue in the           stakeholders to      and make
    targeted sectors          provide and use      recommendations
                              labour market        for relevant policy
                              analyses             responses




2. Objectives



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The objective of the consultancy is to prepare a detailed action plan for support to the
tripartite stakeholders in the targeted regions as well as TOR for implementation of
the action plan.

Only exception is that EDSP support to development of labour market information
(LMI) system will focus on Pskov region, as TACIS is already supporting
development of a LMI system in Kaliningrad region.



3. Outputs

The outputs of the assignment are:

   A detailed action plan for support to the tripartite stakeholders in Kaliningrad and
    Pskov regions;
   TOR for implementation of the action plan (to be used for tendering);
   Concurrence of relevant stakeholders on the contents of action plan.


4. Scope of Work

The work to be undertaken under this assignment complements the above objectives
and outputs (Section 1.3) of a logical framework for subcomponent 2.1 by
formulating activities and inputs, as well as related indicators, means of verification,
assumptions and risks.

The programme will cover the following economic sectors (industries):

Kaliningrad region:
  furniture industry;
  food processing industry.

Pskov region:
  food processing industry;
  tourism.

It should be noted that if it turns out during programme implementation that the
programme may cover more than the above sectors in the regions, assistance could be
extended to additional economic sectors. No such sectors are to be covered by the
assignment described in these TOR.

Henceforth, employers associations and trade unions refer to sector-specific
associations and unions in the above economic programme sectors.


Strengthening the Tripartite Labour Market System in order to promote
effective and efficient tripartite dialogue in the targeted sectors

The framework for strengthening the Tripartite Labour Market System includes


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analysis of barriers for successful tripartite dialogue, formulation of a regional action
plan, organisational changes in the tripartite labour market system, and training and
education of tripartite stakeholders of employers, trade unions and public authorities,
i.e. the regional Labour Departments.

Description and Analysis of Present Situation

   Establish the present framework for tripartite dialogue in the targeted regions
    including legal framework and formal tripartite institutions;

   Review and describe the responsibilities and operation of the public institutions
    involved in the Tripartite Labour Market System at the regional and local level;

   Review and describe the operation and responsibilities of the employers
    associations and trade unions in the programme sectors;

   Review and describe the operation and responsibilities of public, semi-public and
    private employment services and other relevant labour market stakeholders in the
    targeted regions;

   Establish who are the main similar bodies at the federal level and how the regional
    bodies link up and cooperate with these;

   Review and describe the responsibilities and operation of the planned “Centre for
    Establishing of Social Dialog” in Kaliningrad region in order to investigate
    potential synergy, cooperation and overlap;

   Determine shortcomings and inexpediencies in the current tripartite labour market
    system with a view to establish how the system could be improved in the opinion
    of the public and private stakeholders;

   Establish the basis for a pilot labour market information (LMI) system in Pskov
    region focussing on the programme sectors.

   Identify the need for improving the capacity of the organisations and their staff to
    commission labour market analysis for programme sectors;

   Identify the need for improving the capacity of the organisations and their staff to
    enter into public private dialogue and partnerships in the field of developing
    tripartite labour market related policies, strategies, plans and legislation.

   Identify the need for improving the capacity of the organisations and their staff to
    promote compliance among targeted programme sector with basic labour and
    environmental standards.

Development of       Action    Plan,   Indicator    System and       TOR      for   Plan
Implementation

   Develop an action plan with activities aimed at improving the process of
    developing tripartite labour market related policies, strategies and plans and


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    associated legislation and regulations. This would include activities aimed at:

     Creating a clear institutional responsibility among government bodies involved
      in the labour market system;

     Establishing a mechanism for improvement and enforcement of tripartite
      dialogue between labour market stakeholders;

     Assuring that the initiatives are in consonance with federal labour market
      system;

     Building capacity of stakeholders with regard to engage in tripartite dialogue,
      including capacity to forecast future labour market needs and make
      recommendations for relevant policy responses through effective use of sector
      specific labour market studies;

     Strengthening the role and the involvement of employers’ in vocational
      training activities.

   Exploit the possibilities of strengthening employers association and labour unions
    capacity, for instance through twinning arrangements or other direct arrangements
    with relevant foreign (for example Danish) institutions;

   Consider an activity aimed at designing a generic tripartite labour market
    policy/strategy/plan paradigm to be used by the regional government,;

   Identify activities that will lead to tangible results in the short term (first year) –
    possibly in the form of pilot projects – in order to demonstrate the utility of the
    programme subcomponent to the stakeholders;

   Consider how to establish a sustainable LMI system in Pskov region;

   Exploit the synergy potential between the TACIS Tripartite Labour Market
    Program in Kaliningrad region and the EDSP supported LMI system in Pskov
    region in the implementation of subcomponent;

   Develop quantifiable indicators and means of verification for measuring the
    achievement of subcomponent 2.1 objectives, delivery of outputs and undertaking
    of activities;

   Establish assumptions and risks related to implementation of the subcomponent;

   Establish baseline against which to monitor the performance of the subcomponent
    2.1 based on the above-mentioned indicators;

   Describe the tasks and responsibilities of each of the stakeholders involved in the
    subcomponent and obtain their consent;

   Develop TOR for implementation of the action plan that can be used as the basis
    for a tendering process.


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Budget (Inputs)

The budget framework for sub-component 2.1: Strengthening the Tripartite Labour
Market System is:

   Capacity building of tripartite stakeholders (DKK 2.5 million);
   Study tours (DKK 500,000).

The Consultant shall:

   Develop a budget for the subcomponent 2.1 at activity level within the above
    budget framework;

   Identify possible budget contributions from public and private tripartite
    stakeholders in kind and in monetary terms.


5. Organisation of the Work

A team of international consultants (referred to as the Consultant) will undertake the
assignment. The Consultant is encouraged and expected to hire local consultants in
the Kaliningrad and Pskov regions to assist them in getting access to relevant
stakeholders and informants, undertaking the analytical work, interpreting results and
discussing recommendations.

During the assignment, the Consultant will liaise with and report regularly to the
consultancy firm Nordic Consulting Group (NCG), which has been contracted by the
Neighbourhood Programme of the Ministry of Foreign Affairs to clarify issues in the
TOR and comment on the Consultant’s work.

The Consultant will be provided with relevant written materials, see Section 8.

Prior to field missions the Consultant will meet with staff of the Neighbourhood
Programme and NCG to discuss the objectives of the assignment and issues of
clarification. Furthermore, the Consultant shall visit Denmark before finalisation of
the document outputs to agree on the final contents with the Neighbourhood
Programme and NCG.




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6. Composition of Consultant Team

International Team Members

   Specialist in development of tripartite labour market system, stakeholder dialogue
    and capacity development to undertake policy, strategy and action plan
    formulation;

   Specialist in labour market information (LMI) system and labour market analysis.

National Team Members

   Specialist on tripartite labour market system analysis and development in
    Kaliningrad region;

  Specialist on tripartite labour market system analysis and development in Pskov
   region.
7. Timing and Reporting

The EDSP will start in December 2005 with a mobilisation phase of three months
followed by an inception period of three months. The first year of programme
implementation will start in May – June 2006.

The assignment will be undertaken during the period December 2005 – March 2006.
Field visits are to take place in January – February 2006.

A Final Draft of the TOR for implementation of the action plan shall be submitted not
later 1 March 2006 and the Final TOR for implementation of the action plan shall be
submitted not later 31 March 2006.

A Final Draft of the Detailed action plan shall be submitted not later 15 March 2006
and the Final Detailed action plan shall be submitted not later than 31 March 2006.

The draft final documents shall be submitted for comments to NCG, NAB as well as
responsible Russian authorities, organisation and private sector stakeholders involved
in the subcomponent. The final documents shall take into account the comments
received. The documents should be made in both the English and the Russian
languages.

The recipients of the results of the assignment are:

   The Neighbourhood Programme Department, Danish Ministry of Foreign Affairs
    (MFA);

   The Programme Offices in the Kaliningrad and Pskov regions;

   The Russian partners and stakeholders among the public authorities, the private
    business community and trade unions.



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8. Background Documents

The consultants should make use the following background documents.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Economic
    Development Support Programme, Russia. Final programme document.
    September 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study of
    Economic Sectors in Kaliningrad and Pskov Oblast's. Final report. September
    2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study on
    Economic, Labour Market and Training Issues in Kaliningrad and Pskov Oblasts,
    Russia. July 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Concept
    Paper for Seminars in Kaliningrad and Pskov regions. March 2005.




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Annex 9: TOR for Detailed Design of Subcomponent 2.2
File number: 403.Rusland.1
November 2005




                   The Danish Neighbourhood Programme

                                  Terms of Reference

                                          for

                Detailed Design of Subcomponent 2.2 of EDSP:

     Preparation of action plan and TOR for implementation of
  support to Vocational Education and Training (VET) institutions,
           individual enterprises and relevant authorities
                in the Kaliningrad and Pskov regions


1. Background

1.1 Economic Development Support Programme (EDSP)

The Department of the Neighbourhood Programme of the Danish Ministry of Foreign
Affairs is in the process of developing an Economic Development Support
Programme (EDSP) in the Kaliningrad and the Pskov regions together with its
Russian partners in the regions.

The overall objective of the programme is that the living conditions of the populations
in the Kaliningrad and Pskov regions are improved as a result of business
development and job creation. This is to be achieved through increased
competitiveness and market access of the SMEs, development of the labour market
systems, and enhanced technical skills of the labour force. This is also expected to
promote the further stabilisation and integration of the regions into the Baltic Sea
region.

The Kaliningrad and Pskov regions are two of the closest regions of the Russian
Federation to the Baltic Sea and Denmark. Denmark has had extensive cooperation
with both these regions along with the Leningrad region since the early 1990s. As the
regions are geographically separated the programme will have two distinct parts, but
there is scope for sharing of experience and joint participation in programme activities
in the two regions.




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The EDSP builds upon interventions that are mutually enforcing and together
contribute to meeting the economic and social programme objectives. It is made up of
two closely interlinked components:

   Component 1: SME Development
    The immediate objective of this component is that SMEs in the economic
    programme sectors (see below) will increase their competitiveness and access to
    local, Russian and export markets;

   Component 2: Labour Market and Skills Development
    The immediate objective of this component is that a labour market system is
    developed that responds effectively and timely to the demand for skilled labour of
    the business sectors, especially SMEs, in the economic programme sectors in the
    two regions.

The two components are made up of three and two subcomponents respectively.
Further, the programme will focus on two economic sectors (industries) in each
region, see Section 4.

By targeting a limited number of sectors, the combined interventions in each of the
sectors covered will be of such magnitude that a critical mass of support can be
obtained by taking full advantage of the intended synergies between the programme
subcomponents. The programme elements and approach is illustrated in the figure
below.


    Regional economies
                          COMPONENT 1                        COMPONENT 2

                          1.1 SME policy
                          dialogue and advocacy              2.1 Strengthening the
                          capacity of business               tripartite labour market
     Two economic         associations                       system
     sectors in each
     region               1.2 Facilitation of
                          business development               2.2 Restructuring the
                          services (BDS) market              vocational education
                          development                        and training (VET)
                                                             system
                          1.3 Provision of
                          financial services




The programme is to create a framework and process for industrial development. The
programme will not only facilitate the development of a shared vision on how to
develop the selected sectors, but will also create a process to ensure that actions are
taken to build an enabling business environment.

These TOR address the above Subcomponent 2.2: Restructuring the Vocational
Education and Training (VET) System.


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1.2 Skills Development

To promote economic growth and job generation, the labour demand side can be
stimulated by supporting entrepreneurship and SME development, e.g. through
technology transfer, tax incentives, financial services and access to credit, improved
advisory and consultancy capacity, etc. On the supply side, training and education are
important instruments.

VET can play an essential role in promoting economic growth and socio-economic
development, benefiting individuals, their families, local communities and society in
general. Moreover, most employment opportunities in the twenty-first century are
likely to be centred on new processes and services requiring specialised knowledge
and skills not yet available in general educational institutions.

Moreover, technical and/or business skills are not only a necessary prerequisite to
exploit existing economic opportunities. The improvement of the demand-orientation
of the VET system will directly contribute to poverty reduction, as it will help to
empower marginalized groups to become gainfully employed.

Realising that VET is of critical importance for the social and economic development
in Kaliningrad and Pskov regions, the EDSP will support the creation of the necessary
conditions for delivering VET that meets labour market requirements. Restructuring
the existing system requires a number of hardware and software inputs including
infrastructure (e.g., modern materials and facilities), human resources (the skills and
competences of trainers), and procedures (teaching manuals, quality assessment
systems etc.).

Barriers to Skills Development

The current situation has contributed to the imbalance of labour demand and supply
that Kaliningrad and Pskov regions are facing today, as it implies that unemployment
and shortages of skilled labour occur simultaneously. Although the ongoing
decentralisation process is creating new opportunities for the vocational education
system to become more responsive to local needs, it places new financial and
administrative burdens on the local authorities. While the employers demand
experienced and skilled labour, they are reluctant to play an active role as strategic
partner for the VET system. At the operational level employers are also not reluctant
to put their production facilities at the disposal in the training process. The limited
capacity and motivation among teachers and administrators is also a challenge to
implementing changes.

Rationale and Contents of Subcomponent 2.2: Restructuring the Vocational
Education and Training (VET) System.

According to the EDSP programme document the rationale and contents of
Subcomponent 2.2: Restructuring the Vocational Education and Training (VET)
System are envisaged to be as follows:

Rationale


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If the Kaliningrad and Pskov regions are to compete successfully in an era of rapid
economic and technological change the productivity and quality standard of final
products of the targeted programme sectors must be improved. This requires not only
capital investment, but also a work force that has the flexibility to acquire new skills
for new jobs as the structures of economies and occupations are changing rapidly. The
transitional nature of the economy makes new demands on the employees’
qualifications, competences and motivation. Fragmented and narrowly specialised job
profiles are evolving to broader and more flexible jobs demanding broader
qualification profiles and flexible work organisation.

However, an internal focus on the human, technical and financial resources does not
in itself bridge the gap between the supply and demand for vocational training. In
order to improve the relevance of the vocational training institutions to the labour
market, it is important to improve the enterprises’ involvement and responsibility in
VET activities, e.g. curricula review, apprenticeships, re-training, etc., in order to
counter future competence gaps.

The restructuring of the VET System should to the largest possible extent be done in
dialogue and partnerships between the VET institution, individual enterprises and
public authorities. Key to success in this area is the establishment of mechanisms for
effective dialogue between the partners. The commitment and the capacity of
stakeholders, especially the individual enterprises and their representatives in the
tripartite labour market system, are prerequisites for effective public/private dialogue
and partnership initiatives. These matters are to be addressed through this
subcomponent.

Objective

The immediate objective of Subcomponent 2.2 is to improve the vocational education
and training system in order to meet labour market requirements in targeted economic
sectors.

This is to be achieved through:

   Increased investments in VET infrastructure to improve and modernise the
    educational environment;

   Increased human resource development in VET institutions that enables
    employees to provide vocational education and training that meets labour market
    requirements;

   Increased partnerships between VET institutions and private enterprises to rectify
    the imbalance of labour demand and supply;

   Development of a quality management system that allows administrators, policy
    makers and employers to monitor and evaluate the effectiveness and impact of the
    VET system;




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   Increasing the administrators’ capacity to measure the efficiency of VET
    institutions by improving existing performance management systems.

Strategy

The approach is to involve VET institutions, individual enterprises and relevant
authorities on how to improve the responsiveness and relevance of the VET system.
The approach is to:

   Provide the necessary means for increased investments in vocational training
    infrastructure by subsidising cutting edge-equipment and technologies (VET
    infrastructure investment element).

   Enhancing professional know-how and introduce new pedagogical methodologies
    through upgrading of skills and competences of VET teachers and trainers
    (Human resource element).

   Improve the VET System’s market linkage by assisting partnerships between VET
    institutions, individual enterprises and other regional stakeholders in order to
    increase and improve their ability to share information on the demand and supply
    for labour, in addition to planning the future VET (Partnership element).

   Develop proper mechanisms and feed back structures for the stakeholders to share
    information on the demand and supply for labour and planning the future VET
    (Quality management element).
   Develop adequate monitoring and evaluation measures for the performance of the
    VET System (Performance management element).

Summary of Outputs

The expected outputs of the subcomponent are:

VET infrastructure investment element:
    Supporting investments in vocational training infrastructure by subsidising
     cutting edge-equipment and technologies through a VET Infrastructure Fund.

Human resource element:
   Retraining programmes for teachers in VET institutions developed and
    implemented to enhance professional know-how and introduce new pedagogical
    methodologies

Partnership element:
    Formalised partnership-building activities between VET institutions internally,
     and between VET institutions, individual enterprises, and the tripartite system,
     especially the public authorities, need to be developed and successfully
     institutionalised.

Quality management element:




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     Mechanisms and feed back structures developed to monitor and evaluate the
      quality and impact of vocational education in relation to the labour requirements
      at the enterprise level.
     VET forum/council established for VET institutions and tripartite partners to
      share information on the demand and supply for labour and planning the future
      VET.
     Curricula developed to reflect changes in labour market demands in the targeted
      economic sectors.

Performance management element:
    A sustainable monitoring and evaluation system that gives VET institutions
     incentives to provide vocational education and training that is in demand by the
     labour market.


2. Objectives

The objective of the consultancy is to prepare a detailed action plan for support to
VET institutions, individual enterprises and relevant authorities in the Kaliningrad
and Pskov regions as well as TOR for implementation of the action plan.


3. Outputs

The outputs of the assignment are:

   A detailed action plan for support to the VET institutions, individual enterprises
    and relevant authorities in the Kaliningrad and Pskov regions;
   TOR for implementation of the action plan (to be used for tendering);
   Concurrence of relevant stakeholders on the contents of action plan.

4. Scope of Work

The work to be undertaken under this assignment complements the above objectives
and outputs (Section 1.3) of a logical framework for subcomponent 2.2 by
formulating activities and inputs, as well as related indicators, means of verification,
assumptions and risks.

The programme will cover the following economic sectors (industries) in the
programme regions:

Kaliningrad
  furniture industry;
  food processing industry.

Pskov
  food processing industry;
  tourism.




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It should be noted that if it turns out during programme implementation that the
programme may cover more than the above sectors in the regions, assistance could be
extended to additional economic sectors. No such sectors are to be covered by the
assignment described in these TOR.

Henceforth, VET institutions, individual enterprises, and public authorities refer to
sector-specific and relevant institutions for the above programme sectors.

Restructuring the Vocational Education and Training (VET) System

The framework for restructuring the VET System includes various elements;
infrastructure investment, human resource development, public-private partnership,
and quality and performance management.

Description and Analysis of Present Situation

   Establish the present framework for VET in the regions including VET
    development policies, strategies and plans as well as related legislation and
    regulations;

   Review and describe the responsibilities and operation of existing public and
    private institutions and government entities involved in developing the framework
    for VET in the regions;

   Review and describe the labour market needs within the targeted sectors with a
    view of how to tailor the EDSP support to comply the current economic, technical
    and human resources shortcomings and gaps within the regional VET system;

   Review and describe the current basis for involvement of individual enterprises in
    the development of the VET System with a view of how the cooperation between
    the VET institutions and the private enterprises could be improved regarding
    apprenticeship, retraining, co-financing, etc.;

   Review and describe the current VET mechanisms and tools for demand
    assessment with a view of how to strengthen these in the opinion of the VET and
    the tripartite partners;

   Identify the need for improving the capacity of the regional Educational
    Departments and their staff to develop and implement VET-related policies,
    strategies and plans as well as to draft related legislation and regulations;

   Identify the need for developing strategies to integrate occupational health and
    safety education, incl. HIV/AIDS, into training and re-training programmes;

   Identify and specify the type of equipment needed by the targeted VET
    institutions in order to improve their practical training facilities

   Review and describe the framework for performance management with a view of
    how the current managements systems could be improved in order to strengthen
    the monitoring and evaluation of the VET institutions’ performance.


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Development of Action Plan, Indicator System and TOR for Plan
Implementation

   Develop an action plan with activities aimed at restructuring the regional VET
    system. This would include activities aimed at:

     Creating a clear institutional responsibility among institutions and government
      bodies involved in the VET development;

     Improving the performance of the VET institutions within the selected
      economic programme sectors through tailored re-training programmes of VET
      teachers and trainers, provision of new equipment, review of curricula, etc.;

     Upgrading the technical facilities of VET institutions within the selected
      economic programme sectors through provision of new equipment

     Increasing the awareness of occupational health and safety, incl. HIV/AIDS, by
      integrating the education into training and re-training programmes;

     Strengthening the involvement and commitment of the business community in
      order to increase various forms of apprenticeships, retraining, co-financing,
      etc.;

     Strengthening mechanisms for dialogue and cooperation between VET
      institutions, tripartite partners and other stakeholders, e.g. through VET
      forum/council, in order to monitor labour market trends and ensure timely and
      relevant responses to changes of demands;

     Improving the regional Education Departments’ capacity to develop and
      implement a monitoring and evaluation system that gives VET institutions
      incentives to provide vocational education and training that is in demand by the
      labour market.

     Assuring that the initiatives are in consonance with federal VET development
      programmes and take full advantage of possible support from federal level;

   Consider an activity aimed at designing a generic VET development
    policy/strategy/plan paradigm to be used by the regional government,;

   Identify activities that will lead to tangible results in the short term (first year) –
    possibly in the form of pilot projects – in order to demonstrate the utility of the
    programme subcomponent to the stakeholders;

   Develop quantifiable indicators and means of verification for measuring the
    achievement of subcomponent objectives, delivery of outputs and undertaking of
    activities.

   Establish assumptions and risks related to implementation of the subcomponent;



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   Establish baseline against which to monitor the performance of the sub-
    component based on the above-mentioned indicators;

   Describe the tasks and responsibilities of each of the stakeholders involved in the
    subcomponent and obtain their consent;

   Develop TOR for implementation of the action plan that can be used as the basis
    for a tendering process

Budget (Inputs)

The budget framework for sub-component 2.2: Restructuring the Vocational
Education and Training (VET) System is:

   Capacity building of targeted VET institutions and regional Educational
    Departments in the Kaliningrad and Pskov regions (DKK 4.9 million);

   Equipment packages (DKK 27.5 million).

The Consultant shall:

   Develop a budget for the subcomponent 2.2 at activity level within the above
    budget framework;

   Identify possible budget contributions from public and private stakeholders in
    kind and in monetary terms.


5. Organisation of the Work
A team of international consultants (referred to as the Consultant) will undertake the
assignment. The Consultant is encouraged and expected to hire local consultants in
the Kaliningrad and Pskov regions to assist them in getting access to relevant
stakeholders and informants, undertaking the analytical work, interpreting results and
discussing recommendations.

During the assignment, the Consultant will liaise with and report regularly to the
consultancy firm Nordic Consulting Group (NCG), which has been contracted by the
Neighbourhood Programme of the Ministry of Foreign Affairs to clarify issues in the
TOR and comment on the Consultant’s work.

The Consultant will be provided with relevant written materials, see Section 8.

Prior to field missions the Consultant will meet with staff of the Neighbourhood
Programme and NCG to discuss the objectives of the assignment and issues of
clarification. Furthermore, the Consultant shall visit Denmark before finalisation of
the document outputs to agree on the final contents with the Neighbourhood
Programme and NCG.


6. Composition of Consultant Team


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International Team Members

   Specialists in development of VET and support to VET institutions and
    government entities, including development and implementation of performance
    management system, etc.

National Team Members

   Specialist on development of the VET System in the Kaliningrad region;
   Specialist on development of the VET System in the Pskov region.


7. Timing and Reporting

The EDSP will start in December 2005 with a mobilisation phase of three months
followed by an inception period of three months. The first year of programme
implementation will start in May – June 2006.

The assignment will be undertaken during the period December 2005 – March 2006.
Field visits are to take place in January – February 2006.

A Final Draft of the TOR for implementation of the action plan shall be submitted not
later 1 March 2006 and the Final TOR for implementation of the action plan shall be
submitted not later 31 March 2006.

A Final Draft of the Detailed action plan shall be submitted not later 15 March 2006
and the Final Detailed action plan shall be submitted not later than 31 March 2006.

The draft final documents shall be submitted for comments to NCG, NAB as well as
responsible Russian authorities, organisation and private sector stakeholders involved
in the subcomponent. The final documents shall take into account the comments
received. The documents should be made in both the English and the Russian
languages.

The recipients of the results of the assignment are:

   The Neighbourhood Programme Department, Danish Ministry of Foreign Affairs
    (MFA);

   The two Programme Offices in the Kaliningrad and Pskov regions;

   The Russian partners and stakeholders among the public authorities and in the
    private business community.


8. Background Documents

The consultants should make use the following background documents.



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   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Economic
    Development Support Programme, Russia. Final programme document.
    September 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study of
    Economic Sectors in Kaliningrad and Pskov Oblast's. Final report. September
    2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Study on
    Economic, Labour Market and Training Issues in Kaliningrad and Pskov Oblasts,
    Russia. July 2005.

   Danish Ministry of Foreign Affairs, the Neighbourhood Programme: Concept
    Paper for Seminars in Kaliningrad and Pskov regions. March 2005.




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         Annex 10


         Financial Approval of the Economic Development Support Programme

         The total frame of the Programme is DKK 110 mill. On 8 December 2005, the
         Danish Parliament’s Finance Committee approved the first Phase of the
         Economic Development Support Programme. The appropriation covers the first
         phase of the 5-year Programme amounting to DKK 110 mill. The commitment for
         the first Phase amounts to DKK 20 mill. This commitment will become effective
         once the authorities of Kaliningrad and Pskov Oblasts have signed the ´Cover
         Page´. Subject to Parliamentary approval, the following Phases are expected to be
         budgeted with DKK 45 mill in 2006 and DKK 45 mill in 2007.




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